Retail Investors: A Key SEC Focus
The Commission’s focus on retail investors, reflected not just in enforcement trends but also in the OCIE inspection program, is spawning interesting trends. One is the rise in enforcement actions involving investment adviser. That trend traces to before the current retail investor focus, but has been accelerated by it. The other is in offering fraud actions. The common denominator here is the victims – retail investors.
This week two enforcement actions have been brought focused on offering frauds. One – ARO Equity — involved a barred securities law recidivist. The other – Blakstad — centers on what turned out to be essentially a Ponzi scheme conducted by a man who is a corporate officer of a number of microcap issuers and is facing criminal and civil insider trading charges brought by the U.S. Attorney’s Office and the Commission.
ARO Equity: Thomas Renison is a state licensed insurance agent who was barred from the securities business by the state of Maine and from association with an investment adviser by the Commission. ARO Equity, LLC is a private investment firm that is located in the home of Timothy Allcott, a long unemployed former manager of a billiards hall and motel. Each is named as a defendant in SEC v. ARO Equity, LLC, Civil Action No. 1:20-cv-10027 (D. Mass. Filed Jan. 8, 2020).
The action centers on an offering that took place over a three-year period beginning in mid-July 2015. Over $6 million was raised from about 15 investors, largely senior citizens. Investors were solicited to purchase promissory notes in ARO Equity. The notes had a term of three to five years and paid interest of 8% to 12% annually.
Messrs. Renison and Allcott told investors the returns on the notes were superior to those available from other retirement products. Key to these claims were repeated representations regarding the safety of the investments.
Unfortunately, the notes were anything but a safe investment, according to the Commission’s complaint. While investor capital was used to fund several small businesses, none had made a profit. Two other business that obtained about $3.3 million in loans were also unprofitable. One was later sold at a loss of about $1.3 million.
Nevertheless, Mr. Renison was paid a finders fee of $580,000. Mr. Allcott was paid a salary of about $225,000. Portions of the investor capital was paid to the sons of Mr. Renison. Little was left to repay investors. The Commissions complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24710 (Jan. 8, 2020).
Blakstad: Donald Blakstad, is a defendant along with two of his controlled entities in SEC v. Blakstad, Civil Action No. 20-CV-163 (S.D.N.Y. Filed Jan. 8, 20120). Mr. Blakstad owns, controls and holds executive officer positions in Midcontinental Petroleum, Inc., a purported oil firm, and Defendants ESI, supposedly a firm engaged in the crypto mining business, and Xact Holdings Corporation, a holding company formed to acquire another entity. In July 2019 he was charged by the DOJ and the Commission with insider trading.
Over a four-year period, beginning in mid- 2015, Mr. Blakstad raised funds through Midcontinental, ESI and Xact. Overall about $3.5 million was obtained from 14 or more investors.
Mr. Blakstad used a variety of representations to convince investors to purchase the securities of the firms. With respect to Midcontinental, investors were told that their funds would be used begin operations and for other costs related to the oil, gas and alternative energy exploration business. Those would include the acquisition of land leases and other equipment necessary for energy exploration. For ESI investors were told that their funds would be used to purchase equipment and pay start-up costs to initiate cryptocurrency mining operations. For Xact investors were told that their money would be used to purchase a Canadian firm and lease facilities in Huston, Texas.
The representations made by Mr. Blakstad as to each company were false. Rather than use the funds as represented, he used the investor capital has his “own personal piggybank” in the words of the complaint. He also used part of the funds to pay an individual used to solicit investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24711 (Jan. 8, 2020).
