Ponzi and investment scheme cases are a staple of SEC enforcement in the post Madoff world. Emerging, however, may be a new trend based on a subset of these frauds – investments in ATM machines. At the close of last month the Commission filed an investment fund fraud case centered on the solicitation of investors for a business which operated ATM machines. SEC v. Ferguson, Civil Action No. 3:14-cv-04188 (N.D. Cal. Filed September 29, 2014). Now the Commission has brought another Ponzi scheme case centered on the lease of ATM machines. SEC v. Nationwide Automated Systems, Inc., Civil Action No. CV 14 07249 (C.D. Cal. Unsealed October 7, 2014).
Nationwide names as defendants the company, Joel Gillis and Edward Wishner. The company purports to be an ATM machine provider which works with high-traffic retail locations and claims to have 80 branches and 1,000 certified technicians on standby. Nationwide claims to service more than $1 billion in ATM transactions per month. Mr. Gillis is the president of Nationwide. He essentially runs the business. Mr. Wishner is the treasurer, vice president and secretary of the company.
Beginning in 1999, and continuing to the present, Nationwide and Mr. Gillis have offered securities in the form of ATM sale and leaseback agreements to the public. Since January 2013 the Defendants have raised about $120 million from investors through the sale of the ATM leaseback offering.
Defendants used a standard set of agreements to implement their scheme. Those included an ATM Equipment Purchase Agreement, a lease agreement and an addendum. Typically investors paid $12,000 to purchase an ATM. The machine was then leased back to the defendants who operated it. Investors agreed in the contracts not to interfere with the operation of the machine which included not ever contacting the site where it was installed.
Nationwide agreed to pay the investor $0.50 for each approved transaction at the machine. In addition, the investor was guaranteed a return of 20% or more and was assured that the firm had a 19 year track record of success.
Payments were in fact made to investors who were also provided a monthly statement regarding their investment. The payments came largely from money paid to the company by other investors. For example, during April, May and June 2014 over $23 million was deposited in the Nationwide bank account. Only a little over $390,000 came from legitimate ATM transactions. At the same time about $18.4 million was deposited from investors. Yet the firm paid about $23.4 million to investors under the sale and leaseback agreements. Portions of the money raised were also transferred to entities affiliated with Mr. Wishner.
In August 2014 Nationwide bounced about $3 million in checks written to investors. By the end of the month the firm’s bank accounts were reduced to about $200,000. Hundreds of investors called seeking payment. Investors were offered excuses. At the same time the defendants continued to raise money from other investors. For example, in late August and early September 2014 about $3.8 million was raised from investors. During the same period only $52,436 was raised from ATM transactions while about $2 million was paid out to investors.
The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 20(a), Securities Act Sections 5(a) and (c) and of each subsection of 17(a). The case is pending. See also Lit. Rel. No 23106 (October 8, 2014).