A key focus of SEC Enforcement, according to the Commission’s recent publication about the Division, is retail investors. While the agency has always sought to protect the individual investor and has an investor advocate, a new task force was created to marshal the Division’s resources around this key focus. To date the task force has only brought one case, although that is to be expected. In the future however, surely a key focus of the task force will be offering frauds, such as the action brought yesterday which raised over $20 million from one hundred investors over a five year period. The difficulty with these cases, of course, is to get there before the money has been drained off. In this case, the entities crashed into bankruptcy by the time of the complaint, leaving little hope that the investors will recoup their hard earned cash. SEC v. Fossum, Civil Action No. 2:17-cv-01894 (W.D. Wash. Filed Dec. 19, 2017).
Named as defendants are Ronald Fossum, Jr., the apparent mastermind of the alleged scheme, and Alonzo Cahoon, who was instrumental in one facet of the operations. Critical to the alleged scheme were six controlled entities that can be broken into two groups. Group one was the management entities. It included SMFG, Inc., Smart Money Secured Income Fund Manager, LLC, and Turnkey Investment Fund Manager, LLC. The second group, collectively called the SMFG Funds, was composed of Accelerated Asset Group, LLC, Smart Money Secured Income Fund, LLC and Turnkey Investment Fund, LLC. Neither of the Defendants and none of the entities were registered with the Commission. Both Defendants and SMFG, Smart Money Manager and Turnkey Manager are alleged to have acted as investment advisers.
The complaint centers on four offerings of securities to the public. The first involved Mr. Fossum and SMFG which managed Smart Money Manager which in turn managed Accelerated Asset. Over a two year period beginning in June 2011 Mr. Fossum raised about $1 million from approximately 40 investors, inducing them to purchase Accelerated Asset promissory notes which are securities.
A second offering involved Mr. Fossum, Smart Money Manager and Smart Money Fund, also managed by Smart Money Manager. This offering overlapped with the first, beginning in May 2012 and continuing for about four years. Investors were sold Smart Money Fund notes, also securities. The investor funds were to be used to acquire real estate, oil and gas interests, domain names and websites and other securities. This offering raised over $7 million from about 100 investors.
A third offering also involved Mr. Fossum and Smart Money Fund. Again it overlapped with the others, beginning in March 2013 and continuing over the next two year. This offering involved the sale of Smart Money Fund Investment Contracts – essentially joint venture agreements between the Fund and investors. The funds were to be used to purchase and operate revenue generating websites. Investors were assured that the investment was entirely passive, and would generate returns through the efforts of others. This offering involved about 60 investors and raised another $6 million.
The final offering involved Messrs. Fossum and Cahoon, SMFG and Turnkey Manager which in turn managed Turnkey Fund. The offering took place from about July 2013 to November 2014. The offering, which raised about $6 million from 30 investors, promised to pool the investment capital to acquire oil and gas working interests. The instruments sold were Turnkey Fund Units.
The Smart Money Fund Notes, Smart Money Fund Investment Contracts and Turnkey Fund Units were not registered with the Commission. They were not exempt from registration. Likewise, Messrs. Fossum and Cahoon acted as Turnkey Fund brokers, but failed to register with the Commission.
Defendants Fossum and Cahoon, along with the managed entities owed fiduciary duties to the investors, according to the complaint. Those obligations were breach because:
- Investor funds were misappropriated for personal use;
- Funds continued to be raised from new investors while concealing the fact that Smart Money Fund Investment Contracts could not be redeemed in accord with their terms;
- The funds from the various offerings were comingled; and
- Various consulting fees and/or commissions were charged and paid for out of investor funds to which neither the Defendants nor the Managed entities were entitled.
In the end, the entities were placed in bankruptcy. It does not appear that they have sufficient funds to repay the investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a), Exchange Act Sections 10(b), 15(a) and 20(a) and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 24017 Dec. 20, 2017).