SEC Continues to Focus on Retail Investors
The retail investor focus of SEC enforcement is reflected in two recent actions filed by the Division. One centered on a fraudulent investment scheme run by a pastor just freed from prison that targeted Vietnamese investors. SEC v. Whitney, Civil Action No. 8:19-cv-499 (C.D. Cal. Filed March 13, 2019). The other involved an oil and gas operator who, despite losing the firm’s leases and most its revenue in a court action, recruited new investors with claims about those oil and gas leases and revenue. SEC v. Crawford, Civil Action No. 19-cv-1022 (S.D. Ohio Filed March 19, 2019)..
The scheme targeting Vietnamese investors was operated in part by Defendant Kent Whitney, a former commodity broker then recently released from prison on wire fraud charges who became an on-line minister. Minister Whitney the became pastor of The Church for the Healthy Self, a/k/a/ Defendant CHS Trust which was related to CHS Asset Management Inc., another defendant. Defendant David Parrish, a friend of Pastor Whitney, also became a pastor at the Church for the Healthy self.
The two Pastors, along with the Church and its related entity, used presentations, radio and television advertisements and YouTube videos, to solicit investors for their investment fund. Specifically, potential investors were told there would be at least 12% annual returns that were tax deductible, guaranteed and FDIC and SIPIC insured. Potential investors were assured that the investment was safe and growing tax free. The fund was supposedly managed by Wall Street Investors, audited by KPMG and an overall well-run company. Indeed, part of the returns were donated to charity.
The claims, which generated over $25 million in investments from investor savings and retirement accounts, were false. The majority of the investor cash was misappropriated by Defendants. This scheme is on-going today. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court granted the Commission’s request for a freeze order. See Lit. Rel. No. 24426 (March 18, 2019).
The oil and gas scheme was conducted by Defendant Timothy Crawford and his firm, Cardinal Group, Inc., also a defendant. Mr. Crawford served as the CEO of Cardinal Energy until 2012 when he resigned to become a consultant. The firm’s shares were listed on OTC Markets Group, Inc.
In 2017 Cardinal lost control of two oil and gas leases that represented 87% of the firm’s revenue in a lawsuit. That action was filed in March 2017. In June of that year the Court entered a default judgment against the company.
The month after the judgment was entered Cardinal filed reports with the Commission. Those filings represented that the firm still had the two leases lost in the Court action. Mr. Crawford signed the filings. Defendants subsequently raised about $1 million from investors in a private offering of Cardinal stock. Investors were not told that the Commission filings were false. They were also not told that the two leases had been lost. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(d) and 14(c) and Securities Act Section 17(a)(2). The case is pending. See Lit. Rel. No. 24427 (March 19, 2019).