SEC Files Offering Fraud and Ponzi Scheme Cases
A staple of SEC enforcement in recent years has been offering fraud and Ponzi scheme cases. This week the Commission filed two more of these actions, one an offering fraud targeting military personnel and a second and investment fund fraud case which virtually told investors it was a Ponzi scheme. SEC v. Brown, Civil Action No. 6:15-cv-119 (W.D. Tx. Filed April 13, 2015); SEC v. Evans, Civil Action No. 1:15-01118 (N.D. Ga. Filed April 13, 2015).
The offering fraud: Leroy Brown was a member of the United States Army for twelve years. He joined the Army at the age of 18 in 2001. He formed LB Stocks and Trades Advice LLC and has claimed on his Facebook page to be its CEO and founder since 2004, although the required certificates for the formation of the firm were not filed with Texas state authorities until 2014.
Mr. Brown and his firm claim on its website to furnish a variety of securities and investment related services. Those include investment advice, portfolio management, research and brokerage services for securities, currencies, commodities and real estate. The firm also claims to be a FINRA broker-dealer, although it has never registered with the regulator. The firm also claimed to offer 7,600 leading mutual funds and that investors can trade over 200 future products. These representations also were incorrect. Mr. Brown is not a licensed securities professional.
Mr. Brown, who resides near Fort Hood military instillation, began targeting military personnel to purchase $1,000 membership certificates in the company. Touting his military service, he claimed that investors would participate in LB Stocks’ speculative investments in raw, undeveloped land. Potential investors were told to wire their investment funds to Mr. Brown.
Beginning in early 2014 Mr. Brown began receiving substantial deposits into his personal brokerage account. Mr. Brown then transferred nearly all of these funds from his brokerage account to his personal bank account. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Commission obtained a temporary freeze order at the time the complaint was filed. The case is pending.
The Ponzi scheme: Beginning in 2012 defendant James Evans, operating a website using the DollarMonster name through domain name Cashflowbot.com, soliciting investors with claims of big profits. The site claimed to have been working with investors since 2003 and was designed to furnish reliable, profitable returns on investments.
The DollarMonster site stated that the payout of profits was tied to receipt of additional investment funds from others. Specifically, investors were told that their funds would be pooled, that the pool pays off the next person in line giving them a return of 200% after which that investor returns to the end of the line. Each time funds come in there is a payoff. If no funds come in the line does not change. For this service DollarMonster charged a fee of 2.5% plus a $2.24 transaction fee.
The website specifically represented that DollarMonster had paid out sums exceeding those contributed by investors, which is false. It also did not tell investors that if there were no additional contributions the scheme would collapse.
In 2013 the site was altered. In October the site told investors that DollarMonster was a “financial adviser” with over 120 management teams and $38 million of assets under management. The next month the site claimed DollarMonster managed a hedge fund which purchased stock. Later the site claimed DollarMonster was a private holding company. When the staff issued a subpoena to the site it ceased operation, although the complaint alleges, on information and belief, that Mr. Evans continues to solicit investor funds. The complaint alleges violations of Securities Act Sections 5(a) and 5(c), each subsection of Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). The case is pending.