SEC Files Two More Offering Fraud Actions

Offering fraud actions are a staple of SEC Enforcement. While each action is different, yet typically each involves raising substantial amounts of cash from investors who are promised significant to outsized returns from a safe investment. Unfortunately the investments do not pay substantial returns returns; they are not safe; and the investors lose. The Commission’s latest offering fraud actions are built on these same key elements.

SEC v. Katzen, Civil Action No. 16 Civ. 06606 (E.D.N.Y. Filed November 29, 2016) names as a defendant Harrison Katzen, formerly a registered representative, and purportedly an officer and director of Dunhill Investment Holdings, Inc. Together with International Stock Transfer, Inc., a registered transfer agent, Cecil Speight, the firm’s president and owner, and two attorneys, James Schmidt and Jonathan Flom, he is alleged to have defrauded 60 investors out of $3.2 million.

From about 2012 through mid-2013 Ms. Speight offered for sale debt bonds of Altmark Holdings, Inc. which promised returns of 14% or 12.5%, depending on the specific bonds. In addition, stock was offered in PDL Portfolio (XIX) Ltd. which promised a fixed rate of return of 20%. The offerings were made through International Stock Transfer.

Websites were used to solicit investors. The sites were staffed by teams of supposed financial advisers. In fact they effectively served as cold callers with a sales pitch that lured investors. The sales pitch and offering materials touted the high rate of returns. In fact the claims were fictitious and the securities were worthless. For example, Altmark is an actual issuer founded in Switzerland and based in the Turks & Caicos. What investors did not know is that Ms. Speight incorporated another Altmark entity in Belize using the same name as the real firm. In furtherance of the scheme International Stock Transfer issued fake certificates for the bonds.

The interest payments promised by the cold caller advisers were made for a time by channeling a portion of the investor funds back to investors. Other portions of the investor money went to International Stock Transfer. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Flom, Civil Action No. 14-CV-5575 (E.D.N.Y.)(action against other participants in the scheme). See Lit. Rel. No. 23696 (Nov. 30, 2016).

SEC v. Blackbird Capital Partners, LLC, Civil Action No. 2:16-cv-01199 (D. Ut. Filed Nov. 28 2016) names as defendants Blackbird, a member of the National Futures Association and a registered Commodity Trading Advisor, and Andrew Kelley and Paul Shumway, founders and managers of the firm.

Beginning in September 2014, and continuing to the present, the individual defendants solicited investors for Blackbird. They falsely claimed that Mr. Kelly was an expert trader who had previously developed algorithmic software that had been purchased for millions of dollars and was being used by financial institutions, including JP Morgan Chase Bank and Wells Fargo Bank. Indeed, Mr. Kelly claimed to have made very profitable investments that had paid returns as high as 300% in one year. The claims were incorrect.

About $3.1 million was raised from several investors. The funds were supposed to be used for trading. Mr. Kelly did trade with portions of the money. By October 2016 he had about $2 million in losses using investor funds. Defendants continue to solicit investor who were told that their funds would be invested.

In November 2016 Mr. Kelly deposited at least $750,000 into his brokerage account, portions of which came from investors. Between November 17, 2016 and November 22, 2016 Mr. Kelly lost another $100,000. Other portions of the investor funds were used to repay investors. The complaint alleges violations of Securities Act Sections 17(a) and 17(a)(2) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23695 (November 30, 2016).

Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).

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