SEC Halts Offering Fraud and Secures Freeze Order

The Commission’s retail investor focus has spawned a long series of offering fraud actions. The common element to most of these cases is a series of assurances given to the investors that their funds are secure, available and will eventually pay them a reasonable return. While the cases arise across the country Florida, as favorite retirement haven, is a good venue for promoters. That was the case with the Commission’s latest action in which almost $40 million was raised over a six year period from 30 investors. SEC v. Kinetic Investment Group, LLC, Civil Action No. 8:20-cv-00394 (M.D. Fla. Filed Feb. 20, 2020). The Commission obtained a freeze order and other temporary relief on March 6, 2020.

Defendants in the action are: Kinetic Group, a firm formed by Defendant Michael Williams. He is a managing member of the firm as well as of KCL Services LLC or Lendacy and others. That firm, also controlled by Mr. Williams, supposedly furnishes lines of credit to accredited investors. Kinetic Group managed Kenetic Funds Yield or KFYield.

Kinetic Funds used four investment strategies, implemented through its sub funds: Yield, gold, growth and inflation. The yield strategy is KFYield, a sub-fund. It represented about 98% of the assets for the group. Interests were marketed as private placements through the use of a Subscription Agreement rather than the more typical PPM.

The Subscription Agreement provided in part that the memberships purchased were restricted securities. Under the agreement investors selected one of the sub-funds. All trading decisions were made by Mr. Williams. A 1% management fee was charged.

A modified version of the Subscription Agreement, used beginning in 2015, contained a description of KFYield, its performance information, AUM and holdings available on Bloomberg. A computer system permitted viewers to access real time financial data on companies. The system gave the investment program apparent transparency.

When marketing KFYield, Mr. Williams at times described Lendacy as a “real estate lending structure” designed to the meet credit demands of accredited investors. Some investors were told that they were eligible to receive a Lendacy credit line of up to 70% of their investment in KFYield at low interest rates.

Investors were told that their funds would be placed in income producing U.S. listed financial products. Investors were also assured that their principal would be secure because KFYield hedged the portfolio with listed options. According to the marketing materials, 90% of the investments were covered by the hedges. The materials also stated that Lendacy had a separate funding source. Investors were assured that their funds were always available.

The representations made to investors were false. Defendants also misappropriated portions of the investor money. Mr. Williams used investor funds to pay for a series of personal expenses and his other business ventures. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as Advisers Act Sections 206(1)(2) and (4). The complaint is pending. See Lit. Rel. No. 24767 (March 11, 2020).