SEC Offering Fraud: A Multi- Year, Multi-Faceted Ponzi Scheme

While there is no doubt that microcap fraud is a key focus of SEC Enforcement, another staple of the Division is offering fraud and Ponzi scheme actions. Typically, those actions reach out to small investors who are often friends of those behind an unregistered offering that is built on claims that are often too good to be true. Of course, once the investment is made the money is gone and, as with the microcap fraud cases, the investor is left with little to nothing. This appears to be the result in the Commission’s most recent offering fraud action, SEC v. Natural Diamonds Investment Co., Civil Action No. 19-80633 (S.D. Fla. Filed May 13 2019).

A years long fraud built on three different investment vehicles was conducted by Defendants Jose Aman, Harold Seigel and Jonathan Seigel. The vehicles, used in succession as each version of the fraud stumbled, were Natural Diamonds, Eagle Financial Diamond Group Inc., and Argyle Coin, LLC. The individual Defendants had varying interests in, and or positions with, the entity Defendants. Mr. Seigel was the host of a weekly radio show called “The World Financial Report” that later became a podcast. Those broadcasts were used to tout investment opportunities including, at time, those detailed below.

Beginning as early as May 2014, and continuing up to this year, the individual Defendants used the entity Defendants to raise about $30 million from approximately 300 investors through the sale of securities in the form of promissory notes and investment contracts tied to the entity Defendants in a series of offerings. Those offerings began – and in fact ended – with Natural Diamond investment contracts. The investment contracts represented that investor funds would be used at the sole discretion of the company to purchase high grade diamonds. Those diamonds were to be cut, polished and sold for a profit. Investors would receive 2% simple interest for 24 months. At the end of the period the investor’s principal would be returned.

Investors in Natural Diamond were typically not sophisticated or knowledgeable about the diamond trade. One was a veterinarian, another a bus driver and another in the insurance industry, for example. Overall about 133 investors put up almost $1.8 million to secure the unregistered securities of the company.

During the period portions of the investor funds were transferred to the other entity Defendants. Portions of the investor funds were diverted to other interests of the individual Defendants. By February 28, 2019 Natural Diamonds bank accounts had negative balances of about $120,000.

The Eagle offerings began in March 2015 and also continued up to this year. The offering documents were an Eagle “Contract for Investment.” This was supposedly a one time partnership with Eagle to cut, polish and sell diamond for a profit. It was to last for a period of 18 months while the diamonds were prepared for sale and sale. The solicitations were similar to those made for Natural Diamond. The impact was also the same. Portions of the investor cash was used to repay other investors. Portions were comingled with capital raised by the other two entity Defendants. Portions used for other purposes by the individual Defendants. By February 28, 2019 the Eagle bank accounts had a combined balance of $155.26 despite the millions of dollars that had traveled through them.

Finally, the Argyle Coin offering began in December 2017. The investments were supposed to be in cryptocurrency token called “RGL.” The token was supposedly backed by what are known as “fancy colored diamonds.” As with the typical crypto coin offering, a “White Paper” was used to tout the offering. Under the terms of the offering investors were to receive an 8% return on principal after 12 months and an additional 2% return at the end of 24 months if they elected to extend the investment. The White Paper detailed the manner of the offering, using typical crypto currency terms.

The results were the same as with the other investment vehicles used by the individual Defendants. The claims were not accurate – the coins were not backed by diamonds. The investor funds were comingled with those from the other entity defendants. Ultimately the investor funds were dissipated and by February 28, 2019 the Argyle Coin bank account had a balance of $376.53.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a), and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24473 (May 21, 2019).

FCPA Institute: On June 21 and 22, 2019, Professor Mike Koehler will conduct the FCPA Institute at the Offices of Dorsey & Whitney LLP in Minneapolis, Minnesota. The Institute provides a unique learning experience for those seeking to elevate their knowledge of the Foreign Corrupt Practices Act. Professor Koehler is one of the foremost scholars on the FCPA and conducts an interesting and most informative program. The program is live in Minneapolis and also webcast. You can obtain more information about the program and register here.

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