SEC Prevails in Trial of Ponzi Scheme Case
While Ponzi scheme cases have become a staple of SEC Enforcement in recent years, most settle. Last week the SEC prevailed in one of the few that proceeded to trial. SEC v. National Note of Utah, Civil Action No. 2:12-cv-00591 (D. Utah).
Defendant National Note is one of a complex of entities controlled by Wayne Palmer, also a defendant in the action. Mr. Palmer has been in the real estate business since 1976. He gives seminars across the country. He formed National Note in 1992.
Investors were solicited in two offerings. Prior to 2007 an offering of unregistered notes was conducted. It raised about $50 million. Beginning in September 2007 a private place of notes under Rule 506 of Regulation D. Some of the investors were accredited, some were not.
Generally, investors were solicited to purchase notes of National Note. Investors were told that the notes would pay 12% interest and that they were secured by the real estate holdings of several related entities. Investor funds were supposedly loaned to the related entities for investment. The interest payments were guaranteed, according to the sales pitch. Investor funds were supposedly secured by interests in real estate.
Some investors were provided with glossy marketing materials. Those materials contained a chart which showed that interest payments were never missed. The materials also represented that the notes provided safe, double digit returns with monthly payments. The principal and interest payments were all “guaranteed.”
Investor funds were initially deposited in an account at JP Morgan titled “investor trust account.” On deposit the funds were immediately wired to a Well Fargo account titled “investor interest account.”
In fact the related entities generated little in the way of revenue. Since 2009 those entities, controlled by Homelands Holdings, have not been able to service their debt. Investor interests were not secured or guaranteed. While National Note raised about $100 million from approximately 600 investors it had little in the way of income. Payments were made to investors from the Wells Fargo account using the funds furnished by other investors.
By 2011 National Note had difficulty raising additional capital. Payments to investors dwindled. While promises of repayment were made, they were not. The SEC’s complaint alleged violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a), in addition to violations of Exchange Act Sections 10(b) and 15(a). A temporary freeze order was obtained by the Commission at the time of filing.
Following trial the Court concluded Mr. Palmer had promised over 600 investors a guaranteed return of 12% while assuring them that their funds were safe. The Court also concluded that he had deposited investor funds in one account titled “investor trust account,” wired the funds to a second tilted “investor interest account,” and made payments of returns from the funds of other investors.
The Court ordered Mr. Palmer to pay disgorgement of $1,767,287.10. National Note was directed to pay disgorgement of $65,188,83. Mr. Palmer was also ordered to pay a penalty of $1,050,000 and National Note $900,000. See Lit. Rel. No. 23419 (December 4, 2015).