THE COMMISSION CONTINUES TO FOCUS ON INVESTMENT FUND FRAUD
On Friday, SEC Enforcement Director Robert Khuzami participated in the announcement of the Virginia Financial and Securities Fraud Task Force. That task force will apparently focus at least in part on brining securities fraud actions in the Eastern District of Virginia, a new focal point for such cases. At the same time the Commission announced the initiation of its latest Ponzi scheme case, the new post-market crisis post-Madoff staple of the Enforcement Division.
SEC v. Allen, Case No. 1:10-cv-01143 (N.D. Ohio, Filed May 20, 2010) is an investment fund fraud action against Edward Allen, David Olson and their company A&O Investments, LLC. According to the complaint, beginning in September 2005 and continuing through the end of 2008 the defendants raised approximately $14.8 million from at least 100 investors. Those investors were solicited to purchase promissory notes issued by A&O.
Investors were told that A&O Investments would purchase, rehabilitate and sell real estate. The promissory notes they purchased were supposed to pay a 20% return and be secured by the real estate which would eventually be sold to generate the promised returns.
Messrs. Allen and Olson misrepresented the nature of the investment according to the complaint. In part, A&O was operated as a classic Ponzi scheme. About $4.4 million of investor funds were used to pay interest and, in some instances, principal to some investors. Another $2.2 million was used to pay the personal expenses of Messrs. Allen, Olson and their family members. Although all of the promissory notes issued to investors were supposed to be properly secured by real estate, in fact about $5.5 million were backed by the same parcel of real estate in Lakeland, Florida. That value of that property was grossly inadequate to secure the notes. Likewise, while all of the almost $15 million raised from investors was supposed to be used to purchase and rehabilitate real estate, only about $5.1 million was used for that purpose. The claims that the investments were successful was also false. In fact, those investments only produced revenues of about $952,000.
The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission has not obtained a temporary freeze order in this case. The action is in litigation. See also Litig. Rel. 21529 (May 21, 2010).