Actions centered on an offering fraud – the sale of securities through misleading and fraudulent claims – have become a staple in the era of the retail investor. Yet labeling a case as an “offering fraud” frequently tells little about the actual conduct. To be sure, the case will be based at least in part on the solicitation of investors to purchase securities based on fraudulent misrepresentation. At the same time the basic conduct involved often differs markedly from case to case. This point is well illustrated by three cases filed on the last business day of June each of which which involve offering frauds tied to very different overall conduct: One is based largely on efforts to save a stumbling business; a second, on false projections which represented more wishful hopes than actual fact; a third on a simple fraud where defendant sought only to misappropriate the investor money.
The first, SEC v. Sillerman, Civil Action No. 1:19-cv-6052 (S.D.N.Y. Filed June 28, 2019), is based on a misguided effort to save a failing business. The action which names as defendant Robert F.X. Sillverman, the founder and CEO of on line publishing and entertainment firm Function(x), Inc.
By 2017 the firm had become financially dependent on investor financing and loans from its founder. In early March 2017 the firm raised about $4.8 million in a public offering, although Mr. Sillverman falsely claimed the offering raised about $10 million, including $2 million from him. After the offering Mr. Sillverman directed the transfer of $500,000 of offering proceeds to his personal account, citing various conflicting reasons for the transfer.
In April and May Defendant led another effort to raise additional capital for the firm, this time through a private placement of securities. To stimulate interest, Mr. Sillverman claimed two celebrities participated in the offering, referencing forged documents he created. He also told investors that he personally put $4 million into this second offering based on a round trip transaction of that sum he directed be made by wiring cash out of the firm account to his and then back. Later Mr. Sillverman wired an additional $1.4 million from the firm to himself. At least $550,000 of that sum exceeded any amount owed to him by the company. The complaint alleges violations of Exchange Act Sections 10(b), 13(a) and 13(b)(5) and Securities Act Section 17(a).
To resolve the matter, Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint and to the entry of a permanent director-and-officer bar. He also agreed to pay a penalty of $175,000 pursuant to a Chapter 11 plan. The Commission previously suspended trading in the shares of the company. See Lit. Rel. No. 24524 (June 28, 2019).
In contrast, the principals of Blue Earth, Inc., a comprehensive provider of efficient energy and alternative/renewable energy solutions, relied on projections build on the proverbial foundation of sand in an effort to save their firm. SEC v. Thomas, Civil Action No. 19-cv-1132 (D. Nev. Filed June 28, 2019).
Named as defendants in the action are: Johnny Thomas, CEO and a director from 2010 through 2015; Robert Potts, President and COO from early 2013 through March 2016; Jonathan Woodward, CFO from May 2013 through August 2015; and John Francis, V.P. of Corporate Development and Investor Relations from Fall 2010 through September 2015.
Over a year long period, beginning in March 2014, the firm pursued a business opportunity which had the prospect of transforming the company, according to the executive team Defendants. Specifically, Blue Earth had a business opportunity centered on the construction, ownership and operation of “combined heat and power (CHP) plants for a large North American processor of beef, pork, poultry, and lamb.” The firm’s executive team claimed that the never-profitable firm would be transformed, generating over $75 million per year with earnings of $20 million or more for ten years by the project. Those prospects were tied to critical foundation building elements that included the execution of contracts with the meat processing company for multiple sites. Those agreements would require at least $120 million for construction alone.
In repeated presentations to investors, the executive team claimed that “it acquired CHP projects from another company and had contracts with the meat processing company to construct and operate CHP plants. The firm also reported assets of over $44 million on its balance sheet that supposedly reflected those CHP projects. At the same time the firm reported equipment orders for plants not yet approved by the meat processing company and stated it was making progress payments.
None of these representations were true. Ultimately the firm was not able to implement many of the key foundation elements necessary for the project. Blue Earth tumbled into bankruptcy. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)-5 and 16(a). The case is pending. See Lit. Rel. No. 24522 (June 28, 2019). See also In the Matter of R. Gordon Jones, C.P.A. Adm. Proc. File No. 3-19224 (June 28, 2019)(An accounting consultant to the company who is alleged to have participated in the violations; resolved with a cease and desist order based on Exchange Act Sections 13(a) 13(b)(2)(A) &(B) and 13(b)(5), the denial of the privilege of appearing and practicing before the Commission as an accountant and the imposition of a $70,000 penalty); In the Matter of S. Jeffrey Jones, CPA, Adm. Proc. File No. 3-19225 (June 28, 2019)(engagement partner on audits by external firm alleged to have engaged in unprofessional conduct by failing to conduct audits in accord with PCAOB standards; resolved with the entry of an order denying Respondent the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after two years).
Finally, the Commission’s action in SEC v. Rinfret, Civil Action No. 19-cv- 6037 (S.D.N.Y. Filed June 28, 2019) centered on a very different kind of business transaction. Here, Defendant Paul Andrews Rinfret, who had been associated with a number of broker-dealer from 1989 to 2005, allegedly sought only to line his own bank account – no failing or struggling business was involved. Over a five-year period, beginning in late 2013, Defendant Rinfret is alleged to have defrauded at least five investors out of about $19.5 million. The investors purchased limited partnership interests in Plandome LLC, a firm that supposedly traded futures contracts. Investors were told that their funds would be used to day-trade S&P 500 futures contracts using an extremely successful strategy that generated triple-digit returns as high as 362%. Indeed, Plandome supposedly never lost money and had about $25 million in AUM.
In fact, the firm did little futures trading. Much of the investor money was misappropriated by Mr. Rinfret. In 2019 the scheme collapsed. When confronted by two investors Mr. Rinfret “told them that he had lost all of Plandome’s money trading and that the proprietary algorithm [that supposedly guided trading] had never worked. Rinfret also admitted that he had sent falsified account statements to investors each month.” The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24521 (June 28, 2019).
In the end, the common denominator to each of these very different situations is the same: Investors were solicited to what was supposed to be an investment, an opportunity to make money. Yet in each instance the deck was stacked against them. In each instance they lost their hard earned capital.