With Investment Fund Fraud All Is Never As It Seems

Enforcement officials have brought what seems to be an endless stream of Ponzi scheme and investment fund fraud cases in recent years. Once exposed the schemes often appear simple and obvious which may leave many wondering how investors were duped into parting with their funds.

The reality is quite different, a point well illustrated by the SEC’s most recent investment fund fraud case, SEC v. Innovida Holdings, LLC, Case No. 1:12-cv-24326 (S.D.Fla. Filed Dec. 7, 2012). Innovida Holdings was a manufacturer of innovative, energy efficient products. Its website described the company as a manufacturer of “building solutions that bridge the gap between energy efficiency, affordability and high quality. Using its proprietary technology, Innovida manufactures fiber composite panels which are used to build residential, commercial, government, military . . . structures without the use of cement, steel, or wood and with significant savings . . . and [which] are energy . . . “ efficient.

The company had a solid board of directors and management. The board included a former Florida governor, a lobbyist and a successful real estate developer. Its CEO was defendant Claudio Osorio who was also a member of the board. His is a former Ernst & Young Entrepreneur of the Year Award winner. Its CFO was defendant Craig Toll, a well established certified public accountant in Florida. The company products apparently met Miami-Dade Country hurricane code requires and were used to build homes in the area.

This appearance of legitimacy was used by Mr. Osorio to raise about $16.8 million from five investors in 2009 and 2010. In September 2009 one investor purchased $100,000 of Mr. Osorio’s interest in the company for a five percent stake in the company. At the time the investor was told that the company was worth about $50 million. That representation followed one made to other investors earlier in the month who had attended a board of directors meeting that the company was valued at $250 million. In fact Mr. Orsorio had no basis for either representation. At the time the investor was induced to purchase a stake in the company it had less than $40,000 in cash or cash equivalent assets.

Another investor put $312,000 in the company, also in September 2009. At the time he relied Mr. Osorio claim that had tens of millions of dollars in his own funds in the company. In fact he did not.

In October 2009 Mr. Osorio raised about $16.8 million from five investors. The funds were to grow the business. In fact Mr. Osorio used about half of the money for himself.

Another investor was induced to add $3.7 million to his initial investment based on the claim that a sovereign wealth fund would buy units from existing shareholders at $2.50 per share. There was no deal with a sovereign wealth fund.

Eventually an investor began a state court action against the company which resulted in the appointment of a receiver. The company ended in Chapter 11 bankruptcy.

The Commission’s complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is in litigation. See also Lit. Rel. No. 22563 (Dec. 7, 2012).

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