Dec 29, 2017 | Shareholder & Investor Protection
Initial Coin Offerings – ICOs
The SEC’s Office of Investor Education and Advocacy has provided the following information to make investors aware of the potential risks of participating in Initial Coin Offerings – ICOs:*
Initial Coin Offerings, also known as ICOs or token sales, are being used to raise capital; however, new technologies and financial products, such as those associated with Initial Coin Offerings, can be used improperly to entice investors with the promise of high returns in a new investment space.
Initial Coin Offerings – Virtual Coins & Tokens – Background
Virtual coins or tokens are created and disseminated using distributed ledger or blockchain technology. Recently, promoters have been selling virtual coins or tokens in Initial Coin Offerings. Purchasers may use fiat currency (e.g., U.S. dollars), or virtual currencies, to buy virtual coins or tokens. Promoters may tell purchasers that the capital raised from the sales will be used to fund development of a digital platform, software, or other projects and that the virtual tokens or coins may be used to access the platform, use the software, or otherwise participate in the project.
Some promoters and initial sellers may lead buyers of the virtual coins or tokens to expect a return on their investment or to participate in a share of the returns provided by the project. After they are issued, the virtual coins or tokens may be resold to others in a secondary market on virtual currency exchanges or other platforms.
Depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities. If they are securities, the offer and sale of these virtual coins or tokens in an ICO are subject to the federal securities laws.
SEC’s Investigation of a Virtual Organization – Federal Securities Laws Apply
The SEC’s “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” describes an SEC investigation of The DAO, a virtual organization, and its use of distributed ledger or blockchain technology to facilitate the offer and sale of DAO Tokens to raise capital.
The SEC applied existing U.S. federal securities laws to determine that DAO Tokens were securities. The SEC emphasized that those who offer and sell securities in the United States are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.
The SEC investigative report stated that its investigative
. . . [r]eport reiterates these fundamental principles of the U.S. federal securities laws and describes their applicability to a new paradigm—virtual organizations or capital raising entities that use distributed ledger or blockchain technology to facilitate capital raising and/or investment and the related offer and sale of securities. The automation of certain functions through this technology, “smart contracts,”[] or computer code, does not remove conduct from the purview of the U.S. federal securities laws.[] This Report also serves to stress the obligation to comply with the registration provisions of the federal securities laws with respect to products and platforms involving emerging technologies and new investor interfaces. [Emphasis added]
Image: Pixabay, Gerd Altmann (geralt), CC0 1.0 Universal
Initial Coin Offerings & Virtual Currency – Some Concepts to Help Investors Understand a New, Complex Investment Area
Blockchain
A blockchain is an electronic distributed ledger or list of entries – much like a stock ledger – that is maintained by various participants in a network of computers. Blockchains use cryptography to process and verify transactions on the ledger, providing comfort to users and potential users of the blockchain that entries are secure. Examples of blockchain are the Bitcoin and Ethereum blockchains, which are used to create and track transactions in bitcoin and ether, respectively.
Virtual Currency, Token or Coin
A virtual currency is a digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account, or store of value. Virtual tokens or coins may represent other rights as well. Accordingly, in certain cases, the tokens or coins will be securities and may not be lawfully sold without registration with the SEC or pursuant to an exemption from registration.
Virtual Currency Exchange
A virtual currency exchange is a person or entity that exchanges virtual currency for fiat currency, funds, or other forms of virtual currency. Virtual currency exchanges typically charge fees for these services. Secondary market trading of virtual tokens or coins may also occur on an exchange. These exchanges may not be registered securities exchanges or alternative trading systems regulated under the federal securities laws. Accordingly, in purchasing and selling virtual coins and tokens, you may not have the same protections that would apply in the case of stocks listed on an exchange.
Issuance of Virtual Tokens or Coins
Virtual tokens or coins may be issued by a virtual organization or other capital raising entity. A virtual organization is an organization embodied in computer code and executed on a distributed ledger or blockchain. The code, often called a “smart contract,” serves to automate certain functions of the organization, which may include the issuance of certain virtual coins or tokens.
Initial Coin Offerings – Participation in an Initial Coin Offering – Things to Consider
Depending on the facts and circumstances, the offering may involve the offer and sale of securities. If that is the case, the offer and sale of virtual coins or tokens must itself be registered with the SEC, or be performed pursuant to an exemption from registration. Before investing in an ICO, ask whether the virtual tokens or coins are securities, whether the persons selling them registered the offering with the SEC, in addition to keeping the following in mind about registration:
-If an offering is registered, you can find information (e.g., registration statement or “Form S-1”) on SEC.gov through the SEC’s EDGAR.
-If a promoter states that an offering is exempt from registration, and you are not an accredited investor, you should be very careful – most exemptions have net worth or income requirements.
-Although Initial Coin Offerings are sometimes described as crowdfunding contracts, it is possible that they are not being offered and sold in compliance with the requirements of Regulation Crowdfunding or with the federal securities laws generally.
Ask what your money will be used for and what rights the virtual coin or token provides to you. The promoter should have a clear business plan that you can read and that you understand. The rights the token or coin entitles you to should be clearly laid out, often in a white paper or development roadmap. You should specifically ask about how and when you can get your money back in the event you wish to do so. For example, do you have a right to give the token or coin back to the company or to receive a refund? Can you resell the coin or token? Are there any limitations on your ability to resell the coin or token?
If the virtual token or coin is a security, federal and state securities laws require investment professionals and their firms who offer, transact in, or advise on investments to be licensed or registered. At Investor.gov, one can check the registration status and background of these investment professionals.
Ask whether the blockchain is open and public, whether the code has been published, and whether there has been an independent cybersecurity audit.
Fraudsters often use innovations and new technologies to perpetrate fraudulent investment schemes. Fraudsters may entice investors by touting an Initial Coin Offering investment “opportunity” as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors should always be suspicious of jargon-laden pitches, hard sells, and promises of outsized returns. Also, it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.
Virtual currency exchanges and other entities holding virtual currencies, virtual tokens or coins may be susceptible to fraud, technical glitches, hacks, or malware. Virtual tokens or virtual currency may be stolen by hackers.
Investing in an Initial Coin Offering may limit your recovery in the event of fraud or theft. While you may have rights under the federal securities laws, your ability to recover may be significantly limited.
If fraud or theft results in you or the organization that issued the virtual tokens or coins losing virtual tokens, virtual currency, or fiat currency, you may have limited recovery options. Third-party wallet services, payment processors, and virtual currency exchanges that play important roles in the use of virtual currencies may be located overseas or be operating unlawfully.
Initial Coin Offerings – Law Enforcement Challenges & Possible Limitations on Investor Remedies
Law enforcement officials may face particular challenges when investigating ICOs and, as a result, investor remedies may be limited. Challenges include:
Tracing money. Traditional financial institutions (such as banks) often are not involved with ICOs or virtual currency transactions, making it more difficult to follow the flow of money.
International scope. ICOs and virtual currency transactions and users span the globe. Although the SEC regularly obtains information from abroad (such as through cross-border agreements), there may be restrictions on how the SEC can use the information and it may take more time to get the information. In some cases, the SEC may be unable to obtain information from persons or entities located overseas.
No central authority. As there is no central authority that collects virtual currency user information, the SEC generally must rely on other sources for this type of information.
Freezing or securing virtual currency. Law enforcement officials may have difficulty freezing or securing investor funds that are held in a virtual currency. Virtual currency wallets are encrypted and unlike money held in a bank or brokerage account, virtual currencies may not be held by a third-party custodian.
“Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.
Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication—meaning you didn’t ask for it and don’t know the sender—about an investment opportunity.
Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.
Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.
Unlicensed sellers. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status on Investor.gov.
No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Many registration exemptions require that investors are accredited investors; some others have investment limits. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income or whether investment limits apply.
Pixabay, QuinceMedia, CC0 1.0 Universal
Initial Coin Offering Investors
If you invested in an Initial Coin Offering and wish to speak privately with a securities attorney about your potential legal rights, please complete the form on the right or e-mail [email protected].
*Source: U.S. Securities and Exchange Commission’s “Investor Bulletin: Initial Coin Offerings,” available at Investor.gov.
Dec 22, 2017 | Shareholder & Investor Protection
SEC Charges & Asset Freeze Against Group of Unregistered Funds & Their Owner Who Allegedly Bilked Thousands of Retail Investors in a $1.2 Billion Ponzi Scheme
Robert H. Shapiro & Woodbridge Group of Companies LLC Defrauded More than 8,400 Investors in Unregistered Woodbridge Funds – SEC Complaint Alleges
According to the SEC’s press release, the SEC complaint alleges that
Woodbridge advertised its primary business as issuing loans to supposed third-party commercial property owners paying Woodbridge 11-15 percent annual interest for “hard money,” short-term financing. In return, Woodbridge allegedly promised to pay investors 5-10 percent interest annually. Woodbridge and Shapiro allegedly sought to avoid investors cashing out at the end of their terms and boasted in marketing materials that “clients keep coming back to [Woodbridge] because time and experience have proven results. Over 90% national renewal rate!” While Woodbridge claimed it made high-interest loans to third parties, the SEC’s complaint alleges that the vast majority of the borrowers were Shapiro-owned companies that had no income and never made interest payments on the loans. [Emphasis added]
The SEC complaint alleges that Shapiro and Woodbridge used investors’ money to pay other investors, and paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.” Shapiro, of Sherman Oaks, California, is alleged to have diverted at least $21 million for his own benefit, including to charter planes, pay country club fees, and buy luxury vehicles and jewelry. According to the complaint, the scheme collapsed in typical Ponzi fashion in early December as Woodbridge stopped paying investors and filed for Chapter 11 bankruptcy protection.
The SEC’s press release stated that the action was filed “to prevent further dissipation of investor assets after obtaining court orders in September and November in subpoena enforcement actions that forced the unregistered [Woodbridge Group of] companies to open their books.”
Woodbridge Ponzi Scheme – Woodbridge Business Model a Sham
The SEC’s press release also stated that the “complaint alleges that Woodbridge’s business model was a sham,”; “[t]he only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money”; “Shapiro used a web of layered companies to conceal his ownership interest in the purported third-party borrowers”; and “Shapiro used the scheme to line his pockets with millions of investor dollars.” [Emphasis added]
SEC v. Robert H. Shapiro, Woodbridge Group of Companies, LLC, d/b/a Woodbridge Wealth, RS Protection Trust, WMF Management, LLC, Woodbridge Structured Funding, LLC, et al
Woodbridge Ponzi Schem: Web of More than 275 Limited Liability Companies Used to Conduct the Massive Ponzi Scheme
According to the SEC complaint:
Beginning in July 20 12 through December 4, 20 17, Defendant Robert H. Shapiro (“Shapiro“) used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $ 1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings. Shapiro promised investors they would be repaid from the high rates of interest Shapiro‘s companies were earning on loans the companies were purportedly making to third-party borrowers. However, nearly all the purported third-party borrowers were actually limited liability companies owned and controlled by Shapiro, which had no revenue, no bank accounts, and never paid any interest under the loans. [Emphasis added]
Despite receiving over one billion dollars in investor funds, Shapiro and his companies only generated approximately $13.7 million in interest income from truly unaffiliated third-party borrowers. Without real revenue to pay the monies due to investors, Shapiro resorted to fraud, using new investor money to pay the returns owed to existing investors. Meanwhile Shapiro and his family lived in the lap of luxury and spent exorbitant amounts of investor money in alarming fashion, on items such as luxury automobiles, jewelry, country club memberships, fine wine, and chartering private planes. [Emphasis added]
By December 20 17, the fraudulent scheme collapsed. Shapiro and his companies became unable to timely meet their obligation to pay investors their monthly dividends and interest payments. Fundraising from investors was halted, and on December 4, 20 17, Shapiro caused most of his companies to file Chapter 11 bankruptcy. The effect of Shapiro and his companies’ actions will leave investors with substantial losses, as they are owed at least $961 million in principal. At least 2,600 of these investors unknowingly placed their retirement savings into Shapiro’s Ponzi scheme. [Emphasis added]
Woodbridge Ponzi Scheme Entities – Essential to Shapiro’s Fraudulent Business Operation
The SEC’s complaint alleges that the following entities were essential to Shapiro’s fraudulent business operation:
Woodbridge Group of Companies, LLC (d/b/a Woodbridge Wealth); RS Protection Trust; WMF Management, LLC; Woodbridge Structured Funding, LLC (a/k/a Woodbridge Structured Funding of Florida, LLC); Woodbridge Mortgage Investment Fund 1, LLC; Woodbridge Mortgage Investment Fund 2, LLC; Woodbridge Mortgage Investment Fund 3, LLC; Woodbridge Mortgage Investment Fund 3A, LLC; Woodbridge Mortgage Investment Fund 4, LLC; Woodbridge Commercial Bridge Loan Fund 1, LLC; Woodbridge Commercial Bridge Loan Fund 2, LLC; 144 Woodbridge–Affiliated Property Limited Liability Companies & 131 Woodbridge-Affiliated Holding Limited Liability Companies
Woodbridge Ponzi Scheme: Misrepresentations & Omissions to Investors & Ponzi Scheme Payments
The SEC complaint stated:
Shapiro, as the sole person in control of the Corporate Defendants, not only mad material misrepresentations and omissions to investors, but also signed falsified documents, controlled the company’s bank accounts, made Ponzi payments to investors, paid significant sales commissions to unregistered sales agents, and misappropriated investor funds for his own personal enjoyment and the enjoyment of his family.
At Shapiro ‘s direction, Woodbridge’s network of hundreds of in-house and external sales agents raised in excess of $1.22 billion dollars, falsely selling Woodbridge‘s investments as “safe” and “secure“. Shapiro and Woodbridge directed that investor funds be deposited into [various] accounts . . . (with Shapiro as the sole authorized signer) and almost immediately commingled the funds into Woodbridge‘s operating account.
Shapiro and Woodbridge used at least $328 million to repay principal and interest to investors and spent at least another $ 172 million on operating expenses, including $64.5 million on sales agent commissions and $44 million on payroll. Shapiro also spent at least $21 million of investor funds on extravagant personal expenditures.
Woodbridge Ponzi Scheme: Shapiro Properties Had No Revenue Source or Bank Accounts
The SEC complaint stated that
Shapiro selected which properties would be purchased with the investors’ commingled funds. Shapiro would create a Shapiro Property LLC to hold title to the property, making RS Trust and Shapiro the ultimate beneficial owners of the properties. The Shapiro Property LLCs, which had no revenue source or bank accounts, then issued promissory notes to one of the Fund entities promising to pay monthly interest, with the principal usually due in one year. Despite the Shapiro Property LLCs having no ability to pay monthly interest, Shapiro and Woodbridge created investment products which sought to market these Shapiro Property LLC’s promissory notes as “low risk” and “simpler” investments.
Because . . . entities were not receiving any interest payments on the Shapiro Property LLC promissory notes, Shapiro instead used new investor funds to pay the interest and dividends owed to previous investors. These interest payments created the illusion that Shapiro and Woodbridge were successfully loaning investor funds as promised to legitimate third–party borrowers who had an ability to pay monthly interest. This allowed Woodbridge and Shapiro to continually induce new investors to participate in their investment products and induce existing investors to rollover their investment into a new note upon maturity, thus delaying Shapiro‘s and Woodbridge’s need to come up with cash to repay the principal balance.
Woodbridge Ponzi Scheme: Relief Defendants
The SEC’s complaint named the following as Relief Defendants:
Jeri Shapiro (Shapiro’s wife), Woodbridge Realty of Colorado, LLC d/b/a Woodbridge Realty Unlimited; Woodbridge Luxury Homes of California, Inc. d/b/a Mercer Vine, Inc.; Riverdale Funding, LLC; Schwartz Media Buying Company, LLC; and WFS Holding Co. LLC, all of which, according to the SEC complaint, received proceeds of the fraud without any legitimate entitlement to the funds.
Woodbridge Investors
If you invested in the Woodbridge Group of Companies, LLC; Woodbridge Structured Funding, LLC; RS Protection Trust or WMF Management, LLC and wish to speak privately with a securities attorney, please fill out the form on the right or send an e-mail to [email protected].
Dec 19, 2017 | Shareholder & Investor Protection
Behavioral Recognition Systems & Former CEO Charged with Fraudulently Raising Approximately $28 million from Investors & Diverting More than $7.8 million for Former CEO’s Benefit
On December 14, 2017, the SEC issued a Litigation Release which stated:
The Securities and Exchange Commission . . . charged [Behavioral Recognition Systems] and its former CEO with fraudulently raising approximately $28 million from investors and then diverting more than $7.8 million of those proceeds for the former CEO’s personal benefit.
According to the SEC’s Litigation Release, the SEC’s complaint, filed in United States District Court, Southern District of Texas, Houston Division, stated that
. . . Behavioral Recognition Systems, Inc. . . . and CEO Ray C. Davis, solicited over $28 million from hundreds of investors through repeated lies, such as that investor funds would only be used for working capital and [Behavioral Recognition Systems] only paid Davis a nominal salary. In reality, as the complaint alleges, [Behavioral Recognition Systems] and Davis secretly diverted millions of dollars of investor money for Davis’s personal use, including to purchase ancient jewelry, gold, and other artifacts and to fund Davis’s and his wife’s joint bank account. [Behavioral Recognition Systems] and Davis allegedly covered their tracks using fake invoices in the names of two shell companies Davis controlled, the Blackstone Group, Inc. and Afcon Communications, Inc., purportedly for services they provided to [Behavioral Recognition Systems]. Davis also allegedly invented a fake company and used fictitious invoices in that company’s name to cause [Behavioral Recognition Systems] to send payments to an antiques broker for Davis’s personal purchases. The invoices listed a purported address for the company in Australia; however[,] the address was for an Australian cemetery where an individual is buried with the name of the fake company. [Emphasis added].
SEC Charges Against Behavioral Recognition Systems & Ray C. Davis – Blackstone Group, Inc., Afcon Communications, Inc. and Former CEO’s Wife, Debra Davis, Named As Relief Defendants
The SEC’s Litigation Release stated that [i]n a parallel action, the U.S. Attorney’s Office for the Southern District of Texas today unsealed criminal charges against Davis. [Emphasis added].
The SEC’s Litigation Release also stated that
[t]he SEC’s complaint charges [Behavioral Recognition Systems] and Davis with violating Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, [Behavioral Recognition Systems] with violating Section 17(a)(2) of the Securities Act and Rule 10b-5 under the Exchange Act, and Davis with violating Rules 10b-5(a) and (c) under the Exchange Act and aiding and abetting [Behavioral Recognition Systems’] violations of Section 17(a)(2) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The SEC seeks permanent injunctions and disgorgement of allegedly ill-gotten monetary gains plus interest from [Behavioral Recognition Systems] and Davis, and a civil penalty from Davis. The SEC also names the Blackstone Group, Afcon and Davis’ wife, Debra Davis, as relief defendants for the purpose of recovering investor proceeds.
According to the SEC’s complaint summary:
Ray C. Davis and Behavioral Recognition Systems, Inc. (now known as Giant Gray, Inc.) (“BRS”) engaged in a fraudulent scheme that began as early as March 2010. As part of the scheme, the Defendants solicited over $28 million from investors in seven equity security offerings between January 2013 and July 2015 (the “Relevant Period”). To raise the funds, BRS made material misrepresentations and misleading statements to investors regarding BRS’s (1) intended use of investor proceeds; (2) executive compensation; (3) related party transactions; and (4) operating expenses.
Davis participated in and substantially assisted BRS’s material misstatements to investors. He was the highest-ranking executive at BRS and the executive in charge of fund raising. Davis was also responsible for the company’s offering documents, which contained multiple false and misleading statements. He participated in drafting them, approved them, authorized their distribution to prospective investors, and personally used them to raise funds for BRS from prospective investors.
Although BRS claimed in the offering documents that investor funds would be used for “growth,” “mezzanine funding,” “working capital,” and “general corporate purposes” to build BRS’s business, as Defendants raised the $28 million from investors, Davis siphoned approximately $7.8 million for his own use and benefit, engaging in a fraudulent scheme that began in at least March 2010, and continued throughout the Relevant Period.
From at least March 2010, Davis used shell corporations that he controlled to divert approximately $11 million ($7.8 million during the Relevant Period) of the BRS investors’ funds for his personal benefit. To make the payments to the shell companies appear legitimate, Davis submitted, or caused to be submitted, to BRS dozens of invoices falsely claiming that these shell companies provided services to BRS.
Contrary to the statements in the offering documents, Davis used the diverted investor funds for his own purposes, including: (a) $5.2 million in transfers to Davis’s and his wife’s joint bank account; (b) purchases from an art gallery in Boca Raton, Florida; and (c) payments to a well- known auction house.
Davis also caused BRS to send an additional $679,000 to an antiques broker to pay for Davis’s personal purchases of ancient jewelry, gold, and other artifacts, including gold pendants, gold crosses, pearl bracelets, garnet pendants, and gold rings. To make these payments appear legitimate, Davis created a fake entity called “LS Farrow” and on at least three occasions submitted, or caused to be submitted, invoices to BRS that falsely claimed “LS Farrow” operated from Victoria, Australia and provided “financial services” to the company. But, in reality, no such entity exists and no such services were ever provided. In fact, the Victoria, Australia address Davis used on the invoices was really the address for a cemetery in Australia where a person named LS Farrow is interred.
Kehoe Law Firm, P.C. is a multidisciplinary, plaintiff–side law firm dedicated to protecting investors and consumers from corporate fraud, negligence, and other wrongdoing. Driven by a strong and principled sense of social responsibility and obtaining justice for the aggrieved, Kehoe Law Firm, P.C. represents plaintiffs seeking to recover investment losses resulting from securities fraud, breaches of fiduciary duty, corporate wrongdoing or malfeasance, those harmed by anticompetitive practices, and consumers victimized by fraud, false claims, deception or data breaches. Together, the partners of Kehoe Law Firm, P.C. have spent more than 30 years prosecuting precedent-setting securities and financial fraud cases in federal and state courts on behalf of institutional and individual clients.
