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.
Complaint Details: Securities and Exchange Commission v. Ray C. Davis and Behavioral Recognition Systems, Inc., n/k/a Giant Gray, Inc., No. 17-cv-03774 (S.D. Tex. filed Dec. 14, 2017)
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.