Enforcement News: A Double Shot of Ponzi Schemes with a Dose of Affinity Fraud

• Posted on: Jun 28 2023

By: Jeffrey M. Haber

On many occasions, we have written about Ponzi schemes that have been the subject of enforcement actions brought by, and/or settlements with, the Securities and Exchange Commission (“SEC” or the “Commission”). E.g., here, here, here, and here. It never ceases to amaze us how often people try to run a Ponzi scheme and do so by exploiting the trust and friendship that exist in groups of people who have something in common, such as a religious group, an ethnic group, or an immigrant community – also known as affinity fraud.¹ [Eds. Note: we wrote about the intersection of Ponzi schemes and affinity fraud here, here, and here.]

Today, we examine two enforcement actions brought by the SEC involving Ponzi schemes, one of which also targeted the Haitian-American community.

SEC v. Royal Bengal Logistics, Inc.

On June 26, 2023, the SEC announced (here) that it brought charges against Sanjay Singh, a resident of Broward County, Florida, and his trucking and logistics company, Royal Bengal Logistics Inc. (“RBL”), for fraudulently raising approximately $112 million from as many as 1,500 investors through an unregistered securities offering that primarily targeted Haitian Americans. See SEC v. Royal Bengal Logistics, Inc., et al., Case 0:23-cv-61179-AHS (S.D. Fla. 2023).

According to the SEC, since at least August 2019, defendants operated a Ponzi scheme and affinity fraud, which targeted South Florida’s Haitian-American community. As explained in the SEC’s complaint (here), defendants offered high-yield investment programs that purportedly generated 12.5% to 325% of “guaranteed” returns. 

The SEC claimed that defendants promised investors their money would be used to grow RBL’S operations and increase RBL’S fleet of semi-trucks and trailers. Among other things, defendants allegedly assured investors and prospective investors that their investment programs were safe, that RBL’S business did not depend on investor funds because it generated up to $1,000,000 per month, and that they had a fleet of over 200 semi-trucks.

The SEC alleged that, in truth, for almost four (4) years, RBL had been operating at a loss of over $18 million. Without sufficient revenue to pay returns owed to investors, said the SEC, defendants used approximately $70 million of new investor money to pay promised returns and redemptions to existing customers.

In addition, Singh allegedly misappropriated at least $14 million of investor funds for himself and others, including the relief defendants (defined below), who did not provide any legitimate services for those investor funds. Defendants also allegedly diverted over $19 million to two brokerage accounts controlled by Singh, who allegedly engaged in highly speculative equities trading on margin, ultimately losing more than $1 million of investor money.

The SEC alleged that defendants did not disclose to investors and prospective investors their misappropriation of investor funds. Nor, said the SEC, did they disclose that investor funds would be used to trade hundreds of millions of dollars in equities on margin.

The SEC claimed that, as of February 2023, RBL’S bank accounts had declined to approximately $2.1 million. The SEC further claimed that RBL would be be unable pay the interest and principal owed to hundreds of investors absent an influx of new investor money in perpetuation of the scheme.

“As alleged in our complaint, Singh targeted many members of the Haitian-American community to raise money in a Ponzi-like scheme to enrich himself,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “We are committed to holding accountable individuals like Singh who prey on investors through lies and deceit.”

The SEC filed its complaint in the United States District Court for the Southern District of Florida. The Commission charged defendants with violating the registration and anti-fraud provisions of the federal securities laws. The complaint also named Singh’s spouse and the spouse of RBL’s Vice President of Business Development as relief defendants. 

The Court granted the SEC’s request for emergency relief, including preliminary injunctive relief, asset freezes, the appointment of a receiver, and an order prohibiting the destruction of documents. The SEC is also seeking an officer and director bar against Singh and permanent injunctions, civil money penalties, and disgorgement of ill-gotten gains with prejudgment interest against both of the defendants and the relief defendants.

SEC v. Baston

On June 23, 2023, the SEC brought charges against Wilson Baston (a/k/a Chanon Gordon) for defrauding numerous investors in a Ponzi scheme, in which he raised millions of dollars through dozens of transactions purportedly to fund real estate investments, but frequently used the money to instead pay off earlier investors and for personal expenses. See SEC. v. Baston, Case 1:23-cv-05347 (S.D.N.Y. 2023).

As noted, Baston involved a Ponzi scheme. It was conducted by defendant, a convicted felon who allegedly used the alias “Chanon Gordon” to conceal his true identity and criminal history while raising millions of dollars in investments from dozens of his investors. According to the SEC, since at least 2018, Defendant solicited more than $10 million in investments based on the false representation that his purported business, the Gordon Management Group (“GMG”), would use investor funds for real estate-related transactions and repay investors, with substantial interest, using the profits from such transactions.

The SEC alleged that, contrary to defendant’s representations, defendant did not use investors’ funds as promised and instead used a substantial portion of the funds to pay for unrelated expenses and to make payments to other investors in a Ponzi-like manner.

The SEC said that in many instances, defendant issued promissory notes to investors that memorialized their investments in GMG. Defendant allegedly raised at least approximately $4 million through transactions involving notes. Pursuant to these notes and related documents, said the SEC, defendant often represented that he and GMG would use investors’ funds to facilitate real estate transactions through (i) the advancement of closing costs to third-party real estate purchasers or (ii) the making of a down payment to secure a sales contract on a particular property and resell it to a third-party purchaser.

According to the SEC, defendant typically promised to repay investors their principal with a high rate of interest equal to up to 25% of the principal within weeks of their investments. In some instances, said the SEC, defendant also purported to pledge collateral to the investors that he either did not own or significantly overvalued.

The SEC also alleged that defendant offered investment contracts in some cases, in which he agreed to pay investors a percentage of net profits (with a guaranteed minimum) on the relevant real estate transaction, in addition to a fixed rate of interest on their principal.

As explained by the SEC in its complaint (here), to carry out his scheme, defendant used bank accounts in the name of GMG. For example, noted the SEC, defendant directed that investors transmit their funds to GMG accounts and accessed GMG accounts to use such funds for cash withdrawals, personal expenses, and repayments to other investors.

The SEC further alleged that, with little cash left in GMG accounts, defendant resisted repaying investors their promised principal, interest, and/or guaranteed share of purported transaction profits. After providing various excuses for delays in repayments, said the SEC, defendant allegedly stopped responding to communications from several investors, who had lost large amounts of money as a result of defendant’s fraudulent conduct.

“As we allege in our complaint, [defendant] deceived investors by using an alias to conceal his criminal history and by initially making payments to create the false appearance of a successful investment strategy,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “This case is yet another example of the SEC’s constant efforts to stop those who profit from lies at the expense of investors.”

The SEC filed its complaint in United States District Court for the Southern District of New York. The Commission charged defendant with violating the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. The SEC seeks permanent injunctive relief; disgorgement plus prejudgment interest; a civil penalty; a conduct-based injunction, which, among other things, would prohibit his future participation in the sale of promissory notes and investment contracts; and an officer and director bar.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York brought criminal charges against defendant (here). The government charged defendant with one count of wire fraud and one count of securities fraud, which, if convicted, carries a maximum sentence of 20 years in prison for each count, and one count of aggravated identity theft, which, if convicted, carries a two-year mandatory sentence in addition to any sentence imposed. 

Commenting on the indictment (here),² U.S. Attorney Damian Williams said: “As alleged, [defendant] used a fake name to conceal his prior convictions and to solicit more than $10 million as part of a series of brazen real estate scams against innocent New Yorkers.  Today’s arrest demonstrates this Office’s commitment to stopping recidivist fraudsters like [defendant] and to seeking justice for victims of financial frauds.”

FBI Assistant Director in Charge Michael J. Driscoll also comments, stating: “As alleged, the defendant ran a fraudulent scheme which used funds intended for real estate investment to repay other investors or use on lavish personal expenses.  This fraud, like many Ponzi schemes, guaranteed large returns on investment, but proved too good to be true.” 

Footnotes

1. In 2014, the SEC issued an investor alert about affinity fraud. The alert can be found here.
2. It is important to remember that the charges in the indictment (here) are merely accusations, and defendant is presumed innocent unless and until proven guilty.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.