Enforcement News: SEC Brings Emergency Action Against Alleged Perpetrators of an Affinity Fraud and a Ponzi SchemePrint Article
- Posted on: Apr 19 2022
By: Jeffrey M. Haber
Affinity fraud is a type of securities fraud in which the promoter of the fraud preys upon members of an identifiable group, such as a religious or ethnic community, the elderly, or a professional group. The promoter of an affinity fraud frequently is – or pretends to be – a member or a good friend of the group. The promoter often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests.
Affinity frauds exploit the trust and friendship that exist in a group of people who have something in common. Because of the tight-knit structure of the group, it can be difficult for regulators or law enforcement officials to detect an affinity fraud. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the promoters have used respected community or religious leaders to convince others to join the investment.
Many affinity frauds involve Ponzi schemes. In a Ponzi scheme, the operator creates an investment program in which “profits” are paid to earlier investors with money taken from later investors. The “profits” are, therefore, fictitious instead of returns on investment. Ultimately, Ponzi schemes collapse under their own weight (because the supply of new money stops), taking investors, many of whom are the later ones in the scheme, down with them. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use.
Many Ponzi schemes share common characteristics. These include, among others: high returns with little or no risk – i.e., “guaranteed” investment opportunities; overly consistent returns – i.e., investments that consistently generate positive returns regardless of overall market conditions; unregistered investments – i.e., investments that are not registered with the SEC or with state regulators; unlicensed sellers – i.e., investment professionals and firms that are not licensed or registered with state and federal regulators; secretive, complex strategies – i.e., investment strategies that are locked away in a black box or are the operator’s “secret sauce”; and difficulty receiving payments – i.e., difficulty cashing out or obtaining redemptions.
Shutting down Ponzi schemes and holding the operators accountable for such frauds is an important part of the enforcement mission of the Securities and Exchange Commission (“SEC” or the “Commission”). Recently, in SEC v. Beasley (here), the SEC brought an emergency action against several Las Vegas-area individuals and companies behind an alleged $450 million dollar Ponzi scheme involving purported personal injury settlements. As discussed below, the SEC charged certain defendants with violations of the antifraud provisions of the federal securities laws, certain individual defendants with acting as unregistered brokers, and all defendants with engaging in an unregistered securities offering.
The SEC announced the action on April 15, 2021 (here).
According to the SEC, Matthew Beasley, an attorney, and Jeffrey Judd and Christopher Humphries falsely told hundreds of investors, including many in their church community, that they would earn 12.5 percent quarterly returns by making purportedly risk-free investments in J&J Consulting Services, Inc. (a Nevada corporation), J&J Consulting Services, Inc. (an Alaska corporation), and J and J Purchasing LLC, companies that Judd allegedly controlled.
The SEC claimed that Beasley and Judd created a litigation financing business to supposedly advance funds to tort plaintiffs who had reached settlements with insurance companies. According to the SEC, none of the $449 million raised from investors was used for this purpose. The alleged perpetrators instead used investor money to purchase luxury homes, cars, boats, and a private jet for themselves and paid fictitious returns to keep the Ponzi scheme going.
According to the SEC, on March 3, 2022, Beasley confessed to an FBI negotiator that the litigation funding business was a Ponzi scheme. [Ed. Note: according to news reports, on March 3, 2022, FBI agents sought to execute a search warrant on Beasley’s home, as well as the homes of two other defendants. (E.g., here and here.) As reported by Bloomberg, “When agents arrived at Beasley’s home, Beasley brandished a pistol and the agents shot him twice.” Thereafter, despite his injuries, Beasley “locked himself inside his home for nearly four hours” and “repeatedly confessed” to an FBI negotiator that the so-called investments were part of a Ponzi scheme.]
Commenting on the action, Tanya Beard, Acting Director of the SEC’s Salt Lake Regional Office, said the following: “As alleged in our complaint, Beasley, Judd, and others enriched themselves through lies and deception, using their religious and community networks to fleece investors out of hundreds of millions of dollars after promising them a nearly 50 percent annual increase on their initial investment”.
The SEC filed its complaint (here) in the United States District Court for the District of Nevada. The SEC sought and obtained an asset freeze against Beasley and the other defendants to prevent any further dissipation of investor funds. The SEC is seeking permanent injunctions and disgorgement of ill-gotten gains plus interest and penalties.
Shutting down Ponzi schemes and holding the operators accountable for such frauds is an important part of the SEC’s enforcement mission. Ponzi schemes are notorious for promising guaranteed returns with little or no risk of loss. As alleged in Beasley, no risk, no loss investing is exactly what defendants promised.
As also alleged in Beasley, Ponzi scheme operators perpetrate their fraud on communities in which they are a part of. For this reason, many Ponzi schemes involve an affinity fraud. The SEC has a long history of commencing enforcement proceedings against affinity fraud promoters. In this regard, the SEC has investigated and taken quick action against affinity frauds that have targeted a wide spectrum of groups. [Ed. Note: For a list of some of the SEC’s actions and links to the announcements, readers can go here.]
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.