Enforcement News: SEC Charges California-Based Real Estate Development Company and its CEO for An Affinity Fraud Offering

• Posted on: Dec 23 2020

Affinity fraud is a type of securities fraud. In this form of fraud, the person committing 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 fraudster 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 fraudsters have used respected community or religious leaders to convince others to join the investment.

Many affinity frauds involve Ponzi schemes or pyramid schemes, where new investor money is used to make payments to earlier investors to give the illusion that the investment is successful. New investors are induced to invest in the scheme and existing investors are lulled into believing their investments are profitable. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use. Both types of schemes depend on an unending supply of new investors – when the inevitable occurs, and the supply of new money stops, the scheme collapses, and investors lose most or all of their money.

On December 21, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that it filed an emergency action against California-based real estate development company SiliconSage Builders LLC, aka Silicon Sage Builders, and its sole owner, Sanjeev Acharya, in connection with an alleged $119 million fraudulent offering.

According to the SEC’s complaint (here), Silicon Sage Builders and Acharya raised money from approximately 250 retail investors, most of whom were members of the Northern California South Asian community, by falsely describing Silicon Sage Builders’ real estate business as profitable and promising investors exorbitant returns. The SEC alleged that, in reality, from 2016 to 2019, all but one of Silicon Sage Builders’ projects had significant cost overruns and did not generate enough money to pay investors the promised returns. The SEC also alleged that Acharya misled investors into believing the payments they received were derived from Silicon Sage Builders’ profits when, in fact, Silicon Sage Builders and Acharya had used new investor funds to pay earlier investors. The SEC further alleged that Acharya misled investors as to the amount of money the company was attempting to raise and falsely told investors they could redeem their investments despite there being insufficient funds to meet redemption requests.

“As we allege in our complaint, wrongdoers sometimes prey on the trust of members of their communities to raise funds for their fraudulent schemes,” said Alka Patel, Associate Regional Director of the SEC’s Los Angeles Regional Office. “Affinity frauds are particularly harmful to retail investors, and this case demonstrates the SEC’s commitment to pursuing such schemes and protecting retail investors.”

The SEC filed its complaint in the U.S. District Court for the Northern District of California. The SEC charged Silicon Sage Builders and Acharya with violating the antifraud provisions of the federal securities laws. In particular, the SEC charged Silicon Sage Builders and Acharya with, among other thing, misleading and deceiving Silicon Sage investors (a) about the safety and security of investors’ funds, how the funds were used, and the promised returns, including: the profitability of Silicon Sage and all of its real estate projects, the source of the interest payments paid to fund investors, the ability to redeem investments, and the amount of the offering, and (b) by making Ponzi payments and lulling existing investors to contribute new capital, roll over existing investments, and defer interest payments. The SEC seeks preliminary and permanent injunctions, the appointment of a receiver over Silicon Sage Builders, asset freezes, disgorgement with prejudgment interest, and financial penalties against the defendants, as well as an order prohibiting the destruction of documents and an accounting.

Takeaway

The SEC has a long history of commencing enforcement proceedings against affinity fraud promoters. Indeed, 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.] 

In the SEC’s Investor Publication, “Affinity Fraud: How to Avoid Investment Scams That Target Group,” the Commission provides a number of helpful tips on how to avoid an affinity fraud (here). These include:

• Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investors should investigate the investment thoroughly and check the truth of every statement made about the investment. 
• Do not fall for investments that promise spectacular profits or “guaranteed” returns. If an investment seems too good to be true, then it probably is. Similarly, investors should be very hesitant to purchase a security that is said to have no risks. As noted by the SEC, the greater the potential return from an investment, the greater one’s risk of losing money. “Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.”
• Investors should be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing. Legitimate investments are usually in writing. If a person says that they do “not have the time to reduce to writing” the particulars about the investment, investors should be leery about the opportunity. Investors should also be suspicious if a person says to keep the investment opportunity confidential.
• Investors should not feel pressured or rushed into buying an investment; investors should think about – or investigate – the investment opportunity. 
• Investors should be skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.
• Investors should avoid unsolicited emails offering investment opportunities. 

As the Silicon Sage Builder action shows, investors should be suspicious of investment opportunities that come from members of an ethnic community or religious group. An investment opportunity should never be based on a promise of high returns and little to no risk, even if those opportunities come from trusted people within the community or group. Investors should always perform due diligence before acting on an investment opportunity by conducting their own research or consulting a securities broker or investment advisor.  If an investment opportunity seems suspicious, a “can’t miss” or “too good to be true”, then investors should steer clear of the opportunity. And, in such cases, investors should report those opportunities to the SEC.