Enforcement News: SEC Charges California Company and its Principals With Operating a Ponzi-Like Scheme

• Posted on: Nov 3 2021

By: Jeffrey M. Haber

This Blog has written numerous articles about Ponzi schemes and the enforcement proceedings that resulted from them. See, e.g., here, here, here, here, and here. 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, taking investors, many of whom are the later ones in the scheme, down with them.

Today, we examine SEC v. BNZ One Capital, LLC, an enforcement action involving a Ponzi-like scheme that bilked more than 100 retail investors out of millions of dollars.

The SEC announced the action on October 29, 2021 (here). The SEC charged BNZ One Capital, LLC, a Newport Beach, California-based company, and its co-founders and co-managers Brett Barber and Louis Zimmerle, for fraudulently raising $13.5 million from more than 100 retail investors.

According to the SEC’s complaint (here), since June 2019, defendants have raised $13.5 million from retail investors by telling them BNZ was in the business of making investments in real estate and alternative investments and promising to pay investors significant returns, generally 10% per year. The SEC alleged that defendants used only $6.4 million of the $13.5 million raised from investors to invest in real estate and alternative investments. Those investments, said the SEC, generated only $300,000 in profits. According to the complaint, despite generating minimal profits, the defendants paid investors returns of at least $1.7 million using funds raised from other investors in Ponzi-like fashion, and transferred over $1.6 million to Barber through his company, Guaranteed Income Solutions Inc., and over $700,000 to Zimmerle. According to the SEC, defendants made false and misleading statements to investors regarding, among other things, the source of the payment of the investor returns.  In addition, said the SEC, Barber allegedly misled investors by touting his education in finance and his investment experience without also disclosing that he had been barred by the Financial Industry Regulatory Authority from affiliating with any member firm.

“The complaint here alleges that when defendants failed to earn sufficient profits in order to pay investor returns, they made Ponzi-like payments to investors using other investors’ money, and, separately, also used investor funds to pay themselves handsomely,” said Michele Wein Layne, Regional Director of the SEC’s Los Angeles Regional Office. “Individuals who engage in such misconduct should expect to be held accountable for their actions by the SEC.”

The complaint charges BNZ, Barber, and Zimmerle with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, violating the registration provisions of Sections 5(a) and (c) of the Securities Act, and, as to Barber and Zimmerle, violating the broker-dealer registration provisions of Section 15(a) of the Exchange Act. The complaint also charges Barber and Zimmerle as control persons of BNZ under Section 20(a) of the Exchange Act. The complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties from BNZ, Barber, and Zimmerle, and disgorgement with prejudgment interest from Relief Defendant Guaranteed Income Solutions.

In a parallel action, the Department of Justice brought criminal charges against defendants (here). The allegations in the indictments mirror those in the complaint filed by the SEC. We briefly discuss the facts alleged by the DOJ.

According to court documents, BNZ, its principals (i.e., Barber and Zimmerle), and several marketers raised money from investors by falsely representing that the firm bought and sold real estate projects and “flipped” real estate. Defendants falsely promised investors a “guaranteed” return of between 8 percent and 10 percent, as well as potential bonuses based on successful deals. According to the indictments, Barber told investors that their funds were “safe” and “FDIC insured.”

According to the DOJ, although BNZ did purchase some real estate, it did not take any substantial steps to develop parcels, nor did BNZ flip real estate for a profit. Rather, BNZ primarily used investor funds to allegedly pay Barber, Zimmerle, and others associated with the scheme, including purchasing residences where Barber and Zimmerle lived. According to court documents, some of the investors’ money was used to repay earlier investors.

During the scheme, Barber, Zimmerle, and the marketers solicited or caused to be transferred to BNZ approximately $13.8 million from investors. Because several million dollars were paid to earlier investors, investigators estimate that actual losses resulting from this alleged Ponzi-like scheme are more than $9 million. In his plea agreement, Zimmerle admitted that he received and kept approximately $582,815 of investor money.

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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.