Enforcement News: SEC Charges Georgia Investment Adviser and Its Principal with Operating $110 Million Ponzi SchemePrint Article
- Posted on: Sep 13 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 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.
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.
Older investors are particularly vulnerable to the Ponzi operator. Research shows that as people grow older, they become too trusting and fail to recognize false or misleading claims, suspicious intentions and evidence of risky behavior.
Shutting down Ponzi schemes and holding the operators accountable for such frauds is an important part of the SEC’s enforcement mission. Recently, in SEC v. Woods (here), the SEC brought an emergency action against a Ponzi scheme organizer allegedly responsible for fleecing investors, including retirees and seniors, out of millions of dollars. The SEC announced the action on August 25, 2021 (here).
According to the SEC, Defendant, John Woods, has been running a massive Ponzi scheme for over a decade. By the end of July 2021, more than 400 people had invested money in Horizon Private Equity, III, LLC (“Horizon”) (i.e., the investment vehicle used in the Ponzi scheme). According to the SEC, investors are owed over $110,000,000 in principal. Many victims of the alleged Ponzi scheme are elderly and retirees who were preyed upon by investment advisers at Livingston Group Asset Management Company d/b/a Southport Capital (“Southport”), a registered investment adviser firm that Defendant owned and controlled.
Defendant and other investment advisers at Southport allegedly told investors that they would receive returns of 6-7% interest, guaranteed for two to three years, for non-specific investments in a fund called “Horizon Private Equity.” Defendant and his associates at Southport allegedly told investors that their investments were safe, Horizon would earn a return by investing their money in, for example, government bonds, stocks, or small real estate projects and could get their principal back without penalty after a short waiting period. Investors were not, however, told that their money would or could be used to pay returns to earlier investors. But, said the SEC, that is exactly what Defendants did. According to the SEC, Horizon has not earned any significant profits from legitimate investments; instead, a large percentage of purported “returns” to earlier investors were simply paid out of new investor money.
The SEC noted that the assets owned by Defendant and the entities under his control, including Southport and Horizon, are worth far too little for there to be any prospect that existing investors would receive their principal, let alone the promised returns.
According to the SEC, Defendant and the Southport investment advisers working with him cultivated relationships of trust with Southport’s clients. Many investors had long-standing relationships with their individual adviser before being pitched the Horizon investment. These investors felt comfortable investing in Horizon in large part because of the trust they placed in their individual investment advisers at Southport.
Playing on the trust reposed in them, Defendant and his cohorts verbally induced clients to invest their money in Horizon. As noted by the SEC, most investors were not given any written materials setting forth the terms of their Horizon investments. The SEC alleged that Defendant made the following misrepresentations, among others: (a) returns would be paid from profits of Horizon’s investments; (b) investments had a guaranteed rate of return; (c) investments carried little risk and were extremely safe and conservative; (d) there was no possibility of losing the principal investment in Horizon; (e) the Horizon investment was an annuity; (f) the risk of loss was minimal because Horizon had a very diversified investment portfolio; and (g) the Horizon investment was sponsored or offered by an Institutional Investment Adviser.
According to the SEC, it is not yet clear whether investors will be able to recover their money. Defendant had raised only $600,000 per month in new investments during the months for which the SEC has been able to obtain bank records. And, according to the SEC, millions of dollars’ worth of investor funds are unaccounted for because of the duration of the scheme, and because Defendant did not use any of the typical recordkeeping practices expected from a legitimate investment fund.
In addition to the scheme and its implementation, Defendant allegedly concealed his affiliation with Horizon. For example, during a 2018 examination of Southport, Defendant failed to disclose his involvement in Horizon. “In fact,” alleged the SEC, “Woods minimized his role in Horizon … even though he maintained control over the entity.”
In 2021, the SEC conducted another examination of Southport. During the 2021 examination, said the SEC, Defendant and Southport misleadingly downplayed their relationship with Horizon.
[Ed. Note: The Commission’s Division of Examinations conducts the National Exam Program. Among other things, the Division of Examinations conducts on-site examinations of SEC-registered investment advisers. One of the issues the staff of the Division of Examinations considers when conducting an examination is whether there are any undisclosed outside business activities that could indicate an undisclosed conflict of interest. The presence of undisclosed outside business activities creates the risk that individuals working at an investment adviser may be recommending investments based on their own undisclosed self-interest rather than the interests of their clients.]
On August 24, 2021, the United States District Court for the Northern District of Georgia granted a temporary restraining order and asset freeze with respect to Defendants Woods and Horizon and ordered expedited discovery with respect to Southport, among other relief.
The SEC charged Defendants with violating the antifraud provisions of the federal securities laws. The complaint seeks preliminary and permanent injunctions, disgorgement, prejudgment interest, civil penalties, an asset freeze, and the appointment of a receiver.
“Investors felt comfortable investing in Horizon in large part because of their relationships with advisers at Southport,” said Nekia Hackworth Jones, Director of the SEC’s Atlanta Regional Office. “As alleged in the complaint, Woods and Southport preyed upon their clients’ fears of losing their hard-earned savings and convinced them to place millions of dollars into a Ponzi scheme by falsely promising them a safe investment with steady returns.”
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.