Enforcement News: SEC Obtains Emergency Relief to Stop Alleged Ponzi Scheme and Misappropriation of Investor Funds

• Posted on: May 3 2021

Less than three weeks ago, this Blog wrote about an enforcement action brought by the Securities and Exchange Commission (“SEC” or the “Commission) against Zachary Horwitz, a.k.a. Zach Avery, a Los Angeles-based actor known for low budget features such as “Trespassers” and “The White Crow”, and his company 1inMM (one in a million) Capital, LLC, for allegedly running a Ponzi scheme that raised over $690 million (here). As discussed in the article, the scheme had two components: the misappropriation of investor funds and the use of new investor money to pay the “returns” of older investors – the hallmark of a Ponzi scheme.

This combination – a Ponzi scheme and the misappropriation of investor funds – was at the heart of the SEC’s emergency enforcement action against Jonathan P. Maroney (“Maroney”) and several entities he controls. The SEC announced (here) the action on April 26, 2021.

According to the SEC’s complaint (here), from at least May 2015 through the present, Maroney and his entities raised in excess of $17.1 million from more than 100 investors nationwide through a series of unregistered fraudulent securities offerings. The securities sold were in the form of either promissory notes or agreements issued by an affiliated entity that Maroney controlled. Investors were told that their money would accrue interest from between 2% to 5% per month for 12 to 36 months. Additionally, investors in those instruments were allegedly promised a full return of their investment principal upon maturity.

The SEC alleged that beginning in late 2018, Maroney and five special purpose entities he controlled sold “high yield, secured bonds” with interest rates varying from 1% to 1.5% per month. The bonds were offered in 1-, 2-, 3- or 5-year terms, with a guaranteed return of investment principal at maturity. 

Defendants allegedly represented to investors that the proceeds from the offerings would be used to provide “bridge funding” for one of the entity’s business of generating online customer lead campaigns for other businesses. [Ed. Note: A customer lead generation campaign is essentially the process of capturing online interest in a service or product for the purpose of developing sales leads.] According to the offering documents, the leads generated from the campaigns were to be sold at a substantial profit to the entity’s “pipeline” of business clients within the “$200 Billion internet advertising sector.” From the resulting profits, investors were supposed to receive monthly interest payments followed by the return of their principal when their notes or bonds matured.

According to the SEC, Defendants solicited and raised money from investors primarily through the company’s website and a series of on-line marketing videos featuring Maroney posted both on the company’s website and on YouTube. In the videos, Maroney allegedly represented the bonds to be as “safe as a CD” and equated the offering to “going down to your local bank and purchasing a certificate of deposit.”

Besides the company’s website and marketing videos, the SEC said that Defendants marketed their high-yield bonds through pop-up advertisements on social media platforms like Facebook. According to one investor, these ads guaranteed annual returns of up to 18%.

According to the SEC, once investor money was received, their funds were transferred into entity-controlled accounts and commingled along with funds from the other offerings. Maroney was the sole signatory on all related company bank accounts.

The SEC alleged that Defendants’ representations concerning the use of proceeds raised from the offerings were materially false and misleading. According to the SEC, Defendants were not engaged in a significant lead generation business and only used a small portion of the money raised from investors to fund their business. Instead, said the SEC, from January 2017 to February 2021, Defendants generated no significant revenues from their customer lead generation businesses or from any other venture. Significantly, alleged the SEC, of the $17.1 million in investor funds deposited into related bank accounts, at most only about $449,000 may have gone to business expenses.

Instead, claimed the SEC, Maroney used investor money to enrich himself and his family, and to perpetuate the Ponzi scheme by making payments of fictitious returns to existing investors using other investor funds. Specifically, explained the SEC, of the $17.1 million raised from investors, Maroney misappropriated more than $4.88 million for his own personal use, including the purchase and maintenance of his waterfront home and a Mercedes Benz, and to pay for his extensive credit card bills and renovation-related expenses on the house. In addition, said the SEC, Maroney allegedly misused approximately $1.4 million of investor money by making payments to other entities unrelated to the supposed purpose of the offerings, including money sent to a company involved in the container, storage and shipping industry. Thus, explained the SEC, about $6 million of investors’ money was allegedly misappropriated and misused by Maroney.

Regarding the Ponzi scheme, the SEC alleged that since 2017, Maroney used at least $6.5 million of investor funds to make monthly interest payments and other payouts to investors.

“As alleged in our complaint, Maroney lured investors with promises of double-digit returns and false claims, while pocketing millions of investor dollars for himself,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Investors should be skeptical of any investment that promises extraordinarily high rates of return.”

The SEC filed its complaint on April 20, 2021, in the United States District Court for the Middle District of Florida.  The Commission charged Defendants with violating the antifraud and registration provisions of the federal securities laws. In addition to the emergency relief the SEC obtained from the Court (i.e., a temporary restraining order and asset freeze), the complaint seeks preliminary and permanent injunctions, disgorgement, prejudgment interest, and a civil penalty from each Defendant. The complaint also named Tonya Maroney, Maroney’s wife, and Celtic Enterprises LLC, another Maroney-controlled entity, as relief defendants for receiving proceeds from the alleged fraud. The Court set a hearing for April 29, 2021, to determine if a preliminary injunction should be entered and whether the asset freeze should remain in force for the duration of the litigation.