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Standby Letters of Credit. Bank Guarantees. Trading Platforms. Oh the crap that gets pushed on the unsuspecting and the unasked questions that too many investors fail to voice. All of which usually ends with the collision of scam and failed due diligence to produce lots of missing money. Has the SEC filed yet another such case?
Prime Bank Investment
On May 16, 2013, the Securities and Exchange Commission (“SEC”) filed an emergency action in federal court in the federal district in Atlanta, charging Robert Fowler, 51, Duluth, GA, and his company US Capital Funding Series II Trust 1 (Fowler was a “control person”), with violations of the federal securities laws for defrauding investors in a “prime bank” investment scheme. SEC v. Fowler et al. (NDGA, 13-CV-1656, May 16, 2013).
NOTE: The assertions in the Complaint are merely allegations and the defendants are presumed innocent unless and until prove guilty in a court of law.
Standby Letters Of Credit and Bank Guarantees
Since at least August 2012, the Complaint alleges that Fowler targeted foreign-born small business owners -- and seems to have put the cross-hairs on folks with limited or non-existent finance/investing experience. The purported pitch to his pigeons as set forth in paragraph 21 of the Complaint:
21. Through oral statements and related transaction documents, Fowler has entered separate investment contracts with at least three investors. The details of each investment were fundamentally the same: First, the investor wired money into a bank account held in the name of US Capital over which Fowler had signatory authority. Second, US Capital claimed that it would issue a SBLC or "bank guarantee" and, using its supposed connections with major financial institutions (e.g., "a TOP 25 Bank" such as "Credit Suisse"), would obtain a loan for the investor. Third, US Capital and Fowler claimed that the loan proceeds would be wired to a bank account controlled by US Capital, an affiliated "trader" of US Capital, or, in one instance, the investor. Fourth, Fowler and US Capital represented that they would exercise control over all or a portion of the loan proceeds in order to generate shared investment returns, sometimes with the use of affiliated "traders" and "trading platforms."
Sort of a you-scratch-my-back-and-I'll-scratch-your-back deal in which the sales of the US Capital issued product were a form of bait for securing loans for the business-owner investors. Moreover, once Fowler had arranged for the loans, he further volunteered his expertise with investing a portion of the proceeds through what he represented were affiliated “traders” and “trading platforms” in unspecified “instruments.”
Having dangled the prospect of not only getting a business loan but also having sophisticated entree into what seemed a world of high finance promising substantial profits, Fowler alleged demanded an up-front fee from the investors for this service. Not to worry (or so the spiel went), Fowler promised that if he was unsuccessful in securing the loan that the up-front fee was fully refundable.
Blessing (in disguise)
As an extra bit of icing on this somewhat dubious cake, the Complaint asserts that Fowler misrepresented to potential investors that the SEC had "blessed" US Capital's offering. In fact, not only is the SEC not in the business of offering testimonials about investment products but there was no such blessing. Moreover, in trying to assure his targets that everything was legit, the Complaint alleges that:
19. US Capital's website, http://www.uscapitalfundingii.com/, misrepresents that US Capital "has an S&P Triple-A (AAA) rating." In fact, an unaffiliated trust by the same name actually maintains such a credit rating. US Capital's website also claims that it has assets "valued in the Trillions" and maintains "precious assets in safe keeping depositories and banks around the world[.]" In fact, US Capital does not own or control any assets, other than the funds raised from investors.
The Old Switcheroo
The Complaint alleges that starting at least by August 2012, Fowler and US Capital allegedly raised at least $350,000 from investors via the standby letters of credit/ bank guarantees loan arrangement. Allegedly, Fowler and US Capital did not use the investor proceeds as represented; rather, shortly after US Capital's bank accounts received investors' funds, Fowler spent the funds at restaurants, grocery stores, gas stations, and clothing stores, and also withdrew thousands of dollars through ATM transactions.
Bill Singer’s Comment
Please note – carefully – this stark assertion in the Complaint:
5. In fact, the letters of credit created by Fowler from US Capital were worthless, fictitious instruments, and US Capital had no relationships with financial institutions to obtain loans for individuals or entities based on letters of credit from US Capital.
BrokeAndBroker readers know that I regularly warn against investing in so-called “investment platform” or “trading platform” deals; and I often sound the alarm about any deal involving an offshore bank that is offering an opportunity to invest in some impressive sounding paper, which is only made available to some middleman and involves billions of dollars but you only need to come up with a few hundred thousand.
READ these past articles:
In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in March 2012, Claimants alleged causes of action including breach of fiduciary duty, fraud, and elder abuse pertaining to an investment in a Tenant-in-Common ("TIC") real estate investment. Claimants sought indemnification under guaranty agreements; $499,365 in damages plus interest; punitive damages; fees, costs, and expense. At the close of hearing, Claimants sought $648,737.64 in damages. In the Matter of the FINRA Arbitration Between Suzy Asad and 1999 Suzy Asad Revocable Trust dated August 20, 1999, Claimants, vs. Mamdoh Aziz Abas and ProEquities, Inc., Respondents (FINRA Arbitration 12-01167, May 14, 2013).
Respondents Abas and ProEquities generally denied the allegations and asserted various affirmative defenses. Both respondents sought the expungement of the arbitration from their records.
SIDE BAR: Although not fully explained in the arbitration Decision, online FINRA documents as of May 20, 2013, indicate that Respondent ProEquities had characterized the customers’ complaint as follows:
CLAIMANT ALLEGES THAT IN LATE 2007 TO EARLY 2008, RR RECOMMENDED THAT CLAIMANT INVEST CASH PROCEEDS OF $499,365 AND ASSUME DEBT IN CONNECTION WITH A TENANT IN COMMON (TIC) REAL ESTATE INVESTMENT LOCATED IN PHOENIX, ARIZONA. CLAIMANT ALLEGES FINANCIAL LOSS DUE TO THE TIC NOT GENERATING THE INCOME AND TAX SAVINGS THAT HAD BEEN PROJECTED. CLAIMANT ALLEGES INJURY DUE TO: VIOLATION OF SEC ACT 1934; BREACH OF FIDUCIARY DUTY; CA SECURITIES, COMMON LAW AND CONSTRUCTIVE FRAUD; UNFAIR SALES PRACTICES; NEGLIGENCE AND NEGLIGENT MISREPRESENTATION; ELDER FINANCIAL ABUSE
The FINRA arbitration panel found Respondents jointly and severally liable and ordered them to pay to Claimants:
- $379,424.33 in compensatory damages plus 7% interest from February 1, 2008 to May 3, 2013;
- $68,838.06 in costs.
- $300.00 for filing fee
Bill Singer's Comment
TIC investments became increasingly popular as a way for a seller of real estate to qualify for a so-called 1031 Tax Free Exchange via the acquisition of an ownership interest in another property. Sales of fractional ownership interests to sellers of appreciated realty became an attractive business for many FINRA brokerage firms, who marketed this transaction as a way to preserve the tax-free status of a property exchange.
TIC transactions, however, have seen their share of consumer complaints. Among the most common source of friction is the alleged lack of adequate pre-sale due diligence by the brokerage firm, and the failure of the firm to reasonably monitor ongoing developments at the subject properties. A cursory glance at the litigation in this area shows disagreements between claimant investors and respondent brokerage firms as to the quality of the latter’s review of financial statements; the thoroughness of background checks involving promoters; and the validity of any appraisals done on the property in dispute.