Author: Doug Cornelius

Randy King, his son Matthew King, and Andrea Trout founded and ran The Legacy Group, Inc. a real estate investment firm based in Colorado Springs. The firm’s business model was to provide mezzanine loans to real estate projects. These Legacy mezzanine loans would be junior to the secured mortgage loans on the project. 

Legacy raised its capital to make these mezzanine loans from over 200 investors in dozens of states. The investors would purchase notes that were tied to a specific project.  

Unfortunately, as some projects would run into financial difficulty, Legacy would use the proceeds from selling the notes to help fund those projects, in addition to the projects the notes were intended to fund.

In some instances, Legacy mislead investor about the status of the projects. In one case, Legacy failed to tell incoming investors that project was in the middle of foreclosure proceeding with the senior lender. There are other instances where Legacy failed disclosed that there were other investors and loans in the ownership structure of an investment that would affect the investment.  

The notes did not say that funds from the notes could be used to make payments to the Kings and Trout, but Legacy paid hundreds of thousands of dollars to them. The firm also paid over $400 thousand in undisclosed origination fees to King and Trout when closing on an investment.  

The case shows the importance of (1) only putting investor funds into items allowed by the investment documents and (2) not paying fees to affiliates that are not permitted by the investment documents.

The defendants have consented to the judgements. 

• SEC Charges Real Estate Investment Entity and Principals with Securities Fraud and Registration Violations: https://www.sec.gov/litigation/litreleases/2021/lr25097.htm 
• SEC Complaint 

Knight Nguyen Investments raised millions from its retail investor clients to invest in securities that met the firm’s investment criteria: 

(a) always allocate “secured” capital to attract at least 10% returns, and would select entities 

(b) with taxable income to support returns and that often do over $10 million of revenue;  

(c) that are already making money and not dependent on investor funds; and  

(d) that have financials that have been audited by KNI.    

Instead, the firm put its clients into extremely risky investments that did not meet the stated investment criteria. Instead, the firm invested its clients’ capital into high risk or fraudulent companies that, in most cases, were owned, controlled, or associated with principals of the firm. 

One was investments in promissory notes issued by a Seychelles-based company that was purportedly involved in the purchase and sale of gold from a Lebanese refinery. The company later defaulted on the notes and the firm’s clients lost their capital.  

Another was a Florida bioscience company that purportedly held patents for peptides that have potential applications ranging from cancer and burn treatments to crop solutions. The investment was speculative and did not meet the investment criteria, because the company de minimis revenues, its financials were not audited, and it was not actually offering secured investments. 

A Texas widow lost her entire $30,000 retirement investment. A Nevada individual lost his entire $92,000 retirement portfolio. A Kansas veteran and military professor, who was months away from retirement, lost almost all of his $320,000 retirement savings. An Alabama retiree lost $105,000. A retiree in Houston who had been seriously injured at work, and feared she could never work again, was seeking safety and income from her investments. Instead, says the SEC, she lost her entire $75,000 retirement portfolio. The SEC mentions others who lost between $30,000 and $150,000 their retirement accounts.

There looked to be a lot of other shenanigans going on at the firm. The big one problem the SEC hung its charges on was how the actual investments differed from the promised investment criteria.

Sources:

• SEC Charges Texas Investment Adviser and Three Individuals with Defrauding Advisory Clients and Retail Investors https://www.sec.gov/litigation/litreleases/2021/lr25089.htm
• SEC Complaint https://www.sec.gov/litigation/complaints/2021/comp25089.pdf

Peter Quartararo met with potential investors and told them that he had access to “pre-IPO” stock in Peloton, WeWork, and Airbnb.  

The first potential investor was an acquaintance that had done a favor for Mr. Quartararo. He offered to let the investor buy the shares in WeWork and AirBnB at his cost, with was less than $2.00. That investor wrote a check for $96,000 to Quartararo’s firm, Private Equity Solutions, with the notation “Stock Purchase IPO.” 

A few weeks later, Quartararo came back to this investor with access to pre-IPO shares in Peloton. That investor wrote a check for $71,000. That investor shared the opportunity with some friends and Mr. Quartararo also sold them some shares. In all, Quartararo raised $436,000 from this pool of investors. 

After Peloton and AirBnB had their public offerings of shares, the investors began asking for the shares to be sold and the profits sent to them. Mr. Quartararo kept putting them off.  

According to the Securities and Exchange Commission and the Nassau County District Attorney, Mr. Quartararo never had access to the shares in those companies. Instead, Mr. Quartararo pocketed the cash and used it for personal purposes, including to buy a Maserati. 

If the investors had checked the BrokerCheck system, they would have seen that he was barred from acting as a stockbroker. The bar was imposed in 2013 because Mr. Quartararo stolen money from a client. He had a prior history of other misdeeds before  being barred.  

Sources:

• SEC Charges Previously-Barred Broker with Defrauding Investors in a Pre-IPO Investment Scheme https://www.sec.gov/litigation/litreleases/2021/lr25083.htm 
• SEC Compliant: https://www.sec.gov/litigation/complaints/2021/comp25083.pdf 
• Nassau County District Attorney Press Release:  https://www.nassauda.org/CivicAlerts.aspx?AID=1305 
• Quartararo in BrokerCheck: https://brokercheck.finra.org/individual/summary/3079675  

Zach Horwitz was struggling actor using the stage name “Zach Avery.” His IMDB entry lists him in minor parts in mostly bad movies. His biggest movie role is an uncredited part as a medic in Brad Pitt’s “Fury.” 

Mr. Horowitz couldn’t figure out how to get rich and famous, but he did hatch a plan to get rich.  

Mr. Horwitz told investors that he had acquired and distributed dozens of cheap films including titles such as “Active Measures,” “Ruin Me” and “Slasher Party.” He produced contracts signed by HBO or Netflix executives showing he was doing business with the streaming platforms. He paid great returns to his early investors.  

Those early investors were mostly college friends. Those friends  offered the opportunities to their friends and family members to enter into loans with Mr. Horowitz’s production company. That lead to larger investors making loans. 

One investor urged his partners to finance deals more films.  “This is the goose that lays the golden egg guys, lets just hope they keep coming month after month.”  He brushed off his partners’ annoyance at Mr. Horwitz for refusing to let them see his business records. “If anything not sending us financials proves to me even more that they are not desperate, they don’t need our money.” 

As you might expect, Mr. Horowitz was not sending financials because it was a massive fraud. The documents were fake. He had not purchased any films and had no connection to the streaming platforms for distribution. Those early returns to investors were paid with money received from later investors. The classic Ponzi scheme. 

Maybe he was a better actor than the studios gave him credit. He managed to raise $690 million dollars from investors by convincing them his production company was real. That must take some acting skill.  

It looks like Mr. Horowitz will end up famous for his fraud. Whatever riches he briefly held have evaporated as the fraud came to an end.  

Sources:

• SEC Obtains Emergency Asset Freeze, Charges Actor with Operating a $690 Million Ponzi Scheme: https://www.sec.gov/litigation/litreleases/2021/lr25067.htm 
• SEC Complaint: https://www.sec.gov/litigation/complaints/2021/comp-pr2021-58.pdf 
• A rising actor, fake HBO deals and one of Hollywood’s most audacious Ponzi schemes: https://www.latimes.com/california/story/2021-04-23/zachary-horwitz-hollywood-film-ponzi-scheme 
• Actor’s Most Prominent Role Turns Out to Be Alleged $227 Million Ponzi Scheme: https://www.vulture.com/2021/04/zachary-horwitz-zach-avery-ponzi-scheme.html 
• The Wildest Parts of D-List Actor Zach Avery’s Alleged Ponzi Scheme: https://www.vice.com/en/article/3aq8v8/the-wildest-parts-of-d-list-actor-zach-averys-alleged-ponzi-scheme  

I think many frauds start with a failure to recognize mistakes. Yes, it’s hard to tell your investors that you lost some of their money. It makes it harder to attract new investors and additional investments. It gets really hard to do that when you go to jail.

Martin Silver was the co-founder, managing partner, and chief operating officer of the International Advisory Group LLC. The firm was an investment adviser that specialized in trade finance lending—risky loans to small- and medium-sized companies in emerging markets. The firm also sponsored three private funds to invest in the trade finance loans.

One of the funds had assets of about $300 million. The firm learned that a South American coffee producer had defaulted on a $30 million loan. Fearing that existing investors would flee the fund and that ongoing fundraising efforts would suffer if the loss were disclosed, Silver decided to conceal the loss by incorrectly valuing the loan on the fund’s books. Later, he replaced the defaulted the loan with fake loans to prop up the value of the fund after auditor inquiries.

Then, a second loan in the fund’s portfolio defaulted. Silver continued his actions of not writing down the value of the loan and eventually replacing it with fake loans.

Eventually, faced with liquidity demands for redemptions, Silver formed the second and third funds to buy the fake loans from the initial fund. Eventually, the schemes collapsed and charges were brought.

Of course the scheme collapsed. You can never find the out-sized returns to make up for the big loss.

Mr. Silver pled guilty to one count of conspiracy to commit investment adviser fraud, securities fraud, and wire fraud, which carries a maximum sentence of five years in prison; one count of securities fraud, which carries a maximum sentence of 20 years in prison, and one count of wire fraud, which carries a maximum sentence of 20 years in prison.

Sources:

• Action by the Securities and Exchange Commission: https://www.sec.gov/litigation/litreleases/2021/lr25070.htm
• Action by the US Attorney in the Southern District of NY: https://www.justice.gov/usao-sdny/pr/second-managing-partner-investment-advisory-firm-pleads-guilty-defrauding-clients-and