Fraud, But Is It Securities Fraud?

Although the Securities and Exchange Commission gets blamed for not bringing enough fraud claims, it’s jurisdiction is limited to securities fraud. When I see a real estate case filed by the SEC I pay attention. The case against Richard W. Davis, Jr. brought the “What is a Security?” questions out.

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The SEC alleges that Richard W. Davis Jr. breached his fiduciary duty and had conflicts of interest using investor money to enter into transactions with entities he beneficially owned or controlled.  The SEC further alleges that Davis made false or misleading statements to investors before and after they made their investments, failed to inform investors of their losses, commingled funds and took more management fees than was allowed.

Davis sold interests in two funds and he marketed them as investing in “hard assets” like real estate and mineral rights. I will assume those interests are securities. Mr. Davis would have needed to comply with the private placement requirements. According to the complaint, he did not do so.

The complaint labels the funds as “pooled investment vehicles” within the meaning of Rule 206(4)-8(b) of the Advisers Act, 17 C.F.R. § 275.206(4)- 8(b):

(b) Definition. For purposes of this section “pooled investment vehicle” means any investment company as defined in section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) or any company that would be an investment company under section 3(a) of that Act but for the exclusion provided from that definition by either section 3(c)(1) or section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7))

To be an “investment company”, the pooled fund would need to invest in securities. A pooled fund that invests mostly and directly in real estate would fall outside the definition of an investment company.

The complaint is short on the details other than the bad acts alleged by the SEC. The issue is not contested since Mr. Davis agreed to settlement.

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Mountains National Bison Range Montana
By Jaix Chaix
CC BY SA