The 10th Circuit affirmed a multi-million judgment for the SEC against the operator of an alleged Ponzi scheme. As alleged, the defendant and his firm defrauded multiple investors by representing that their money would be placed in low-risk financial instruments. Rather than making these investments, the defendant allegedly used the funds to cover personal expenses, pay prior investors and engage in high-risk real estate lending. In the process, the defendant allegedly commingled investor funds, fabricated account statements, refused investors’ inquiries about their money, misled investors about his affiliation with a financial-planning firm, gave promissory notes as collateral for investment funds and gave investors bogus financial product-information sheets.
The court rejected defense claims that there were no statements made in connection with a purchase or sale of securities. The “in connection with” requirement should be broadly interpreted to cover any fraud that coincides with a securities transaction, stated the court. The fact that the defendant did not actually sell or buy any securities was not dispositive. The fact that the defendant took investor funds under the pretense that it would be invested in safe securities such as mutual funds was sufficient.
In addition, the court noted that the defendant gave investors promissory notes to finance investments. Under these circumstances, the notes constituted securities and the transactions were subject to the antifraud provisions of the securities laws.
The 10th Circuit panel also found no error in the refusal of the district court to allow the defendant to withdraw his Fifth Amendment privilege claim. Generally, courts will often allow withdrawal when the claimant was unaware of the consequences, including adverse inferences, of taking the Fifth, and the opposing party has other sufficient sources of evidence. However, in this case, the circumstances of the “invocation of the Fifth Amendment reveal that he was using the privilege to manipulate the litigation process.”
The court affirmed the judgment for the SEC, finding that the defendant was liable for disgorgement of $2,059,077 in investor funds, a civil penalty in that amount, and $597,426 in prejudgment interest, for a total judgment of $4,715,580.
SEC v. Smart (No. 11-4134)