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Wednesday
Oct082014

SEC Halts $123 Million ATM Ponzi Scheme

The Securities and Exchange Commission announced it had obtained an emergency asset freeze and filed civil fraud charges accusing a California company and its principals of operating a $123 million Ponzi scheme.  Nationwide Automated Systems ("NAS"), and its principals Joel Gillis and Edward Wishner, were named in a civil complaint filed in a Los Angeles federal court.  In addition to the asset freeze, the court approved the appointment of a temporary receiver over NAS's assets and also froze the assets of principals Gillis and Wishner.  NAS, Gillis, and Wishner are accused of multiple violations of federal securities laws, and the Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties.

According to the Commission, NAS  has solicited investors since 1999 by promising that their funds would be used to place, operate, and maintain automated teller machines ("ATMs") throughout the country.  Investors were told that they could purchase ATMs for a price ranging from $12,000 to $19,800 from NAS, and could then lease those same ATMs back to NAS for a 10-year term in exchange for a "rent" of $.50 per ATM transaction.  A contract memorializing the investment purportedly contained the serial number and the location of the ATM, and investors were guaranteed an investment return of at least 20% annually.  Notably, each contract also included a "non-interference" clause prohibiting the investor from interfering with the operation of the ATM by contacting the locations where the ATM was installed or any ATM service provider.  While NAS has been engaged in the offering and sale of these ATM leaseback agreements since 1999, the Commission was only able to obtain bank records from 2013 forward during its investigation that showed more than $123 million raised in just that period.

While the company's records showed that it had sold and was leasing back more than 31,000 ATMs to investors as of June 2014, third-party settlement reports provided by NAS's ATM servicers show that only 253 ATMs were serviced.  As the Commission remarked, 

Defendants have “sold” and “leased back” tens of thousands of ATMs to NASI investors that they never owned, that they never operated, and that may have never existed. 

For example, while NAS's internal records claimed ownership or operation of nearly 700 ATMs located at "Casey's Convenience Mart" locations in the Midwest, the Commission's investigation showed that neither NAS nor any of its investors owned or serviced any of those ATMs.  Rather, those ATMs were owned by an unrelated company with no affiliation with NAS.  The Commission also alleged that NAS often sold and leased back the same ATM to more than one investor.  Of the ATMs that NAS did service, those revenues were minimal and were dwarfed by the significant amount of new investor funds.  Those investor funds were used to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  

The Commission's complaint details that NAS bounced over $3 million in checks to investors in August 2014, and investors were told that a "glitch" in connection with retention of a new outside firm handling investor payments was to blame.  

Recently unsealed documents demonstrate that the Commission moved swiftly after presumably receiving a tip about NAS's difficulties making investor payments, with court records showing the Commission filed its application for a temporary injunction and other relief on September 17, 2014.  It appears that the Court granted those requests on September 30, 2014.  The Court also authorized the appointment of William Hoffman as a temporary receiver. It appears that a website has been established at http://www.nasi-nationwideatm.com/ for interested parties.

Several Ponzi schemes purportedly offering lucrative returns from investments in ATMs have been uncovered in recent years, including here, here, and here.

A copy of the Complaint is below:

Comp 23106

 

 

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