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Recent SEC Releases

Entries in bridge loan (2)

Wednesday
Aug152012

SEC Charges Denver Men With $16 Million Ponzi Scheme

 On or about July 20, 2012, in a telephone call with one investor, Sullivan candidly admitted, “Your money is all gone. This is a Ponzi scheme.”

- SEC Complaint

The Securities and Exchange Commission today announced that it had filed fraud charges against a Denver company and two Colorado residents, charging them with carrying on a decades-long Ponzi scheme that took in at least $15.7 million from investors nationwide.  Michael J. Turnock, William P. Sullivan, and their company Bridge Premium Finance, LLC ("BPF") were charged with multiple violations of federal securities laws.  It is estimated that investors losses may near ten million dollars, and the SEC is seeking an emergency asset freeze to prevent further dissipation of investor funds.  

Turnock was the principal of BPF, while Sullivan was the chief financial officer.  BPF, which until September 2005 was known as Berjac of Colorado, LLC ("Berjac"), purported to be in the business of insurance premium funding.  In 1996, Turnock bought a majority interest in Berjac, eventually purchasing the remaining interest in 2004.  Potential investors were told they would be paid an annual return of twelve percent, and that their funds would be used to extend short-term loans to small businesses that would use the funds to pay up-front commercial insurance premiums.  Further details were spelled out in a short brochure distributed by Turnock, including that the investment was "100% safe" and protected by the "Colorado Insurance Guarantee Fund."

Investors were issued promissory notes, known as "Berjac Notes" from 1996 to 2005, and "Bridge Notes" from 2005 thereafter.  These notes, which were open-ended in term, were said to be payable on demand by investors, which was touted to investors as evidence of the liquidity of the investment.  Ultimately, more than 120 investors contributed approximately $15.7 million to the scheme.  BPF's promissory note offerings were never registered with any federal or state securities regulator.

Turnock claimed that BPF could afford to pay such generous returns due to the rate of interest BPF received on the "bridge loans" it was making.  However, according to the SEC, while BPF had not had a profitable year in over a decade and had generated less than $2.5 million in revenue from 1998 to 2012, it still managed to make payments consisting of purported interest and principal redemptions to investors totaling $12.3 million.  Indeed, revenues had been negative since at least January 2011.  The company depended on a constant inflow of new investor funds in order to satisfy interest payments and redemption requests - a classic hallmark of a Ponzi scheme.  The SEC began investigating in June 2012.  After an investor telephoned Sullivan after learning of the investigation, Sullivan told him, 

“I have a lawyer and I shouldn’t be talking to you.  But I feel bad because you were just here in May.  Your money is all gone.  This is a Ponzi scheme.” 

In subsequent interviews with SEC officials, Turnock and Sullivan refused to answer investigator's questions, citing their Fifth Amendment privileges against self-incrimination due to the possibility of criminal charges.  While certainly permitted, the invocation of Fifth Amendment privileges in a civil lawsuit also comes with the strong possibility that those refusals to answer will be accompanied by an adverse inference when presented to a finder of fact, whether it be a judge or jury.  See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976).

The SEC is seeking injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties.

A copy of the SEC's complaint is here.

Tuesday
Aug142012

SEC Charges Utah Man With Operating $27 Million Ponzi Scheme; Is Utah 'Ponziland'?

The Securities and Exchange Commission ("SEC") charged a Utah man with operating a real estate Ponzi scheme that may have bilked investors nationwide out of up to $27 million.  In the latest in a string of Ponzi schemes recently uncovered in Utah, Ivan Wade Brown, 45, is alleged to have duped investors by purporting to provide "bridge loans" to homebuilders.  The SEC's complaint, filed Monday, charges Brown with multiple violations of federal securities laws, and seeks injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties.  Additionally, the SEC has requested an asset freeze and the appointment of a receiver over Brown's companies.

Brown owned and operated Avanti Capital Partners, LLC (“Avanti”) and Highland Residential, LLC ("Highland"), which he formed for the purpose of raising capital to make real estate loans.  Potential investors were told that they could expect above-average returns achieved by making "bridge loans" to aspiring homeowners who were currently unable to obtain a conventional home loan.  These investments were advertised as nearly risk-free, with a worst case scenario resulting in only a 10% loss to an investor's principal.  Investors were provided with promissory notes evidencing their investment and containing their promised rate of return.  Ultimately, Brown issued nearly $13 million in Highland notes from October 2004 to January 2007, and nearly $14 million in Avanti notes from January 2007 to May 2008.  Nearly 100 individuals nationwide invested with Brown, though a large amount were Utah residents.

However, according to the SEC, Brown failed to invest the majority of investor funds as promised.  Instead, investor funds were used to make millions of dollars in interest and principal payments to existing investors, as well as to sustain Brown's lavish lifestyle.  These personal expenses included the purchase of a luxury home in Alpine, Utah, a $120,000 down payment on his residence, a $225,000 airplane, and $650,000 towards the production of a motion picture.

Ironically, of the investments Brown did make on behalf of his investors, several were unwittingly made in unrelated Ponzi schemes.  These included $1.25 million placed with DGB Enterprises, a company that purportedly operated a mineral refinery that promised a return of $11 million in nine months - a 1,040% return.  Not surprisingly, DBG ended up being a fraud, and did not pay any of the advertised returns.  Additionally, Brown purchased $28,000 in real estate insurance contracts, called LIVE-GRIPS, that promised to protect the value of Avanti's properties even if the real estate market took a downturn.  This was also a fraud, and Brown lost his entire investment in LIVE-GRIPS.  

The case is the latest in a number of high-profile Ponzi schemes recently uncovered in Utah.  In late June, Wayne LaMar Palmer ("Palmer") and his company, National Note of Utah were charged with operating a $100 million Ponzi scheme.  Additionally, a Utah father and son were accused in December 2011 with masterminding a massive Ponzi scheme that raised over $200 million.  The widespread frauds prompted a CNBC segment hosted by Scott Cohn, dubbing Utah as "Ponziland" and noting that fraud had become so widespread that public authorities launched a public service campaign in 2010 to try and educate citizens.  The piece pegged the current caseload at over 100 cases with an estimated $1.5 billion in losses.  Authorities point to the large Mormon population as a primary target for fraudsters in what is termed "affinity fraud."

The CNBC Video can be viewed here:

 

A copy of the SEC's complaint is here.