The Securities and Exchange Commission ("Commission") announced that it had initiated an emergency enforcement action and obtained an asset freeze against a California company that purportedly specialized in cloud computing but was, according to the Commission, a massive Pyramid and Ponzi scheme that targeted members of the Asian and Latino community. Defendants World Capital Market Inc., WCM 777 Inc., WCM777 Ltd. d/b/a WCM777 Enterprises, Inc. (the 'WCM Entities"), and Phil Ming Xu were charged with multiple violations of federal securities laws in a complaint filed yesterday and unsealed today in a California district court. The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties. In addition, the Commission is seeking appointment of a Receiver over the WCm Entities.
According to the Commission, Xu formed the WCM Entities in March 2012, identifying himself as the founder, chairman, and president in documents distributed to investors. WCM was described as a "global merchant investment bank," and represented that it was in partnership with over 700 investment organizations including Siemens, Denny's, and Goldman Sachs. WCM777 Inc. was a wholly-owned subsidiary of WCM, opening and maintaining bank accounts in the name of WCM777.
Beginning in March 2013, the WCM Entities began soliciting investors to purchase purported service packages and membership units in various cloud-based computing services. In addition to computing services, each "package" offered investors returns in the form of cash and "points." Investors could earn cash and "points" through referring new members, and were then able to redeem the "points" by either exchanging the "points" for goods and services offered by the WCM Entities or by converting the "points" into equity for the upcoming initial public offering of various companies the WCM Entities planned to bring public, including WCM7.com.
Investors purchasing cloud-based computing packages were given the choice of five different membership levels, which in turn allowed members to purchase even more "World Cloud Media Products." Each of the five service packages promised investors returns of at least 100% in 100 days, with the fifth, or highest, level promising returns of 160% within 100 days. The various levels carried descriptions ranging from "junior distributor" to "director." In order to keep the scheme going and to control the possibility of massive cash withdrawals, investors were encouraged to accumulate point balances, with Defendant Xu allegedly posting on WCM777's online forum that those who took cash withdrawals were required to pay income tax in their respective countries.
To reassure potential investors, the WCM Entities featured a section on their website that included the question whether "WCM777 is a Ponzi game," responding that "we are not a Ponzi game company. We are creating a new business model."T
The WCM Entities have increasingly been the subject of state securities regulators for engaging in unregistered securities offerings, and have since consented to orders in California and Colorado relating to these offerings. Additionally, according to the Commission, the WCM Entities had no source of revenues other than money received from new investors through the sale of service packages. Thus, the success of the WCM Entities depended almost entirely on the recruitment of new investors to sustain operations - which inevitably will lead to the situation where incoming funds dry up and existing obligations will dwarf cash on hand. According to the Commission,the WCM Entities operated a classic Pyramid scheme that had no source of revenue other than soliciting new investors. Additionally, the WCM Entities made Ponzi-style payments to investors by using investor funds as the source of over $4 million of payments of purported "returns" to investors.
Nor did the WCM Entities have the purported extensive connections with numerous multi-national companies. For example, despite claiming to have a partnership with well known companies including Denny's, Goldman Sachs, and Siemens, the WCM Entities did not have any relationship with any of the entities, and in several cases were using the respective company's logo without permission.
Defendants raised more than $65 million from investors worldwide, including nearly $30 million from investors in the United States. However, rather than being used for cloud-based services, investor funds were used for a variety of unauthorized purposes, including (i) the purchase of nearly $14 million in real estate in the United States, including two golf courses; (ii) "playing" the stock market; (iii) various unrelated investments in an oil and gas company and a rough diamond merchant.
According to Patrickpretty.com, a Twitter account belonging to Xu contained an entry on March 14, 2014, that an employee known as "Liu," or "Tiger," had taken more than $30 million in "ecash." The veracity of that claim remains unknown.
A copy of the Commission's complaint is below: