SEC Busts $33 Million Ponzi Scheme Touting Pro Athlete Loans

The Securities and Exchange Commission filed an emergency enforcement action alleging that a Massachusetts company has raised nearly $32 million from dozens of investors under the guise of providing lucrative loans to high-profile athletes during the "off-season."  Capital Financial Partners, LLC, Capital Financial Holdings, LLC, and Capital Financial Partners Enterprises, LLC (collectively, "Capital Financial"), along with principals William D. Allen and Susan C. Daub, were named in a complaint filed by the Commission accusing them of violations of multiple federal securities laws.  The action was unsealed earlier today after the Commission obtained a Temporary Restraining Order that included an asset freeze and other equitable relief.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, prejudgment interest, and civil monetary penalties.

According to the Complaint, which is embedded below, William Allen - a former NFL player himself - and Susan Daub began soliciting investors in 2012 to participate in some or all of a short-term loan to a professional athlete who might not have access to guaranteed salary money during that particular athlete's "off-season."  As Capital Financial's website explained,

In many cases, athletes' contracts do not allow them to access their guaranteed money during the off season or early in the season when they may need a significant sum to purchase a house or car, pay the bills, or meet a financial demand. By pooling the resources of a network of investors, CFP gives athletes access to money when they need it while providing investors with solid, short-term returns on investment.

Potential investors were told that Capital Financial required a minimum $75,000 investment, of which a 3% origination fee would be subtracted, and that a typical athlete loan was for $600,000.  Before making an investment, a potential investor was often provided with information about a particular athlete, including that athlete's sports contract and what amounts of that contract were guaranteed.  According to the Commission, at least some potential investors were led to believe that their investment was backed by that particular athlete's contract and that Capital Financial had the ability to receive payments from that athlete's team if needed.  In return, an investor was promised monthly interest rates ranging from 9% to over 18% depending on the duration of the loan.  In total, Capital Financial raised at least $31.7 million from over 40 investors from July 2012 to February 2015.

However, according to the Commission, nearly half of the money raised from investors never made it into the pockets of a particular professional athlete.  For example, over two dozen investors contributed more than $4 million in mid-2014 with the understanding that they were participating in a $5.65 million loan to an unnamed National Hockey League player.  Yet, the Commission alleged that the $5.65 million promissory note was never signed, and the particular NHL player subsequently filed for bankruptcy in October 2014.  While Capital Financial filed a proof of claim in the player's bankruptcy case claiming a $3.4 million debt, none of the investors were informed of the bankruptcy and continued to receive monthly payments amidst assurances that the loan was "performing as expected".  The Complaint also alleges similar misrepresentations with respect to purported loans made to MLB and NFL players.

The Complaint details that, from July 2012 to February 2015, Capital Financial received roughly $13 million in loan repayments from athletes yet paid out approximately $20 million to investors - a scenario in which the Commission alleged that the additional $7 million paid out to investors came from new investors in a classic Ponzi scheme.  Allen and Daub are also accused of withdrawing more than $7 million for various personal and unrelated business expenses, including casino and travel expenses as well as loans to various insurance companies.

While it is unknown when Capital Financial appeared on the Commission's radar, it appears that the unnamed NHL player in the Commission's complaint was veteran NHL player Jack Johnson, whose high-profile October 2014 bankruptcy filing disclosed at least $15 million in undisclosed loans taken out by his parents - loans that the Columbus Dispatch characterized as "nonconventional" high-interest loans.  Given the significant media coverage of Johnson's bankruptcy and allegations that some of the loans were fraudulently obtained by his parents, it is certainly plausible that authorities may have discovered the fraud after closely scrutinizing Capital Financial's creditor status. (UPDATE: The Palm Beach Post has a story that seemingly confirms this connection, recounting deposition testimony from a lawsuit Allen had filed against Johnson).

A copy of the Complaint is below:

Cfp Complaint