Securities Regulation Daily Federal regulators unravel affinity-based Ponzi scheme targeting African immigrants
Friday, August 28, 2020

Federal regulators unravel affinity-based Ponzi scheme targeting African immigrants

By Mark S. Nelson, J.D.

The SEC, CFTC, and DOJ brought a combination of civil and criminal charges against three individuals and multiple entities that solicited investors based on claims they had expertise in foreign exchange and cryptocurrency trading.

According to charges brought by the SEC and the DOJ, three individuals conducted an affinity-based Ponzi scheme that targeted African immigrants, many of whom were also health care workers or attended the same church as did the individual defendants. The three individuals charged allegedly told investors they had expertise in foreign exchange and virtual currency trading while also promising guaranteed returns. The CFTC charged the individuals with fraud as well as registration violations (SEC v. Jali, August 28, 2020; CFTC v. Jali, August 28, 2020).

The "auspices of God." The SEC’s complaint explained that the three charged individuals directly, and through two entities, solicited investors with assurances of their forex and virtual currency prowess and related promises of guaranteed monthly or quarterly returns of between 6 percent and 42 percent while also offering investors principal protection. Investors were typically required to make minimum investments of $5,000 and had been told their principal would be returned to them within 12 months. One of the individual defendant’s claimed to be a minister and allegedly told prospective investors that the related entities had a "spiritual component" and that they "worked under the ‘auspices of God.’"

But the SEC alleged that, instead of using their supposed investing prowess to make money for investors, the individual defendants used portions of the more than $27 million raised from investors to purchase luxury cars, purchase rides on chartered private jets, make purchases at upscale retail shops, make personal investments in bitcoin, and to fund other companies, including the relief defendant company. The SEC further asserted that the individual defendants were able to make Ponzi payments to investors until May 2019 when incoming funds from investors no longer supported such payments.

The SEC brought civil charges against the three individuals and two entities for violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. The SEC also seeks equitable disgorgement against the relief defendant, which allegedly received at least $781,000 from one of the individual defendants, funds to which the SEC said the relief defendant had no legitimate claim.

A press release issued by the CFTC announced related civil charges based on the status of the entities involved in the Ponzi scheme as commodity pool operators. Specifically, the charges include CPO fraud and fraud by associated persons (APs) of a CPO, fraud by deceptive device or contrivance, and failure to register as a CPO or AP of a CPO. The CFTC seeks permanent injunctions against the individuals and entities, trading bans against the individual defendants, disgorgement, restitution, accounting, and civil monetary penalties.

Moreover, the U.S. Attorney’s Office in Maryland announced a related indictment of the three individuals named by the SEC that includes charges for conspiracy, wire fraud, securities fraud, and money laundering. As mentioned in the SEC’s complaint, one of the individual defendants fled to South Africa, where he had been involved in an allegedly fraudulent scheme. Federal prosecutors said that individual had been arrested in South Africa and that U.S. officials were working on bringing him back to the U.S.

Investor education. The SEC’s press release announcing the civil charges included numerous citations to investor alerts previously issued by the agency. Whether an investment scheme is an affinity scheme or some other type of fraudulent scheme, investors are urged to verify the credentials of those soliciting them for investments before giving them any money. As for Ponzi schemes in particular, the SEC suggested several factors for investors to mull before making an investment, including: (1) high returns with little or no risk; (2) overly consistent returns; (3) unregistered investments; (4) unlicensed sellers; (5) secretive, complex strategies; (6) issues with paperwork; and (7) difficulty receiving payments.

The cases are No. 20-cv-02491 and 20-cv-02492.

Attorneys: Karen M. Klotz for the SEC.

Companies: The Smart Partners LLC; 1st Million LLC; Access2Assets, LLC

MainStory: TopStory Blockchain Enforcement FedTracker Securities FraudManipulation GCNNews InvestorEducation MarylandNews

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