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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 22065 / August 11, 2011

Securities and Exchange Commission v. Evolution Capital Advisors, et al., Civ. Action No. 4:11-cv-02945 (United States District Court for the Southern District of Texas, Houston Division).

SEC Charges New York Businessman and Two Houston-area Firms with Conducting a Fraudulent $10 Million Note Offering

On August 10, 2011, the Securities and Exchange Commission ("Commission") filed suit in the United States District Court for the Southern District of Texas against Damian Omar Valdez of New York and two Houston-area firms he controlled, Evolution Capital Advisors ("Evolution Capital") and Evolution Investment Group I ("EIGI"). Evolution Capital was an investment adviser registered with the Commission until June 2010. The firms and Valdez raised at least than $10 million from more than 80 investors through two fraudulent note offerings.

The Commission alleges that, in the offerings, Valdez, Evolution Capital, and EIGI falsely promised that the notes were safe and secured by assets guaranteed by the United States government. The defendants also falsely promised that they would use leverage to purchase the assets securing the notes. In fact, according to the Commission's complaint, the assets securing the notes were subject to significant, undisclosed default and prepayment risk. Moreover, the defendants never obtained leverage to purchase the assets. The Commission further alleges that the defendants paid themselves more than $2.4 million in fees and expenses and used approximately $2.7 million from the second note offering to make Ponzi-like payments to investors in the first note offering. As a result of defaults and prepayments on the underlying assets, the failure to obtain leverage, and the excessive Ponzi-like payments and fees, the Commission alleges that the defendants do not have sufficient assets to repay investors in accordance with the notes.

The complaint alleges that Evolution Capital and EIGI violated the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleges that Valdez and Evolution Capital aided and abetted the violations and that Valdez is liable as the control person for the firms. The complaint further alleges that Valdez and Evolution Capital violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint requests permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against the Defendants. In addition, the Commission has filed a motion asking the Court to issue an asset freeze, appoint a receiver to collect, marshal, manage and distribute these assets for the benefit of investors, and to enter a preliminary injunction.

 

 

http://www.sec.gov/litigation/litreleases/2011/lr22065.htm


Modified: 08/11/2011