UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22211 / December 28, 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) (Miller, J.).
Following Contested Evidentiary Hearing, SEC Obtains Preliminary and Permanent Injunctions and Related Relief Against New York Businessman and Two Houston-area Firms Who Conducted a Fraudulent $10 Million Note Offering
On August 10, 2011, the Securities and Exchange 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 $10 million from more than 80 investors through two fraudulent note offerings.
After a contested evidentiary hearing on October 19 and 20, 2011, the Court found that: (1) Valdez, Evolution Capital, and EIGI misled investors to believe that the notes were safe and secured by assets guaranteed by the United States government; (2) the defendants falsely promised to use leverage to purchase the assets securing the notes; (3) the assets securing the notes were subject to significant undisclosed default and prepayment risk; (4) 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 payments to investors in the first note offering; (5) because of defaults and prepayments on the underlying assets, failure to obtain leverage, and excessive Ponzi payments and fees, the defendants lacked sufficient assets to repay investors in accordance with the notes; and (6) the defendants would have continued taking all monies from the account each month as “profit” had the Commission not brought its enforcement action. The Court specifically found that Defendant Valdez acted with fraudulent intent.
Based on these findings, the Court granted the Commission’s motion for preliminary and permanent injunction, asset freeze, and appointment of a receiver. The Court also permanently froze the defendants’ assets. In addition, the Court specifically enjoined the defendants against further violations of 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 Commission’s requests for disgorgement of ill-gotten gains plus prejudgment interest, as well as civil penalties, remain pending.