Blake A. Prater and Wellspring Capital Group, Inc.

SEC v. Blake A. Prater and Wellspring Capital Group, Inc. (United States District Court for the District of Connecticut, Civil Action No. 03-CV-01524-MRK).

The Commission announced that, on September 26, 2003, a Connecticut federal court issued a written order imposing a preliminary injunction, asset freeze and other ancillary relief against Connecticut resident Blake A. Prater and his Guilford, Connecticut-based company, Wellspring Capital Group, Inc., in connection with an internet Ponzi scheme. The Court had previously issued a temporary restraining order granting substantially the same relief. In ruling on the preliminary injunction, which the Commission had requested in connection with its pending fraud action filed on September 5, 2003, the Honorable Mark Kravitz, United States District Judge for the District of Connecticut, found that the Commission had made a prima facie showing that Prater and Wellspring had engaged in securities fraud and other violations of the federal securities laws.

Based on the Commission's prima facie showing, the Court found that Prater and Wellspring operated a sophisticated Internet Ponzi scheme that raised millions of dollars from over twenty thousand investors. On the same basis, the Court also found that Prater's scheme used a series of interrelated Internet web sites and a network of agents operating throughout the United States to guarantee prospective investors exorbitant returns through a variety of programs. Under one set of programs, Prater, through Wellspring, promised that, in exchange for a small sum of money, it would pay investors returns as high as 1,000 percent per year in the form of payments for various living expenses of the investors, such as car loans, rent, or business expenses. In ruling on the preliminary injunction, the Court concluded that the websites operated by the defendants "appear to underscore the wisdom of a tried and true investment axiom: If it looks too good to be true, it probably is."

The Court also found at this preliminary stage in the litigation that the Commission's evidence showed that Wellspring claimed to use the investor funds to invest in a portfolio of companies, and that the profits from the portfolio, in turn, paid for the exorbitant returns to investors. The Court noted, however, that "the Court has not been presented with any evidence of any business or investment activity that would allow Defendants to provide the extravagant returns they are promising - that is, short of using the money of later investors to pay off earlier investors." The Court concluded that the SEC was "not required to wait until such a 'rob Peter to pay Paul' scheme collapsed of its own weight" and that a preliminary injunction was therefore appropriate. The Court also found that the Commission had produced evidence showing that Prater made material misrepresentations about the portfolio companies and investment offerings and that he failed to disclose his criminal history, which includes forgery and fraud convictions, to investors.

In issuing the preliminary injunction, the Court ruled that the Commission had made a prima facie showing that Prater and Wellspring violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

For additional information, see Litigation Release No. 18336.