SEC Halts Ponzi Scheme Run by Convicted Felon Siphoning Investor Funds for Sports Talk Venture
FOR IMMEDIATE RELEASE
Washington, D.C., June 15, 2009 — The Securities and Exchange Commission today obtained a court order halting an $11 million Ponzi scheme in which a Chicago-based promoter who is a convicted felon promised investors unusually high returns from purported investments in payday advance stores.
The SEC alleges that David J. Hernandez, who was convicted in 1998 for wire fraud arising from his previous employment at a bank, sold "guaranteed investment contracts" through his company that, unbeknownst to investors, was actually out of business. Hernandez promised returns of 10 percent to 16 percent per month and made false and misleading statements about his background, the use of investor proceeds, and the safety of the investment. Among Hernandez's illicit uses of investor funds was to start up a Chicago sports-talk Web site called "Chicago Sports Webio" featuring Chicago-area sports figures and reporters.
"Hernandez bilked investors out of funds that he led them to believe were being invested properly and safely," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office. "Instead, he was paying investors in Ponzi-like fashion to keep his scheme afloat while he used their money for personal expenses and to start an online sports talk venture."
The SEC brought its enforcement action within days of receiving the initial indication of Hernandez's fraudulent activities. The SEC's complaint, filed in U.S. District Court in Chicago, alleges that Hernandez solicited funds from more than 100 investors in at least 12 different states through his company Next Step Financial Services, Inc. Hernandez solicited investors from February 2008 until the SEC's emergency action, and he did so both in-person and through Next Step Financial's Web site. He claimed that investor funds were covered by insurance policies purchased from nationally recognized insurance carriers.
The SEC alleges that Hernandez, who lives in Downers Grove, Ill., misrepresented that Next Step Financial was a successful company that invested in payday advance stores when, in fact, it was out of business. He trumpeted a strong educational and banking background, claiming to hold a J.D. and M.B.A. and have more than 20 years of experience in banking. According to the SEC's complaint, Hernandez never received the claimed degrees, and his banking career ended with the conviction for wire fraud. He never invested in payday advance stores as he claimed, nor did he purchase the insurance policies that purportedly covered investor funds.
According to the SEC's complaint, Hernandez instead placed investor funds into bank accounts of other companies that he controlled. From there, Hernandez paid existing investors their promised returns with money from new investors in Ponzi-like fashion. He also illicitly transferred investor funds to himself and to his wife for such non-investment related purposes as Chicago Sports Webio and to pay off the mortgage on their family home and to purchase cars, jewelry, and a piano.
The SEC's complaint charges Hernandez with violating the registration and antifraud provisions of the federal securities laws, and seeks a temporary restraining order, preliminary and permanent injunctions, disgorgement, prejudgment interest and civil penalties. The SEC's complaint also names as relief defendants Hernandez's wife and several companies controlled by Hernandez based on allegations that they received ill-gotten gains from Hernandez's fraud.
The Honorable Samuel Der-Yeghiayan, U.S. District Judge for the Northern District of Illinois, granted the SEC's request for emergency relief for investors, including an order temporarily restraining Hernandez from committing further violations of the registration and antifraud provisions and an order freezing the assets of Hernandez and the relief defendants.
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For more information, contact:
Merri Jo Gillette
Regional Director, SEC's Chicago Regional Office
Timothy L. Warren
Associate Regional Director, SEC's Chicago Regional Office
John J. Sikora, Jr.
Assistant Regional Director, SEC's Chicago Regional Office
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