SEC Charges Lending Company and Brokerage Firm With Fraud
The Securities and Exchange Commission today announced fraud charges against a Manhattan-based lending company and its owner accused of repeatedly lying to investors purchasing high-yield securities. The SEC also charged the brokerage firm that acted as the placement agent and two of its executives.
The SEC alleges that American Growth Funding II LLC and Ralph Johnson promised investors 12-percent annual returns and falsely claimed its financial statements were being audited each year. AGF II, which raises capital from investors to provide loans to businesses, also made misrepresentations in offering documents about its management and concealed details about deteriorating loan values that could imperil full payment of the promised returns to investors. The company’s placement agent Portfolio Advisors Alliance and its owner Howard Allen and president Kerri Wasserman allegedly knew the offering documents were inaccurate yet continued using them to solicit sales of AGF II securities.
“We allege that AGF II misled investors and overstated the true value of these investments, which are worth far less than presented because many of the company’s loans are non-performing,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “We further allege that Allen and Wasserman looked the other way and allowed PAA to facilitate the fraud as the placement agent.”
According to the SEC’s complaint filed in federal district court in Manhattan:
- In a private placement offering, AGF II raised approximately $8.6 million from investors from March 2011 to December 2013.
- The company represented in offering documents that its financial statements had been audited and would continue to be audited each fiscal year. Johnson knew this statement was false. No audit of AGF II’s financials occurred until 2014.
- The offering documents represented that AGF II was governed by a Board of Managers comprised of Johnson and two other individuals when, in fact, the two individuals never agreed to serve in any managerial capacity.
- Johnson caused AGF II to send out monthly account statements to investors that concealed the precariousness of its business. The company failed to disclose that it could not have possibly paid investors their stated account balances because the majority of AGF II’s loans were likely uncollectible at the time.
- While PAA acted as the placement agent, Allen became aware by no later than June 2012 that AGF II’s offering documents were not accurate. But he continued using them to solicit investors without informing them the financial statements were unaudited.
- Allen informed Wasserman that AGF II’s offering documents contained false information, but Wasserman took no action and the firm’s brokers continued using misleading documents to solicit investors.
The SEC’s complaint charges AGF II, PAA, Johnson, and Allen with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint also charges Johnson, Allen, and Wasserman with aiding and abetting and control person liability.
The SEC’s investigation was conducted by Gerald Gross, John Murray, and Karen Lee with assistance from Thomas Feretic, Lisa Knoop, and Doreen Rodriguez. The SEC’s litigation will be led by Alexander Vasilescu, Ms. Lee, and Mr. Murray. The case is being supervised by Sanjay Wadhwa.