U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19861 / October 10, 2006
SEC v. Salvatore Favata (aka Sam Favata), Civ. Action No. SACV 06-943 JVS (ANx) (United States District Court for the Central District of California) (Judge Selna)
SEC Sues Ex-President of California Mortgage Firm For Running $30 Million Ponzi Scheme
On October 6, 2006, the Securities and Exchange Commission filed a settled securities fraud action in the United States District Court for the Central District of California against Salvatore Favata ("Favata"), the former President of National Consumer Mortgage, LLC ("NCM"), an Orange County, California company that purportedly brokered residential mortgages. The Commission's complaint alleges that from 2001 through 2006, Favata, acting through NCM, operated a massive Ponzi scheme, which raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals.
Without admitting or denying the allegations of the Commission's complaint, Favata consented to the entry of final judgment permanently enjoining him from violating the antifraud and registration provisions of the federal securities laws. Specifically, Favata consented to the entry of a final judgment permanently enjoining him from violating Section 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Pursuant to Section 15(b) of the Exchange Act, Favata has also consented to the entry of an administrative order permanently barring him from associating with any broker or dealer in the future.
The Commission's complaint also alleges that Favata solicited investors in face-to-face settings, including church gatherings and investment seminars and persuaded mortgage refinance clients to take cash out of their refinancing and use that cash to invest in NCM investment notes. Favata falsely told potential investors that NCM would loan investor funds to homeowners who could not qualify for traditional mortgages. Investors were also told that the return on the notes would stem from the interest NCM received on the mortgage loans. Favata further claimed that the notes were guaranteed by the real estate securing the underlying residential loans and that NCM only lends on properties that have a 65 percent or lower loan to value ratio ensuring a low default rate and the investors' principal in the event of a foreclosure. Favata went so far as to represent that NCM maintained deeds of trust for the real estate securing the investments.
On the same day the Commission filed its complaint, the U.S. Attorney's office for the Central District of California filed an information and plea agreement in which Favata agrees to plead guilty to one count of mail fraud, to pay restitution in excess of $20 million, and to forfeit his residence in connection with the same scheme. Pursuant to the plea agreement, Favata faces a possible 60-month prison sentence.
The Commission would like to acknowledge the assistance and cooperation of the United States Attorney for the Central District of California, the Federal Bureau of Investigation and the Office of the United States Trustee for the Central District of California in the investigation of this matter.