U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20515 / April 3, 2008
Securities and Exchange Commission v. W Financial Group, LLC, Adley H. Abdulwahab, Michael K. Wallens, Sr. and Michael K. Wallens, Jr., (U.S.D.C., Northern District of Texas, Dallas Division, Civil Action No. 3-08CV0499-N)
SEC CHARGES HOUSTON COMPANY WITH SALES OF FRAUDULENT SECURITIES TO MOSTLY ELDERLY INVESTORS
On March 21, 2008, the Securities and Exchange Commission filed an action in Dallas federal court alleging that W Financial Group, LLC of Houston, Texas ("WFG") and its principals fraudulently offered securities, known as Secured Debt Obligations ("SDOs"). The SDOs are notes purportedly secured by automobile financing receivables created or purchased by the defendants. The defendants named in the Commission's Complaint are:
The Commission's Complaint alleges that the defendants, directly and through sales agents, have raised at least $17.9 million from September 2006 through February 2007 from the sale of SDOs to at least 182 investors located primarily in Texas, with additional investors in Wisconsin. Most of WFG's customers were elderly or seeking to invest retirement funds. WFG investors were lured into purchasing SDOs through a series of misrepresentations and omissions that portrayed SDOs to be a higher-yielding, but equally safe, alternative to bank CDs. For instance, the defendants' offering materials asserted that SDOs were insured or reinsured by Lloyd's of London and The Republic Group. WFG's offering materials also represented that WFG would keep investor funds separate and apart from its property and would use investor funds for limited, specially enumerated purposes, such as creating or purchasing automobile financing receivables or placing the funds in government securities or highest-quality corporate bonds.
The Commission alleges, however, that these representations are materially false and misleading. For instance, the Commission contends that the SDOs are not insured as represented, if at all. Indeed, according to the Complaint, the Lloyd's and Republic Group insurance provides only miniscule coverage at best. Moreover, as detailed in the Complaint, the defendants misused investor funds. The Complaint alleges, for example, that defendants did not maintain investor funds in separate accounts and placed only a fraction of the funds in the investment vehicles disclosed to investors. Instead, defendants allegedly have used millions of dollars to purchase the majority interest in an electric power company and fund its operations, to buy and develop residential real estate, and to buy unauthorized investment vehicles, such as a life settlement contract.
The defendants are charged with securities fraud under 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, and with conducting an unregistered offering under Section 5 of the Securities Act. The Complaint seeks permanent injunctions, civil penalties and disgorgement of ill-gotten gains against each defendant.
Pursuant to an Agreed Motion, the Court appointed a Special Master to take immediate custody of all cash assets obtained from or derived from investor funds and deposit these funds in the Special Master's trust account; oversee the sale of WFG's assets by reviewing the terms of any asset sale and seeking relief from the court in the event that it is determined that the transaction is not in the best interest of investors; authorize certain transactions involving the sale of assets or expenditures of funds; hold all cash and monies generated from the sale of assets in its trust account; and distribute proceeds of the asset sales to investors. The proposed defendants consented to the appointment of a Special Master.
The Commission acknowledges the assistance of the Texas State Securities Board.