U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22406 / June 28, 2012
Securities and Exchange Commission v. Small Business Capital Corp., et al. Case No. 12-CV-3237 EJD) (N.D. Cal. June 21, 2012)
SEC SHUTS DOWN MORTGAGE FUND PONZI-LIKE SCHEME
The Securities and Exchange Commission announced today that it has obtained an emergency court order to halt an alleged Ponzi-like scheme operated by Small Business Capital Corp. (“SB Capital”) and its principal Mark Feathers (“Feathers”). According to the Commission, SB Capital and Feathers raised $42 million by selling securities issued by two mortgage investment funds they controlled, Investors Prime Fund, LLC and SBC Portfolio Fund, LLC (“Funds”).
The Honorable Edward J. Davila for the U.S. District Court for the Northern District of California granted the Commission’s request for a temporary restraining order and asset freeze against Feathers, SB Capital, and the Funds and appointed Thomas A. Seaman as a temporary receiver over SB Capital and the Funds.
More than 400 investors were attracted to the Funds by promises that profits from mortgage investments would yield annual returns of 7.5 percent or more, the Commission alleged. In reality, it said Feathers operated a Ponzi-like scheme by paying returns to investors that came partly from Fund profits and partly from other investors.
The Commission said that from 2009 to early 2012, Feathers improperly transferred more than $6 million from the Funds to SB Capital to pay its expenses, including substantial payments to Feathers. According to the Commission, the defendants had the Funds account for the transfers in a way that disguised the depletion of Fund assets, and did not tell investors that SB Capital’s ability to repay the Funds was uncertain and that it was only able to make the interest payments owed to the Funds by borrowing more from them.
In addition, the Commission alleged that investors were not told that in February and March 2012, the defendants caused one Fund to sell mortgages to the other Fund at an inflated price, thus generating a “profit” for the selling Fund so it could pay SB Capital management fees of more than $575,000.
The Commission also charged Feathers and SB Capital for SB Capital’s effecting transactions in the Funds’ securities without being registered as a broker-dealer with the SEC.
The Commission’s complaint charges Feathers, SB Capital, and the Funds with violations of Section 17(a)(1)-(3) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a)-(c) thereunder, and Feathers and SB Capital with violations of Section 15(a) of the Exchange Act; and seeks preliminary and permanent injunctions, and disgorgement of ill-gotten gains with prejudgment interest thereon against all defendants and civil penalties against Feathers and SB Capital.
Judge Davila has scheduled a court hearing for July 10, 2012, on the SEC’s motion for a preliminary injunction.