InverWorld, Inc., et al.

SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 16242 / August 4, 1999

SECURITIES AND EXCHANGE COMMISSION v. INVERWORLD, INC., ET AL. Civil Action No. SA 99 CA 0822-FB

SEC CHARGES INVESTMENT ADVISER, BROKER-DEALER AND PRINCIPALS WITH $475 MILLION SECURITIES FRAUD

On August 4, 1999, the Commission filed a civil action against a San Antonio registered investment adviser, registered broker-dealer and their chairman and president, as well as two related foreign shell companies, charging them with securities fraud, and seeking preliminary and permanent injunctions, an asset freeze, disgorgement, civil penalties and other relief. The defendants may have lost as much as $475 million of client funds in unauthorized, highly leveraged securities investments and practically worthless securities issued by one of the related shell companies.

The Commission's complaint names InverWorld, Inc. ("InverWorld"), an investment adviser formerly registered with the Commission and currently registered with the State of Texas, and InverWorld Securities, Inc. ("InverWorld Securities"), a Commission-registered broker-dealer, together with their chairman Jose P. Zollino ("Zollino") and president, George F. Fahey ("Fahey"), and two related foreign corporations, IWG Services, Ltd. ("IWG") and IG Services, Ltd. ("IG Services") as defendants. The Complaint also names LHH Ltd., ("LHH") a Texas limited partnership, as a relief defendant. In particular, the Complaint alleges the following:

  • Since 1997, the InverWorld entities managed approximately $475 million for at least 1000 Latin American clients, primarily Mexican citizens.

  • InverWorld clients sought low risk investments outside of Latin America, such as CDs, money markets and U.S. Treasury obligations, and in some instances, specific stocks traded on national exchanges in the United States.

  • Instead of the sought investments, InverWorld invested their monies in various investments to which one of the InverWorld entities had some close relationship or affiliation or in other risky, highly leveraged investments. Much of the securities purchased were issued by IWG, a foreign shell company with no offices, employees and no operations, and presently the securities appear to be practically worthless.

  • It appears that the two foreign shell companies were used by the domestic InverWorld entities, Zollino and Fahey to move client monies offshore, outside the reach of their clients and regulators. Wire transfer records reveal that some $210 million was transferred offshore to Swiss and Bahamian bank accounts. As to investments in specific stocks, without the knowledge or consent of its clients, InverWorld margined millions of dollars for its own use, creating significant losses. At present it appears that only $90 million in securities may remain for the benefit of investors, and this figure may be further reduced due to margin debt.

  • Another $1.3 million of investor funds were transferred, for no apparent consideration, to LHH, which is controlled by Fahey and which owns the building in which the InverWorld entities have their offices. The remaining funds appear to have been used to purchase or lease automobiles and aircraft and for other improper uses.

  • The highly risky investments and improper use of client funds went undetected by investors because InverWorld issued fraudulent monthly account statements which failed accurately to disclose how investor funds were invested or the risk associated with these investments.

  • Presently, the InverWorld entities hold assets that, if liquidated, would return at best approximately $200 million. Moreover, the InverWorld entities have failed to account for the remaining $250-275 million of funds entrusted to it by its clients for investment.

The Complaint charges that InverWorld, InverWorld Securities, Zollino, Fahey, IWG and IG Services violated the antifraud provisions found in Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and that InverWorld, aided and abetted by Zollino and Fahey, violated Section 206 of the Investment Advisers Act of 1940, based upon these same activities. The Complaint seeks against each preliminary and permanent injunctions, an asset freeze, accounting, repatriation order, order prohibiting the alteration or destruction of books and records, expedited discovery, disgorgement with prejudgment interest and civil penalties. Additionally, against InverWorld and InverWorld Securities, the Commission seeks the appointment of a receiver. The Commission further seeks from LHH the appointment of a receiver, an asset freeze, accounting, repatriation order, order prohibiting the movement, alteration and destruction of books and records and order expediting discovery.

The Commission would like to acknowledge the outstanding assistance of the Texas State Securities Board, the United States Attorney's Office for the Western District of Texas and the Federal Bureau of Investigation, who worked closely with the Commission in its investigation. Their assistance is yet another example of the effective coordination by securities regulators and criminal authorities in their joint efforts to police securities fraud.