U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18562 /January 30, 2004
SEC v. Blake A. Prater and Wellspring Capital Group, Inc., (United States District Court for the District of Connecticut, Civil Action No. 03-CV-01524-MRK).
COMMISSION SEEKS CONTEMPT ORDER AGAINST CONNECTICUT DEFENDANTS IN CASE INVOLVING INTERNET PONZI SCHEME
Court Previously Upheld Sufficiency of the Commission's Fraud Allegations
The Commission announced that on January 13, 2004, the Commission requested that a Connecticut federal court issue an order requiring Connecticut resident Blake A. Prater and his Guilford, Connecticut-based company, Wellspring Capital Group, Inc., to show cause why they should not be held in contempt of court in connection with a case charging them with fraud. The Commission's application for the order alleges that Prater and Wellspring have violated and continue to violate a court-ordered asset freeze, preliminary injunction, and temporary restraining order (TRO). Specifically, the Commission's application sets forth facts suggesting that, beginning immediately upon their receipt of the asset freeze and TRO, Prater and Wellspring began systematically to transfer frozen assets through a variety of schemes including through the Ebay online auction system and through real estate transactions. In addition, according to the application, Prater and Wellspring also violated the preliminary injunction by creating a new internet Ponzi scheme substantially similar to the scheme that was the subject of the Commission's complaint. The Court has scheduled a hearing on this matter for February 6, 2004.
Previously, on November 25, 2003, the court upheld the sufficiency of the Commission's allegations that Prater and Wellspring had operated an internet Ponzi scheme. In upholding the Commission's complaint, the Honorable Mark Kravitz, United States District Judge for the District of Connecticut, noted that the defendants had "fail[ed] to speak to the allegation at the heart of the SEC's fraud charge" and had provided "no alternative to the SEC's explanation of how Defendants would pay out [the] enormous returns [promised] - which is that early investors would be paid from the proceeds obtained from later investors, the very definition of a 'pyramid scheme.'" The Court also denied the defendants' motion to modify the preliminary injunction and asset freeze.
The Court's November ruling establishes that the Commission had stated a cause of action for securities fraud against Prater and Wellspring. The complaint alleges that the defendants operated a sophisticated Internet Ponzi scheme that raised millions of dollars from thousands of investors. It further alleges that Prater's scheme used a series of interrelated Internet web sites and a network of agents operating throughout the United States to guarantee prospective investors exorbitant returns through a variety of programs. Under one set of programs, Prater, through Wellspring, promised that, in exchange for a small sum of money, it would pay investors returns as high as 1,000 percent per year in the form of payments for various living expenses of the investors, such as car loans, rent, or business expenses.
In a separate ruling on September 25, 2003, the Court had previously concluded that the Commission had introduced prima facie evidence showing that the allegations were true and had imposed a preliminary injunction against the defendants and had ordered the defendants' assets frozen. In its latest ruling, the Court noted that the defendants had failed to produce any documentary evidence to support modifying this preliminary injunction and asset freeze. The Court also recited facts suggesting that the defendants had made misrepresentations to the Court in their motion to dismiss and noted that the defendants had produced no information refuting or denying that such misrepresentations had occurred.