Disgorgement and $3M Fine for Ponzi Schemer
HOUSTON (CN) - A Ponzi man who lured investors with false government guarantees and charged hefty fees will pay the maximum penalty for his $10.1 million scheme, a federal judge ruled.
In a 2011 complaint, the Securities and Exchange Commission accused Evolution Capital Advisors (ECA), its subsidiary Evolution Investment Group I (EIGI), and owner Damian Valdez of securities fraud.
Valdez and Evolution drew in 82 investors through two secured-note offerings over a two-and-a-half year period and allegedly paid the first round of investors with money collected from the second group.
The SEC said that the defendants took $2.4 million for fees, while Evolution's assets lingered well below the amount owed to investors.
U.S. District Judge Gray Miller quickly froze the defendants' assets and permanently enjoined them from violating federal securities laws.
Miller determined that December that the private placement memoranda for the offerings lacked disclosures on the type of loans Evolution invested in, specifically Small Business Administration interest-only strips, which the U.S. government does not guarantee.
According to a 10-page order issued Wednesday, a court-appointed receiver has dispersed $3.6 million to those investors whose principal was not repaid.
Valdez and Evolution are still liable for disgorgement of $183,000, though that amount may decrease when the receiver makes additional distributions, the latest order states. Miller declined to award prejudgment interest until the disgorgement liability is set, but the judge did order Valdez to pay a civil penalty.
"Valdez made several misrepresentations by omission in the private placement memoranda at issue in this case," Miller wrote. "Further, these misrepresentations were made in reckless disregard of his obligations under the securities laws as he knew, and failed to disclose, the risks of investing in SBA interest only strips. The egregiousness of this conduct warrants the maximum penalty against Valdez: $3,803,341.31. Moreover, the court finds that because Valdez controlled the Evolution entities, additional penalties against EIGI and ECA are not warranted to serve the twin goals of punishment and deterrence. The court declines to impose civil penalties against ECA and EIGI."