SEATTLE (CN) – Financial advisers took $2 million from a couple to buy pre-IPO Facebook stock from a man who was “being sued by the SEC for fraud,” the couple claims in court.
Robert and Jan Whitsitt sued Allen & Associates LLC and its managing partner, John Eger, in Federal Court.
The Whitsitts say in the complaint that the defendants vetted the deal and vouched for Shervin Neman, who was under investigation by the SEC for fraud and prohibited from selling securities.
Neman is not a party to the complaint.
The Whitsitts say they are experienced investors in professional sports teams and facilities. They claim they declined the advisers’ recommendation to invest in Facebook, but reconsidered when they were told it would help further a “lucrative” sports real estate investment deal.
“On May 16, 2012, defendants telephoned and emailed Whitsitt in Washington. They said that they very close to lining up the Saudi family as investors in the Sports Real Estate Fund, that they had met or were about to meet the family’s lawyer, and that Neman was the family’s representative and thus a key to moving the Fund forward. Defendants requested that Whitsitt meet with them and Neman the following week to commence work on the Fund,” according to the complaint.
The Whitsitts say they were pressured to invest $2 million in Facebook stock and were given less than 48 hours to investigate the transaction.
“Defendants then told Whitsitt that Neman had committed to a $20 million allotment of Facebook stock from Goldman Sachs before the initial public offering, scheduled for May 18, less than 48 hours away,” according to the complaint. “Defendants said that although Neman and his family were making half of the investment, an investor responsible for $2 million of the investment had dropped out. To cover the entire $20 million package Neman needed to quickly find a replacement investor. Defendants encouraged Whitsitt to enter an arrangement with Neman as to those shares, noting that doing so would avoid embarrassment to Neman and implying that it would further the Sports Real Estate Fund project. Whitsitt understood that defendants were assisting him for the purpose of furthering defendants’ relationship with Neman and their anticipated lucrative participation in the Fund but reasonably assumed that they would nonetheless protect Whitsitt’s interests.
“Whitsitt asked why defendant Eger was not purchasing the shares himself. Defendant Eger explained that he had recently invested five to six million dollars of his personal funds in other investments and that he could not liquidate without a significant penalty. Defendant Eger stated that if he had the available funds, he would invest his own money in the Facebook deal with Neman.”
Eger told the Whitsitts that “it was a good investment and that the only risk was the market risk that the shares would decrease in value between purchase and the planned immediate sale,” the complaint states.
The Whitsitts claim the defendants told them to wire the money to Neman’s brother because Neman was having problems with SEC regulations.
“The written agreement that Neman proposed was between Whitsitt and Neman’s brother,” the complaint states. “Defendants represented to Whitsitt that the brother was the contracting party because Neman had to finish working through ‘accounting’ and ‘administrative details’ of regulation by the Securities and Exchange Commission. Defendants represented that they had recommended expert legal counsel to assist Neman, that the administrative issues were being resolved, and that counsel had approved Neman making transactions through his brother in the interim. Defendants offered and Whitsitt relied on the expert assistance of defendants in reviewing the purchase and sale agreement for the Facebook shares. Defendants reviewed the draft agreement, and sent suggested changes to Whitsitt in Washington. They raised no objections to the agreement being in the name of Neman’s brother and raised no concerns about Neman or his brother.”
Neman called the Whitsitts the day after receiving the money and said the Facebook shares had been sold at a profit and the couple would be receiving their money “promptly,” the complaint states.
The Whitsitts says they were still waiting for their money the next week when they learned about Neman’s troubles with the SEC.
“During that time, plaintiffs learned that Neman’s problems with the SEC were not, as defendants had indicated, ‘administrative details’ but included an SEC civil complaint alleging illegal activities, including exactly the kind of fraud that it turned out had been perpetrated on plaintiffs. The SEC had even obtained a temporary restraining order freezing Neman’s accounts and prohibiting him from engaging in the type of transaction defendants recommended plaintiffs enter with Neman. Neman apparently had no intention of using plaintiffs’ money for its intended purpose but, on information and belief, instead used it to try to conciliate prior victims and to pay lawyers defending the SEC charges. Whitsitt pressed Neman for an explanation and to repay the money immediately, but plaintiffs have received no payment from Neman despite repeated demands,” according to the complaint.
The complaint adds: “Neman has been indicted for fraud in the transaction defendants recommended, and he and his brother are apparently unable to pay the Whitsitts.”
The Whitsitts demand $2 million and damages for negligent misrepresentation and breach of fiduciary duty.
They are represented by David Burman with Perkins Coie.
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