DALLAS (CN) – A court-appointed receiver trying to run down a multimillion securities fraud cannot seize donations that the fraudsters made to the American Cancer Society, the 5th Circuit ruled.
Karen Cook has coordinated the assets of entities and individuals involved in a oil-and-gas investment fraud in Dallas. According to the 2009 Securities and Exchange Commission complaint, George Wesley Harris raised $13.4 million from investors through five unregistered securities offerings. The SEC charged Harris, another individual and three companies, Giant Operating, Giant Petroleum and DSSC Operating, for their involvement in the fraud.
Two weeks ago, Harris, 37, of Mansfield, was ordered to pay over $4.75 million in disgorgement, interest and civil penalties for his role in the scam.
According to the SEC complaint, Harris’ sales team made unsolicited cold calls to prospective investors and indicated a 100 percent return on investments within a year. But Harris failed to tell investors that the company had never operated a profitable oil & gas program, and he diverted investor money to his other companies, sales commissions and himself.
Cook, the receiver, had also set her sights on $240,000 in charitable donations that Giant had made to the American Cancer Society. The Northern District of Texas ordered ACS to release the donations as fraudulent transfers under Texas’s Uniform Fraudulent Transfer Act, but the federal appeals court reversed last week.
Writing for a three-judge panel Chief Judge Edith Jones disagreed that the donations were made with “actual intent to hinder, defraud or delay creditors,” which required the court to define Giant as a “Ponzi-like” scheme.
“The sole evidence relied upon by the District Court was Cook’s affidavit and the attending exhibits,” wrote Jones. “The testimony in the affidavit, however, is highly conclusory and thus depends on the data furnished in the exhibits. … Nothing in these documents demonstrates that investor funds were used to issue ‘returns’ to other investors – a sine qua non of any Ponzi scheme.”
Giant may have operated a fraudulent or “at least badly mismanaged drilling investment program,” but there was no proof that it was based on the creation of “returns” to investors from other investor contributions, the decision states.
“The receiver’s attempt to liken the scheme in question to a ‘Ponzi-like fraud,’ and therefore reduce her burden to proving ‘presumed intent to defraud,’ fails for lack of evidence,” Jones wrote. “Not all securities frauds are Ponzi schemes.”
Cook also failed to defend the fraudulent-transfer claim with circumstantial evidence showing that the transfers to the charity were made with actual fraudulent intent. “The affidavit baldly asserts that based on her investigations, ‘it is clear that the donations to ACS were made with the purpose of luring new investors and to keep the fraudulent scheme going,'” Jones wrote. “Cook provides no explanation for this conclusion, nor any supporting facts to bolster this claim. Moreover, while the SEC complaint contained allegations relevant to the issue of authorized uses of investment proceeds, a complaint ‘is not evidence of the charges contained in it.'”