California Firm Rapped on $42M Ponzi Scheme

     (CN) – Small Business Capital ran a three-year, $42 million Ponzi scheme that defrauded investors while paying the firm’s manager substantial bonuses, a federal judge ruled.
     The Securities and Exchange Commission initiated the action against the Los Altos, Calif.-based company last year.
     It said SB Capital CEO Mark Feathers raised $42 million since 2009 by selling securities issued by his two mortgage investment funds.
     Feathers roped in more than 400 people by promising annual returns of 7.5 percent or more, but in typical Ponzi fashion, paid off old investors with new money, the SEC said.
     After granting the SEC a preliminary injunction, U.S. District Judge Edward Davila granted it summary judgment Friday, finding that SB Capital failed to rebut the SEC’s allegations with hundreds of pages of exhibits.
     “The SEC has provided evidence showing that despite [Feathers’] representations, the funds were not profitable and that the returns on members’ investments were not being derived from the funds’ profits,” the 30-page opinion states. “Essentially, the SEC has shown that Feathers was not using fund profits to pay out returns, but rather other member investments – contrary to the representations of the Funds’ offering documents – as ‘Ponzi-like payments.’ Feathers had instructed his employees to maintain monthly payments to investors in IPF [Investors Prime Fund] and SPF [SB Capital Portfolio Fund] at a return of 7.5 percent per annum and 9-10 percent per annum, respectively, without taking into consideration the funds’ net income or actual profitability.”
     Securities regulators also provided the court with a summary of the cash transfers that the funds made to SB Capital, which showed that Feathers transferred more than $7 million of investors’ money to pay himself and his company’s operating expenses.
     “The SEC has presented abundant evidence demonstrating that Feathers acted intentionally or recklessly in carrying out the misrepresentations and misstatements presented in the preceding section,” Davila wrote. “As an initial matter, it is beyond dispute that Feathers prepared and distributed the IPF and SPF offering circulars from at least 2009 to 2011, which clearly prohibited certain loans and money transfers. Rather than refraining from this prohibited conduct, Feathers continued to cause the funds to transfer cash to SBCC [SB Capital Corp.] and make other unsecured loans and transfers since 2009.”
     When SB Capital’s auditor said it could not issue an unqualified opinion on the firm’s 2010 financial statements because of the numerous loans between the firm and the funds, Feathers decided to have the auditor issue a qualified opinion rather than pay the amount before the audit was complete, or disclosing the loans to investors, the court found.
     Davila asked the parties to submit briefing on the SEC’s requested relief – a permanent injunction, disgorgement and a civil penalty.
     In a separate order, Davila granted $131,800 in fees to Thomas Seaman, whom the court previously appointed as receiver of SB Capital and the funds. Those fees represent interim payment of fees and expenses for services performed between Oct. 1, 2012 and Dec. 31, 2012.
     Allen Matkins, Leck, Gamble, Mallory & Natsis – the law firm that represents Seaman – can obtain $85,700, plus another $1,400 in expenses, according to the ruling.
     Both numbers represent 75 percent of the amounts requested, Davila noted.

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