Investors Say They Were Rolled in a Ponzi

(CN) - A purported wholesaler of medical and dental supplies defrauded investors of $3 million by falsely claiming it had a lucrative contract to supply latex gloves to the U.S. government, an investment firm claims in court.

IMG Funding LLC sued the International Manufacturing Group and its CEO, Deepal Wannakuwatte, in Sacramento Federal Court.

IMG, a North Carolina LLC, claims the defendants began the fraudulent investment scheme sometime before 2013, claiming they had secured a $100 million contract to supply latex gloves to the Department of Veterans Affairs.

"Defendants perpetrated their fraud by falsifying IMG, Inc.'s financial statements, falsifying or altering invoices from the VA to inflate the value of IMG, Inc.'s contracts, and even, on information and belief, by having IMG, Inc.'s employees pose as VA representatives during telephone calls," IMG claims in the lawsuit.

"Defendants used these artifices, and others, to induce investors to invest in IMG, Inc. Instead of being paid from IMG, Inc.'s legitimate business revenues, older investors were paid with funds solicited from newer investors, thereby concealing the fact that IMG, Inc.'s revenues and net worth were far less than had been represented."

Paying off early investors with new money - not from profits - is the hallmark of a Ponzi scheme.

In early February this year, Wannakuwatte sent IMG a series of investment materials claiming, among other things, that his company supplied gloves to VA medical centers in all 50 states, that its 2013 revenue exceeded $150 million and its profits more than $7 million, according to the complaint.

Based on these and other assertions, IMG says, it raised $2.4 million from 20 investors and transferred nearly all of it to the defendants' bank account. "As part of the Agreement, IMG, Inc. issued a Secured Promissory Note ('the Note') to plaintiff in the principal amount of $3,000,000," the complaint states.

However, "Plaintiff recently discovered that the statements contained in IMG, Inc.'s Financial Statements regarding its total assets, accounts receivable, and the value of its inventory were false," IMG says. "Upon information and belief, defendants falsified these financial statements to conceal the truth about IMG, Inc.'s revenues, and to induce additional investments in order to maintain the appearance of a profitable company by paying older investors with funds from newly solicited investments."

In fact, two other actions against the defendants are pending before the Federal Court in Sacramento. One is a criminal complaint captioned U.S. v. Wannakuwatte, Case No. 2:14- MJ-035 CKD.

The other is an application and affidavit for search warrant filed on Feb. 10, 2014, in a pending action captioned In the Matter of the Search of International Manufacturing Group Inc./Relyaid Corporate Warehouse, Case No. 2:14-SW-76 CKD.

Both complaints involve allegations of criminal conspiracy, mail fraud, wire fraud and bank fraud, according to the complaint. IMG says it found out about these allegations on Feb. 24.

"The subject of the criminal complaint is the same fraudulent scheme that Defendants utilized to induce Plaintiff to participate in the transactions described herein," the complaint states. It adds that "a warrant had been issued for defendant Wannakuwatte's arrest."

"Prior to its discovery of the criminal complaint, plaintiff did not know that defendants' representations about IMG, Inc.'s business operations and finances were false. Plaintiff only discovered that defendants had provided false and misleading information in connection with plaintiff's investment after the FBI's investigation of defendants was made public in the criminal complaint," IMG says in the lawsuit.

It seeks restitution, rescission of the promissory note and the agreement through which the money was turned over to the defendants, and damages for securities fraud, fraudulent transfer and fraudulent business practices.

IMG is represented by Matthew Jacobs of DLA Piper in Sacramento.

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