LOS ANGELES (CN) - A California-based multi-million dollar ATM Ponzi scheme has been shut down by the Securities and Exchange Commission through an emergency order by a federal judge in Sacramento.
The SEC sued Nationwide Automated Systems Inc. (NASI), Joel Gillis and Edward Wishner as well as relief defendants Oasis Studio Rentals, Oasis Studio Rentals #2 and Oasis Studio Rentals #3 for securities fraud and selling unregistered securities in federal court in Los Angeles on Sept. 17.
In its complaint, the SEC claims NASI is running an ongoing, fraudulent investment scheme that involves key players selling unregistered securities offerings to willing investors through a "sale and lease back" automated teller machine (ATM) investment opportunity.
According to the complaint, the defendants told investors that NASI would lease back the ATM machines they purchase - "invest in" - by paying them a $0.50 "rent rate" for each ATM transaction made on the machines. In typical Ponzi scheme fashion, investors were promised an annual 20 percent rate of return on their investment.
The investors agreed to an initial 10-year term for the sale and leaseback scheme, which automatically renewed for three-year periods thereafter unless investors gave written notice at least 60 days before their contracts expired, the SEC says in its complaint.
Since January 2013, NASI has secured $123 million in ATM sale and leaseback transactions. According to the SEC, an investment typically runs from $12,000 to as high as $19,800.
In 1996, with defendant Gillis as president, NASI became a legal corporation described on its website as an ATM machine provider company whose "revenue-sharing program offers a no-risk proposition for owners of hotels, resorts, casinos, cinemas, shopping centers and other high traffic locations located throughout the United States."
The company's website states that its often-customized ATM machines generate "some $30 million in vault-cash transactions processed every day through one of its processing partners" and that "ATMs generate some $1 billion in total transactions each month, providing substantial revenue sharing opportunities among the company's clients."
But the SEC says that NASI does not actually own many of the ATMs. Instead, the company is in the business of generating belief by securing new investment funds - its revenue stream - which it then uses to pay the guaranteed returns it owed to earlier investors.
NASI claims to operate about 31,000 ATM machines. However, a third-party service provider for the organization can only identify some 235 ATM machines that it is currently servicing, according to the SEC's website.
As part of its attempt to maintain the illusion that the company is an ATM machine provider, NASI required that all investors contractually agree never to contact the facilities or areas where their ATMs were placed. The company's website promises to "undertake full responsibility for installation, cash drop-off and pickup, and maintenance, parts and labor required."
But one investor did exactly that, calling a rural hotel in California where her ATM machine was supposedly installed and discovering the hotel had no ATM machine at all and never did, the complaint states.
"She then contacted Gillis and left a message to the effect of 'I know what you're doing and I want my money back,'" the SEC says in its complaint. "The very next day, Gillis provided that investor with a cashier's check for the full amount of her investment. He asked her no questions."
The company provided few opportunities for investors to audit their ATMs' performance. According to the complaint, when one interested investor asked how he would know how much the ATM made on a monthly basis, a NASI sales rep reportedly said "Your statement with each check is your audit" and gave no further details.
"In fact, in their monthly reports to investors, defendants fabricated false transaction figures for, in many cases, either nonexistent ATMs or ATMs that neither NASI nor its investors actually owned," the SEC says in its complaint.
And in many cases, NASI sold the same ATM machine - which it did not own in the first place - to more than one investor. For instance, the SEC says that in 2013 the company sold an ATM located at a Casey's Convenience Mart in Norfolk, Neb., to five different investors - with two of those sales occurring within a 16-day period.
Gillis executed thousands of transactions by directly marketing the ATM investment scam to investors. He is also the signatory on all bank account "Ponzi-like" payments to investors, according to the SEC's complaint.
In reality, the ATM machines paid very little to the investors - the definition of a Ponzi scheme, the SEC says. In the second quarter of 2014, NASI deposited nearly $24 million in its bank accounts: $391,000 in ATM transaction revenue, and $18 million from new investors.
In that quarter, NASI paid investors nearly $23.5 million - the bulk from new seed money, the SEC says.
Wishner acts as the company's treasurer, vice president and secretary, and is affiliated with the other defendants as their registered agent. The SEC claims Wishner is a key actor who prepared all of NASI's tax returns and is also a signatory on all the company's bank accounts.
The SEC says that the defendants further misused investor money by effectively transferring proceeds to the Oasis defendants, Wishner's companies. They wrote off millions in loans to Oasis, accepting payments of just pennies on the dollar according to the complaint.
Cracks in the scheme began to appear this past August, when NASI bounced about $3 million in checks to investors. Gillis blamed the "glitch" on a variety of situations: the U.S. Postal Service, system upgrades, accounting issues, and "the inordinate amount of time spent on complaints," the complaint states.
On Monday, a federal judge in Sacramento signed off on a preliminary injunction freezing the defendants' assets, prohibiting them from destroying documents and requiring an accounting.
U.S. District Judge S. James Otero also appointed a receiver to take control of NASI during the investigation.
Gary Leung and Peter Del Greco are representing the SEC in the action.
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