AN SEC ENFORCEMENT STAPLE: PONZI SCHEMES

Ponzi schemes, once thought difficult to detect and stop, are now a stable of SEC enforcement. Virtually every week one or more schemes that have fleeced investors of their hard earned dollars with claims of extravagant returns is uncovered and halted. Despite the best efforts of SEC enforcement, it is usually after much of the money is gone. There seems to be no end to the claims made by these fraudsters from selling interest in TARP to highly sought after companies such as Facebook.

As last week drew to a close the SEC unearthed another. This one combined key elements of current interest: the downtrodden residential real estate market and the huge interest in the shares of hot or upcoming IPOs such as Facebook, Groupon, LinkedIn and Angie’s List. SEC v. Neman, CV 12-03142 (C.D. Cal. Filed April 11, 2012).

The action names as defendants Shervin Neman, Neman Financial, Inc. and Cassandra Neman. Mr. Neman is the sole shareholder and CEO of Newman Financial which was a registered investment adviser. Shervin and Cassandra Neman are married.

Beginning in June 2010 Mr. Neman raised about $7.54 million from eleven investors in three states. He induced investors to purchase promissory notes from the Neman Fund which was to pay investors returns of 11% to 18% within 30 to 180 days. Those profits were to come from purchasing foreclosed residential properties and then “flipping” them for a profit.

A second claimed opportunity for investors came through Mr. Neman’s “connections” to a broker with access to shares in companies such as Facebook and IPO shares of issuers such as General Motors, Groupon, LinkedIn and Angie’s List. Investors were led to believe these would be very profitable investments and that they could get in on the profits by entering into purchase agreements with Mr. Newman, the “general partner.” He promised a quick return once the issuers went public.

The sad reality of course is that the only profits went to Mr. and Mrs. Newman. Much of the money was funneled back to other investors to keep the scheme going. Substantial portions however, were used to support the lifestyle of the individual defendants.

The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), Advisers Act Sections 206(1), 206(2), 206(4), 204(a) and 203A. A hearing is scheduled on April 23, 2012 on the Commission’s motion for a preliminary injunction.