PONZI SCHEMES: THE NEW ENFORCEMENT STAPLE
Ponzi scheme cases continue to be the new staple of the Enforcement Division. While they come in all sizes and shapes, the overriding feature of each is a promise of great returns and safety. The only great returns, of course, go to the promoters who have the safety of good cash flow from investors – at least until they get caught.
SEC v. American Settlement Associates, LLC, Case No. 4:10-cv-00912 (S.D. Tex. Mar. 19, 2010) fits the pattern. Investors were promised great returns and safety for their investments. The promoters, here defendants Charles Jordan and Kelly Gipson, got rich at least for a while.
The scheme centered on the sale of an investment product known as a “viatical” or “life settlement.” This is a fractionalized interest in life insurance policies. Messrs. Jordan and Gipson, through their controlled entity American Settlement, began soliciting investor funds for their viatical offering in March 2007, the year the company was incorporated.
Defendants acquired a $5 million policy in the name of a particular insured through a life settlements broker. They raised over $3.7 million from approximately 50 investors in 10 states by selling fractionalized interests in the policy, according to the complaint. Investors were promised returns ranging from 42% to 48% after approximately three and one half years. These returns were promised even if the insured lived beyond the projected time period. In that event, a bonding company was supposed to step in and pay the promised returns. Overall the investors were promised a safe investment in which future premiums were covered and a high rate of return.
In fact, the representations were false. The defendants failed to put aside funds to pay premiums. The bonding company which was supposed to ensure the payments was, in fact, unlicensed to provide insurance in the U.S. Approximately $2.3 million in investor funds were used by the individual defendants to support their lifestyle. The policy lapsed when the premiums were not paid.
The SEC’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). A freeze order and the appointment of a receiver was obtained. The case is in litigation. See also Litig. Rel. 21458 (Mar. 22, 2010).