SEC Offering Fraud Action Built on Duty to Disclose Omissions

The Commission filed another offering fraud action in what has become virtually a continuous stream of these cases. Its latest action centers on the sale of interests in a payday lending business operated in partnership with a federally recognized Native American tribe. In marketing those interests the defendant failed, according to the complaint, to disclose information regarding arrangements and payments made by the issuer since there was a “substantial likelihood” a reasonable investor would have found the facts material. SEC v. Roberts, Civil Action No. 2:16-cv-1664 (D. Nev. Filed July 14 2016).

Defendant Zachary Roberts is an inactive member of the bar of California. He controlled Encore Acceptance I, LLC, a Nevada limited liability company. In 2010 Mr. Roberts was introduced to the Chippewa Cree Tribe of the Rocky Boy’s Reservation, Montana. Eventually an agreement was stuck between Encore Service Corporation LLC, another Encore entity ostensibly operated by a Roberts associate, and an entity controlled by the Tribe. Under the terms of that agreement Encore would advise and mange the Tribe’s then nascent entry into the online payday lending business through a wholly owned subsidiary.

The management agreement contained a number of provisions precluding interference with the business of the Tribe. Those included making payments to members of the Tribe and restricting Tribe members’ ability to have financial interests in certain controlled entities related to the on-line business.

Subsequently, the Tribe entered into an agreement with Think Finance, Inc., a large Texas-based lender. The lender controlled a significant loan portfolio. Think sought to have the Tribe become a business partner. Following the execution of this arrangement Encore, through another affiliate, sought to, and did, expand its management agreement to increase its business with the Tribe and the fees paid to it. The new agreement was initially rejected by the Tribe but later approved after arrangements were made to make payments to certain members of and officials of the Tribe (collectively “Tribe Affiliate”).

Between December 2011 and July 2012 Encore offered and sold about $1.72 million of notes with an interest rate of 24% to 18 persons using a private placement memorandum. That memorandum contained certain information about Encore and the planned use of investor funds with the Tribe entity. It did not disclose that from September 2011 to July 2013 over $1.1 million was paid by the Encore affiliate to Tribe Affiliate; the agreements under which the payments were made; and the fact that under the terms of the management agreement those arrangements and payments could be deemed an act which might result in the termination of the agreement and thus jeopardize the value of the investors’ interests.

Those arrangements and payments should have been disclosed because there is a “substantial likelihood that a reasonable investor would have considered the omitted information material . . . in deciding on the investment, according to the complaint. Indeed, Encore was under a duty to disclose the omitted information not just in view of its materiality but also because of its “fiduciary or agency relationship, course of prior dealings, and attendant circumstances such that investors had placed trust and confidence . . .” in the firm the complaint claims. Alternatively, the omission of the facts regarding the agreements and payments to Tribe Affiliate made the statements to investors materially incomplete and thus false.

The Tribe eventually discovered the undisclosed agreements. The relationship with Defendant was terminated. Mr. Roberts tried to convince investors that the interruption resulted from a change in Tribe leadership. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23595 (July 15, 2016).