THE “FAILURE TO LAUNCH” INVESTMENT FUND SCHEME
Ponzi schemes and investment fund frauds have become the new staple of the SEC Enforcement Division. Last year, the Commission brought over 100 cases involving these scams which at one time were thought hard to find. Almost all of the schemes had the same key characteristics: a pitch to investors about some kind of unique investment or trading scheme; returns that are next to impossible for anyone else to duplicate; and safety for investors. The schemes unfortunately fleece hundreds of investors of millions of dollars and typically collapse when the promoters cannot continue to repay withdraws because they have taken to much money for themselves. This pattern has become all too familiar.
Just when it appeared that every variation of scheme had been discovered, the SEC found a new one – the failed fund. Not failed because it collapsed, but failed because it failed to launch (with apologies to the film with a similar name). This is effectively the victimless investment fund fraud, except perhaps for the promoters. To be sure there were solicitations. But, nobody bought into the pitch. To be sure there were potentially billions of dollars involved. But, no investor funds changed hands or were lost.
The failure to launch scam, according to the complaint, goes like this: Samuel M. Natt controls Pacific Asian Atlantic Foundation, supposedly a non-profit humanitarian organization based in California. Mr. Natt, over a three year period beginning in 2009, creates billions of dollars in bonds supposedly issued by the company. The bonds are PAAF Oil and Gas Global Energy Bonds, 2006 Series A due December 2010, supposedly backed by oil and gas reserves which of course do not exist. Mr. Natt fortifies his bond offering with fraudulent offering memoranda, recording billions in assets. The memoranda are complete with CUSIP numbers.
Mr. Natt tries to launch his scheme by marketing the bonds to brokers. The idea is to deposit the bonds in accounts at brokers and then use them as collateral for bonds. Mr. Natt and his company tried First Dunbar Securities, offering to deposit $1.65 billion in bonds. No deal. The brokerage refused. Undeterred, Mr. Natt moves on to UBS with the same kind of deal and then Primevest Financial. Again, no sales.
A lack of success apparently did not deter Mr. Natt and his company. In a variation of the scheme, third parties were solicited. Those parties were suppose to take the bonds, deposit them with brokers and use them to secure loans and lines of credits. The third parties would get a cut of the profits. Again, no sales.
By the time the Commission found Mr. Natt and his company and put them out of their misery, they had failed at each solicitation. They failed to raise a single dollar. The SEC ended it all with a complaint alleging fraud. Mr. Natt and his company consented to the entry of permanent injunctions prohibiting future violations of Sections 17(a)(1) &(3) of the Securities Act. No disgorgement was ordered since there were no ill-gotten gains. Mr. Natt will pay a penalty of $50,000. SEC v Pacific Asian Atlantic Foundation, Case No. CV 10-1214 (C.D. Cal. Filed February 18 2010). See also Litig. Rel. 21417 (Feb. 19, 2010).