Legal Briefs

SEC Charges BitConnect With $2B Crypto Fraud

September 6, 2021
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crypto crashThe SEC filed an action against BitConnect last week, accusing two of the firm’s executives for defrauding retail investors by offering a digital asset investment program — while fudging the numbers. The company is accused of cheating investors out of an estimated $2 billion.

“We allege that these defendants stole billions of dollars from retail investors around the world by exploiting their interest in digital assets,” said Lara Shalov Mehraban, Associate Regional Director of SEC’s New York Regional Office. “We will aggressively pursue and hold accountable those who engage in misconduct in the digital asset space.”

Stemming from a civil case in May, Bitconnect founder Satish Kumbhani is accused of lying about his company’s profits while also violating registration laws that are put in place to protect investors. The charges also extend to Glenn Arcaro and his firm Future Money Ltd, as they’re accused of receiving fraudulent commissions from BitConnect of up to $24 million for acting as their promoter.

According to the SEC, investors were told that BitConnect used a “volatility software trading bot” that promised returns of 40% per month while also being shown false returns depicting 3,700% annualized gains. The commission called BitConnect’s actions a “textbook Ponzi scheme” where they are being accused of paying old investors with new investor money.

Arcaro appeared before a judge last Wednesday, pleading guilty to a related criminal wire fraud conspiracy charge in California. He is to be sentenced on November 15. Kumbhani, an Indian citizen, is reportedly a fugitive.

According to the SEC’s report, two of the five promoters have already settled in a related action for promoting the BitConnect offering. The commission has also obtained judgments that require promoters Michael Noble, Joshua Jeppesen, and Jeppesen’s fiancé to pay over $3.5 million and 190 bitcoin.

The complaints seek injunctive relief, disgorgement plus interest, and civil penalties.

In internet pop culture, BitConnect achieved “meme status” in 2017 when an investor went wild at a BitConnect conference, was captured on video, and was viewed half a million times on youtube. He was not personally named in the SEC complaint.

MJ Capital Funding CEO Pleads The Fifth in Response to SEC’s Lawsuit

September 2, 2021
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United States Securities and Exchange commission SEC logo on entrance of DC building near H streetThe CEO of MJ Capital Funding, the Florida-based finance company accused by the SEC of being a ponzi scheme, formally lodged an answer to the lawsuit on Thursday. In it, her attorneys state that she has no choice but to assert her Fifth Amendment rights on the basis that a parallel federal criminal investigation is currently being conducted, but “that no negative inference should be drawn from her exercise” of these rights.

Notably, her lawyers say that she might change her mind later if she believes it is appropriate to do so, which would include an event that “she obtains immunity from the US Attorney […] or otherwise receives appropriate safeguards to protect her against criminal prosecution.”

That’s the substance of the response, which at this stage would only require that a defendant admit or deny a list of itemized facts stated by the plaintiff.

More than 2,800 people have come out in support of the accused CEO via a petition on change.org.

A court hearing is scheduled for September 8th at 1:30pm ET via Zoom. Update 9/8: the hearing has been cancelled.

MJ Capital Investors Allege Wells Fargo Knew MJ Capital Funding Was a Ponzi Scheme

August 24, 2021
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class action lawsuitA class action lawsuit filed in the Southern District of Florida on behalf of MJ Capital Funding’s investors is alleging that Wells Fargo knew that the company was a ponzi scheme.

“Wells Fargo knew based on its Know Your Customer inquiries that the MJ Companies were supposed to use investor monies to lend to small merchants, which would then repay the loans, the proceeds of which would be used to pay back investors. Wells Fargo monitored the MJ Companies’ accounts and saw that’s not what happened. Very little money that left the MJ Companies’ accounts went to merchants. Millions instead went to [the CEO’s] personal account at Wells Fargo, to MJ Companies’ sales agents or back to other investors.

Despite this knowledge, Wells Fargo substantially assisted the MJ Companies by allowing them to continue operating with Wells Fargo accounts, commingle investor funds and make payments via wire, transfer and check. Garcia and the MJ Companies’ banking activities at Wells Fargo were integral to her scheme to defraud investors.”

The claims are for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and unjust enrichment.

MJ Capital is estimated to have raised between $70M and $128M from investors over roughly one years time. The company is being sued by the SEC for securities fraud and its assets have been frozen pursuant to a court order.

The case # is: 0:21-cv-61749-RAR

How the MJ Capital Funding Alleged Ponzi Scheme Played Out in Real Time

August 18, 2021
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After the SEC shut down Pompano Beach-based MJ Capital Funding for running what is believed to be a $100M ponzi scheme, more than 2,000 investors are now struggling to figure out what happens next. But in hindsight, could they have known the risks?

Apparently, questions about MJ Capital had been circulating for months. A thread on Reddit with nearly 700 comments is now one of the best preserved insights into the company’s investor community mindset during 2021. There, posters traded anonymous barbs and insults in a spirited debate that challenged the company’s legitimacy. Those that argued it was a ponzi scheme were shouted down with reassurances from people claiming to be paid regularly.

“Scared money makes no money” is a mantra that comes up repeatedly.

The comments are eye-opening in retrospect as posters claim to have invested their life savings or know people that did on the hope that they would make 10% interest on their investment EVERY MONTH. One poster claims that his friend quit his job to promote MJ Capital full time and that he shaved his head, bought a suit, rented an office in Miami “and became some investment f***ing guru even though he could barely explain what the company would do with my money if I gave it to him.”

At least one person said that a friend invested as little as $1,000 into the company, an astonishingly small sum for an operation that is alleged to have raised as much as $129M in little over a year’s time.

Even now with the company’s assets frozen and a receivership in place, some users are wondering if that means their monthly checks will be delayed. Others are confused as to what the SEC lawsuit and temporary restraining order even mean.

“I am out a significant amount of money,” one user wrote. “Literally, my life’s savings. I am scared shitless as I am unaware of what will happen and if I will get my money back. Does anyone know what the odds are for investors who have not received any of their investment back?”

Despite all this, at least one poster thought the SEC’s reference to an undercover FBI operation could work in MJ Capital’s favor since an FBI agent, who posed as an investor, not only made an investment but also got paid.

“Anyone can go to the SEC or FBI to file a complaint about a company to bring them down,” they said. “And of course they are going to look into it. But facts hold up in court. The case file it self says that the [Undercover Agent] made an investment and got paid, proving that the business isn’t a scam and it works. Nothing illegal about what the company does.”

Meanwhile, on instagram, those claiming to be victims have been busy tagging accounts of the people who promoted the investment to hold them accountable. Most of those tagged accounts have already been made private and are not publicly accessible.

To deBanked’s knowledge, no criminal charges have been filed against anyone in connection with this case and it remains a civil matter with charges not proven.

NJ Resurrects Small Business Finance Disclosure Bill

July 28, 2021
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New Jersey’s legislature has revived its small business finance disclosure bill. Having languished since last January, the Senate Commerce Committee quietly gave it a favorable report this past June.

New Jersey’s bill is similar to the law that New York is putting into effect on January 1st. As part of it, non-loan products will be required to calculate an APR even if one cannot be mathematically calculated by “estimating” one.

Brokers would be impacted too:

A broker who charges any fees or commission that would be paid by the recipient of the financing shall provide, at the time of extending a specific offer for a commercial financing transaction and in a form and manner prescribed by the commissioner, a written disclosure, in a document separate from the provider’s contract with the recipient, stating the following, if the information is not contained within the disclosure offered by the provider directly to the recipient:

(1) a list of all fees or commissions that would be paid to the broker by the recipient in connection with the commercial financing;

(2) the total dollar amount of charges listed pursuant to the bill;

and

(3) any increase to the annual percentage rate due to the charges listed above and the resulting dollar cost.

You can read the Senate Commerce Committee’s report here.

Update on PAR Funding Case

July 27, 2021
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SEC BuildingLittle has changed in the PAR Funding case since the last update. PAR’s assets are being handily liquidated by the Receiver while the defendants maintain that the Receiver intentionally destroyed a well-run business. Most recently, the defendants have asked the judge to “discharge” the Receiver.

It has been a year since the Philadelphia-based company was suddenly shuttered as word of an SEC case filed under seal became public. Attorneys for the SEC took issue with the way PAR kept its books and how it marketed itself to potential investors. From the start, the defendants strongly disagreed with the plaintiff’s assertions. After an independent Receiver was appointed, the judge has repeatedly deferred to his assessments and PAR’s business has been systematically dismantled in the process.

Anyone can access the ongoing court battle on the Receivership’s official website.

New York Appellate Division Reaffirms That Merchant Cash Advances Are Not Loans

June 23, 2021
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A series of eight merchant cash advance agreeements were not loans, said the First Department of the New York Appellate Division.

In Strategic Funding Source, Inc. et al. v. Steenbok Inc. et al, the defendants filed for summary judgment to dismiss the complaint. The Court denied it and defendants appealed, causing the Appellate Division to determine whether or not eight merchant cash agreements between the parties were actually usurious loans.

Per the eight merchant agreements, repayment to plaintiff was contingent on future receivables existing. Accordingly, the cash advance was not a loan and is thus not a usurious transaction (see Champion Auto Sales, LLC v Pearl Beta Funding, LLC, 159 AD3d 507 [1st Dept 2018], lv denied 31 NY3d 910 [2018]).

It may have all been for naught because the parties actually settled the case two weeks prior to the decision, according to the public docket (See Index No: 2021-00877).

FTC Tries Hand With Gramm-Leach-Bliley

June 7, 2021
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United States Federal Trade CommissionFollowing a pivotal loss of power for the FTC, the agency is hoping for a do-over on at least one case it had originally brought under Section 13(b). In FTC v. RCG Advances, et al, the FTC filed a motion to amend the complaint it had originally brought in June 2020 to include new claims under Gramm-Leach-Bliley. Without doing this, the original case was essentially doomed, thanks to a recent SCOTUS decision.

Such claims could be pursued criminally but the DOJ informed the FTC that it did not wish to involve itself in this matter.

The FTC filed its motion to amend on May 14th.

Unsurprisingly, the defendants are unhappy by the sudden divergence of claims.

“If the FTC had a credible cause of action against the Defendants under the Gramm-Leach-Bliley Act, 15 U.S.C. § 6801 (the “GLB Act”) it was incumbent upon them to propound it a year ago when they initiated this action – not now amid the disingenuous pretext that they just purportedly realized it,” they wrote in a response to the motion.

Defendants argue that as a 13(b) case, over 50,000 pages of documents had already been exchanged in discovery and more than two dozen subpoenas issued.

“Despite the sheer volume and nature of such discovery already conducted in the instant matter, granting the FTC leave to amend the Complaint would essentially trigger a reset of the entire case,” they say.

They have asked for the Court to deny the FTC’s motion to amend at this late hour.