SEC Obtains Freeze Order Against Recidivist And His Entities

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The Commission brought an action against a securities law recidivist and his entities who had raised about $22 million in a fraudulent investment scheme. When the action was filed a temporary freeze order was obtained. Later the Court entered an order appointing a temporary receiver. SEC v. Schmidt, Civil Action No. 1:14-cv-01002 (D.D.C. Filed June 12, 2014).

Lawrence P. Schmidt, Futuregen Company, Commercial Equity Partners Limited and seven other controlled entities were named as defendants. Mr. Schmidt has a long and well documented history as a law violator. He has been convicted of crimes such as check fraud six times over the years. In 2003 the Pennsylvania Securities Commission issued a cease and desist order against him and one of his companies, requiring that they halt a payday scheme. In 2004 the Tennessee Securities Division issued a cease and desist order against Mr. Schmidt and a controlled entity in an action based on a fraudulent scheme involving the sale of unregistered securities with guaranteed rates of return. In 2008 Mr. Schmidt and his wife filed for bankruptcy. Later his wife claimed he forged her name on the petition. The action was dismissed for not paying the filing fee.

Beginning in the same year as the bankruptcy filing, and continuing until earlier this year, the Defendants sold unregistered corporate notes to over 200 investors in twenty states. The scheme began in May 2008 with the formation of Commercial Partners. The firm had a website which described its leadership team, listing their names and background. The individuals listed do not exist, according to the complaint. The biographical information was copied from other websites. Mr. Schmidt, who actually controlled the company, was listed only as the Senior Vice President of the Tax Lien Department. The site claimed he joined the firm after the management team was in place.

The firm sold notes to investors. Investors had options regarding when the interest on the notes would be paid. At maturity the principle was to be repaid. Investor funds were to be used for the purchase of tax liens.

The next year Mr. Schmidt formed FutureGen and the FutureGen funds. The company issued debt securities which promised payment of a fixed rate of return. The investor funds were supposed to be invested in tax liens, commercial mortgages and distressed debt.

While the entities controlled by Mr. Schmidt were supposed to be separate, in fact they were not. FutureGen serviced clients of Commercial Partners. The investor funds were co-mingled. While portions of the investor funds were invested as claimed, other portions were not. For example, FutureGen used portions of the investor money it raised in an effort to prop up the faltering operations of other corporate defendants. Mr. Schmidt took substantial sums of the money for his personal expenses.

Over time the corporate defendants could not meet their obligations to investors as they became due. Nevertheless, the defendants continued to raise funds from new investors. Mr. Schmidt eventually acknowledged the financial condition of the corporate defendants, noting in an e-mail to a part time accountant that collectively the entities owed investors about $13 million but only had about $7 million in assets. The e-mail concluded stating “We have assets but I can’t be trusted to manage this.” Mr. Schmidt fled the country.

The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b), 20(a) and 20(e). The case is pending. See Lit. Rel. No 23021 (June 13, 2014).

Topics:  Enforcement, Enforcement Actions, Fraud, Freeze Order, SEC, Securities Act of 1933, Securities Exchange Act, Securities Fraud

Published In: Bankruptcy Updates, Business Torts Updates, Civil Remedies Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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