A recent enforcement action from the Fort Worth Regional Office of the SEC reminds one of the agency's investor-protection mission and continued focus on those who deceive retail investors in the private offer and sale of unregistered securities. Although the facts alleged hew to a long-established pattern of offering frauds, the case is noteworthy for the staff's newfangled approach to meeting jurisdictional requirements and the relationship with the ongoing private litigation for breach of contract, fraud and vicarious liability commenced by investors in a Texas state court.

Facts

The SEC on May 31, 2023, charged self-proclaimed "Queen of Mobile Homes" Chimene Van Gundy, her now-defunct company and three other individuals with violating various registration and antifraud provisions of federal securities laws based on an alleged multiyear scheme through which they raised $18.5 million from at least 600 investors on false promises to profitably purchase, fix and flip mobile homes, allowing them to generate guaranteed returns of 15 percent to 20 percent for investors.

The complaint alleges that between June 2018 and November 2021, Van Gundy and her company, Outstanding Real Estate Solutions Inc. (ORES), along with salespeople Santos Kidd, Maria Tosta and Michael Trofimoff, secured investments using a series of material misrepresentations and omissions in offering documents, advertisements and other solicitations directed at investors – most of whom were unsophisticated, unaccredited and inexperienced with private investments – who were led to believe that they would commit money to the improvement and resale of one or more specific mobile homes in exchange for guaranteed returns.

Among the allegations, the SEC claims that CEO and founder Van Gundy and ORES touted a track record of more than 400 successful flips and promised investors they owned specific homes to be flipped. Yet, the SEC contends, they owned just six of 248 mobile homes connected to them, often misrepresenting homes as under their control when, in fact, they belonged to other retailers. In addition, investors were misled to believe that their money would be used to fix and flip specific properties and that their investments were protected by liens on the homes when, in fact, no monies were used to fix or flip properties and no liens existed. Van Gundy and ORES also allegedly committed the same homes to multiple investors without disclosing that fact to the various investors. According to the SEC, Van Gundy and ORES also falsely claimed that investors would be listed as beneficiaries of key-man insurance policies on Van Gundy's life and that she secured a contract to sell mobile homes to the Federal Emergency Management Agency (FEMA) for hurricane-displaced individuals. The SEC further alleged that Van Gundy and ORES continued to mislead investors as the scheme fell apart by blaming delayed payments on a fictional merchant payment processor, claiming to have been locked out of accounts and the like, and reassuring prospective new investors – to keep the scheme afloat – that an investment was "safe" and "recession-proof."

Meanwhile, the complaint alleges, Trofimoff solicited investors through his own company, Georgia Mobile Home Investing, Kidd distributed offering materials and investor presentation to investors while encouraging them to apply to a home equity line of credit to fund their investments, and Tosta solicited investors with false promises of guaranteed returns on investments when there were ongoing material delays in payment of interest proceeds, all while each was receiving undisclosed sales commissions paid out of investor funds.

The SEC alleges that Van Gundy and ORES did not use investor money as promised, either. Rather, the complaint contends that they paid $1.1 million in undisclosed sales commissions to Trofimoff, Kidd and Tosta and used $11 million of investor monies to make "Ponzi-like" payments to existing investors. Van Gundy allegedly misappropriated the remainder to fund her lifestyle, including a nanny and private school tuition for her children, boarding costs for horses and shopping, not to mention a $7,000 weekly salary.

Charges

The SEC charged:

• Van Gundy and ORES with violations of the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 (Securities Act)
• Van Gundy, ORES, Trofimoff and Kidd with scienter-based and non-scienter-based fraud under Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder
• Tosta with non-scienter-based fraud under Section 17(a)(3) of the Securities Act
• Van Gundy, Trofimoff, Kidd and Tosta for acting as unregistered brokers in violation of provision of Section 15(a) of the Exchange Act

Interestingly, the SEC seeks to satisfy jurisdictional requirements under the Securities Act and Exchange Act by alleging that the defendants' offer of investments in mobile homes through mobile home lien purchase agreements, service agreements and promissory notes falls under the definition of "security" pursuant to descriptions of investment contracts and notes. Throughout the complaint, the SEC was careful to allege that the defendants used phone, email, text, investor presentations and offering materials to solicit the investment of money from individuals with the promise to pay profits for a term of five to eight years arising from the defendants' efforts to purchase, fix and resell mobile homes.

Tosta agreed to settle the case at filing and consented to permanent injunctive relief and payment of approximately $178,000 in disgorgement, interest and penalties, subject to court approval. The remaining defendants are challenging the SEC's allegations and, as of this posting, intend to litigate. Notably, in addition to seeking standard injunctive relief and financial remedies, the SEC is asking the court to enter a conduct-based injunction preventing the individual defendants from ever again engaging with others in the offer or sale of securities and, going a step further, seeking a permanent officer-and-director bar against Van Gundy.

Parallel Private Action Against Defendants

The SEC's enforcement action follows a private action filed by a group of investors pending in Texas state court against Van Gundy, ORES, Trofimoff and Trofimoff's company, Viridis Holdings LLC, d/b/a Georgia Mobile Home Investing. In that action, commenced on Dec. 6, 2021, the investors brought claims for breach of contract, fraud and vicarious liability based on allegations that the defendants defaulted on their obligations to make quarterly interest payments and repay loans pursuant to certain promissory notes. On April 19, 2022, the court placed ORES into receivership. According to a May 16, 2023, receiver's report, ORES is insolvent, and an investigation continues to identify all assets that could potentially be recovered for the benefit of the receivership and defrauded investors.

Key Takeaways

• Although assets and consumer goods – such as mobile homes – are not themselves securities, they can become the subject of a securities enforcement action when they are at issue in transactions and instruments that meet the definition of "security" under federal securities laws. According to the complaint, the mobile home lien purchase agreements and service agreements offered by the defendants have the characteristics of an "investment contract" under the U.S. Supreme Court's Howey test¹ (a recurring theme in ongoing digital asset token enforcement actions), while the promissory notes offered by the defendants have the characteristics of a "note" under the Supreme Court's Reves² We will continue to monitor the case to see if defendants move to dismiss for lack of jurisdiction on the premise that the transactions at issue did not involve a "security" but instead involved a direct financial interest in a physical asset.
• Federal securities laws cover private companies and the offer, purchase and sale of securities. Private companies and their directors, officers, employees and third parties they work with (brokers, gatekeepers) are subject to the SEC's oversight and enforcement reach.
• Though rare, the SEC sometimes will seek to permanently bar individuals from ever serving as public company officers or directors in the future, despite a lack of any prior public company experience, where the underlying conduct demonstrates that high degree of unfitness.
• The SEC can and regularly does pursue enforcement actions – including injunctive relief and financial remedies – notwithstanding pending private litigation such as shareholder class actions, derivative actions and lawsuits based on non-securities theories such as breach of contract by some investors in ORES. In such instances, the SEC can use discovery tools during its nonpublic investigations – and later in litigation – to subpoena information from the private plaintiffs and other parties involved in parallel or similar proceedings.
• The SEC and the state-court-appointed receiver for ORES may agree to share information and resources in the best interest of investors. Typically, however, private parties cannot tap into the SEC to gather evidence and information, as securities laws and prior case precedent typically prevent private parties from subpoenaing information from the SEC, including the investigative file, or intervening in the agency's enforcement actions.

Notes

¹ See S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946).

² See Reves v. Ernst & Young, 494 U.S. 56 (1990).