SEC Claims Promoters Conducted Repeated, Fraudulent Offerings

by Dorsey & Whitney LLP
Contact

A key focus of SEC Enforcement, according to the Commission’s recent publication about the Division, is retail investors. While the agency has always sought to protect the individual investor and has an investor advocate, a new task force was created to marshal the Division’s resources around this key focus. To date the task force has only brought one case, although that is to be expected. In the future however, surely a key focus of the task force will be offering frauds, such as the action brought yesterday which raised over $20 million from one hundred investors over a five year period. The difficulty with these cases, of course, is to get there before the money has been drained off. In this case, the entities crashed into bankruptcy by the time of the complaint, leaving little hope that the investors will recoup their hard earned cash. SEC v. Fossum, Civil Action No. 2:17-cv-01894 (W.D. Wash. Filed Dec. 19, 2017).

Named as defendants are Ronald Fossum, Jr., the apparent mastermind of the alleged scheme, and Alonzo Cahoon, who was instrumental in one facet of the operations. Critical to the alleged scheme were six controlled entities that can be broken into two groups. Group one was the management entities. It included SMFG, Inc., Smart Money Secured Income Fund Manager, LLC, and Turnkey Investment Fund Manager, LLC. The second group, collectively called the SMFG Funds, was composed of Accelerated Asset Group, LLC, Smart Money Secured Income Fund, LLC and Turnkey Investment Fund, LLC. Neither of the Defendants and none of the entities were registered with the Commission. Both Defendants and SMFG, Smart Money Manager and Turnkey Manager are alleged to have acted as investment advisers.

The complaint centers on four offerings of securities to the public. The first involved Mr. Fossum and SMFG which managed Smart Money Manager which in turn managed Accelerated Asset. Over a two year period beginning in June 2011 Mr. Fossum raised about $1 million from approximately 40 investors, inducing them to purchase Accelerated Asset promissory notes which are securities.

A second offering involved Mr. Fossum, Smart Money Manager and Smart Money Fund, also managed by Smart Money Manager. This offering overlapped with the first, beginning in May 2012 and continuing for about four years. Investors were sold Smart Money Fund notes, also securities. The investor funds were to be used to acquire real estate, oil and gas interests, domain names and websites and other securities. This offering raised over $7 million from about 100 investors.

A third offering also involved Mr. Fossum and Smart Money Fund. Again it overlapped with the others, beginning in March 2013 and continuing over the next two year. This offering involved the sale of Smart Money Fund Investment Contracts – essentially joint venture agreements between the Fund and investors. The funds were to be used to purchase and operate revenue generating websites. Investors were assured that the investment was entirely passive, and would generate returns through the efforts of others. This offering involved about 60 investors and raised another $6 million.

The final offering involved Messrs. Fossum and Cahoon, SMFG and Turnkey Manager which in turn managed Turnkey Fund. The offering took place from about July 2013 to November 2014. The offering, which raised about $6 million from 30 investors, promised to pool the investment capital to acquire oil and gas working interests. The instruments sold were Turnkey Fund Units.

The Smart Money Fund Notes, Smart Money Fund Investment Contracts and Turnkey Fund Units were not registered with the Commission. They were not exempt from registration. Likewise, Messrs. Fossum and Cahoon acted as Turnkey Fund brokers, but failed to register with the Commission.

Defendants Fossum and Cahoon, along with the managed entities owed fiduciary duties to the investors, according to the complaint. Those obligations were breach because:

  • Investor funds were misappropriated for personal use;
  • Funds continued to be raised from new investors while concealing the fact that Smart Money Fund Investment Contracts could not be redeemed in accord with their terms;
  • The funds from the various offerings were comingled; and
  • Various consulting fees and/or commissions were charged and paid for out of investor funds to which neither the Defendants nor the Managed entities were entitled.

In the end, the entities were placed in bankruptcy. It does not appear that they have sufficient funds to repay the investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a), Exchange Act Sections 10(b), 15(a) and 20(a) and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 24017 Dec. 20, 2017).

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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.