SEC Wins Freeze Order Over “Cloud Computing” Pyramid Scheme

by Dorsey & Whitney LLP

The “cloud” is a current focus for investors. There is cloud computing, cloud storage and new firms with cloud services. And the Commission discovered a “cloud” investment program that promised a 100% return in 100 days and had its own secondary market. The program raised $65 million in a matter of months from thousands of investors. Unfortunately for those investors its a scheme to defraud — a pyramid scheme, according to the SEC. SEC v. World Capital Market Inc., Civil Action No. CV14-2334 (C.D.Ca. Filed March 27, 2014).

Defendant Ming Xu or Phil Ming Xu, the Chairman of a number of the entity defendants, is the apparent mastermind of the scheme. Other defendants include World Capital Market Inc., described as a merchant banking firm that is a strategic investor and incubates companies in a variety of industries; WCM777 Inc. which was dissolved in September 2013; and WMC777 Ltd, also known at WCM777 Enterprises, Inc. A number of entities are named as relief defendants.

The defendants began soliciting investors in March 2013 using the umbrella name WCM777. Those solicitations were made through websites, in-person seminars, webinars and promotional materials which were translated into a number of languages. Investors were told that WCM777 was incubating a number of high tech companies which would generate profits from the sale of packages of cloud services to investors. They were also told that there were partnerships with more than 700 major companies such as Siemens, Denny’s and Goldman Sachs.

Investors had the option of participating in five different levels of packages of cloud-based computing services. Each package supposedly generated returns in the form of cash and points. Members could earn profits and points from the growth of their investment and by referring others. The points could be redeemed for goods and services offered by WCM777 and its affiliates or converted into equity in an IPO of a company named or others which were not identified. The defendants also created a secondary market for individuals to buy and sell points for cash. Each level package generated different returns, investors were told.

In fact, the entire operation is a pyramid scheme, according to the Commission. WCM777 sells its products exclusively to investors. It has no apparent source of revenues other than investor funds. It does not actually offer or sell any of the cloud services it describes to investors. The claims regarding the partnerships with major firms were false.

Initially portions of the investor funds were deposited in a U.S. bank account. As the scheme continued a Hong Kong bank was employed. Portions of the investor funds were recycled to pay other investors. Other portions of the investor funds were used to purchase real estate such as a California golf club, a Walnut, California home, and other properties. Over $2 million was transferred to a brokerage account.

The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a), 5(a) and 5(c). It also asserts a claim for control person liability under Exchange Act Section 20(a). A request for an emergency freeze order by the SEC was granted. The case is pending. See Lit. Rel. No. 22953 (March 28, 2014).

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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