The Securities and Exchange Commission today charged two Florida men with operating a Ponzi scheme disguised as a private equity fund that fraudulently raised about $22 million from more than 100 investors, many of whom were Florida teachers or retirees.
From January 2007 to July 2010, the SEC alleges, James Davis Risher of Sanibel was responsible for handling the fund's trading operations, and Daniel Joseph Sebastian of Lakeland distributed offering materials and solicited investors for the fund, according to the SEC's complaint filed in U.S. District Court for the Middle District of Florida.
Risher boasted to investors that he had substantial experience in trading equities and providing wealth and asset management services, according to the complaint. In reality, Risher had no such experience, but rather had a lengthy criminal history, spending 11 of the last 21 years in jail instead of growing a thriving retail brokerage business as he claimed, according to the complaint.
The SEC alleges that Risher and Sebastian falsely told investors that the fund earned annual returns ranging from 14 percent to 124 percent by investing in public equity securities through a broker-dealer. The two men allegedly sent investors fabricated account statements indicating such high returns to support their false claims. Only a fraction of the money raised was actually invested as promised, and Risher instead spent investor funds on such personal purchases as jewelry, gifts and property in North Carolina and Florida, the SEC alleges.
The SEC also alleges Risher and Sebastian paid themselves management and performance fees of $4.8 million and $3.3 million, respectively.
"Risher, who masqueraded as a highly successful equity trader, teamed up with Sebastian to tout sophisticated trading strategies they claimed would generate substantial profits for investors," said Eric Bustillo, director of the SEC's Miami Regional Office. "Instead, Risher and Sebastian used investors' life savings and retirement nest eggs to line their own pockets."
The SEC is seeking permanent injunctions against Risher and Sebastian from working in the financial securities industry. The SEC also wants the men to forfeit all funds gained through the scheme and pay unspecified civil penalties.
The SEC says Risher and Sebastian marketed the fund under the names Safe Harbor Private Equity Fund, Managed Capital Fund and Preservation of Principal Fund. They described themselves in fund offering documents as "two unique individuals" who used their expertise to "create an investment vehicle that would allow investors to capitalize from both bull and bear markets."
The SEC alleges that Sebastian often solicited his former customers at his prior job as an insurance broker. He primarily pitched the investment opportunity to educators, retirees and members of several churches in Florida, but also solicited investors in California, other states and Canada. Sebastian persuaded former customers to roll over money in their insurance and annuity products into the fund, the SEC alleges. He told them the fund would provide a higher rate of return than they could receive from the products he had previously sold them. At least one investor liquidated an annuity she had purchased from Sebastian and invested the proceeds in the fund.
The SEC alleges Risher misrepresented that the fund was registered in Bermuda, and he and Sebastian falsely claimed that the fund was audited annually by a Bermudan auditor. Sebastian told investors during telephone calls and meetings that they would never lose their principal investments in the fund, according to the SEC.
According to the SEC, Sebastian even provided some investors with written guarantees from a company he owned that it would reimburse any loss. In reality, Sebastian knew that the company had no assets to reimburse investors for losses, making his guarantee meaningless, the SEC alleges.
The U.S. Attorney's Office for the Middle District of Florida, which conducted a parallel investigation of this matter, has filed criminal charges against Risher.