A pair of college dropouts who falsely claimed to be industry professionals with a history of successful trading defrauded dozens of investors out of $1.1 million through a fraudulent and unregistered securities offering, according to the Securities and Exchange Commission.
The SEC complaint alleges that from about 2017 through at least January 2020, Christian Kranenberg and Sebastian Silea, both 22, raised the money from at least 46 investors by offering unregistered securities in the form of membership units in KS Cartel LLC, an entity that they formed in or about late 2016 or early 2017, with money pooled from part-time jobs, as well as an inheritance that Kranenberg had recently received.
Kranenberg, a resident of Waco, Texas, serves as CEO, equity owner and one of two managing members of KS Cartel. Before forming the firm, he was a student at a community college in Frisco, Texas. Silea, a resident of Frisco, serves as vice president, CFO, equity owner, and one of two managing members of KS Cartel. He was a university student in Waco, Texas, for one semester, the complaint noted.
The SEC said the men, who grew up together, held themselves out to prospective investors as “highly qualified business and industry professionals,” and represented that proceeds from the KS Cartel offering would be used, at the investor’s election, either to day trade funds pooled from multiple investors through a so-called “mutual fund” or to manage separate “private stock portfolios” for individual investors, the SEC complaint said. The men also guaranteed, said the agency, that investors would not lose more than 50% of their initial investments and claimed that investors should expect 20% to 30% per month.
Silea and Kranenberg allegedly used most of the invested funds for undisclosed personal expenditures and for payments of purported “profits” to investors on their investments in KS Cartel. The SEC said the “profit” payments were sourced not from any gains in trading, but from money others invested in KS Cartel. The complaint said the pair provided investors phony account statements depicting profitable trading.
“Silea and Kranenberg were neither highly qualified nor industry professionals,” the SEC’s complaint says. “They were 20-year-olds who had no financial industry experience or track record in securities trading. They had no basis to project the claimed returns (which they failed to deliver), and their promise of downside protection (which they took no steps to achieve) was illusory.”
The pair offered membership units in KS Cartel to prospective investors through a drafted confidential private offering memorandum (PPM) based on a template Silea found through an internet search. The men used it to market to investors an opportunity to invest in an offering of membership units of KS Cartel. The offering sought to raise a minimum of $1 million, with each membership unit priced at $1,000. The PPM stated that KS Cartel would use the proceeds from the offering to trade securities and would split any profits from the trading with investors, with the precise profit split to be negotiated with each investor, the SEC said.
The men solicited and offered KS Cartel membership units to friends, family and people with whom they had no prior relationships, the agency added. They used a LinkedIn page to promote KS Cartel’s business and to correspond with and solicit prospective investors. Silea also solicited investors by, among other methods, handing out KS Cartel business cards to strangers, at least one of whom ultimately invested in the offering. They also met with prospective investors, sometimes together and at other times separately.
The SEC complaint said investors invested relatively small amounts but in some cases tens of thousands of dollars. Some of the investors lacked financial sophistication, and neither Silea nor Kranenberg took reasonable steps to verify that they were accredited, the agency said.
The SEC's complaint, filed in the U.S. District Court for the Eastern District of Texas, alleges that Kranenberg, Silea and KS Cartel violated the antifraud and securities-registration provisions of federal securities laws and seeks injunctive relief, disgorgement plus prejudgment interest and civil penalties.