SEC CHARGES COMPANY AND OWNER WITH FRAUD IN RELATED TO SALE OF "LIFE SETTLEMENT" INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

04/07/2015 04:30 PM EDT

The Securities and Exchange Commission charged Los Angeles-based Pacific West Capital Group Inc. and its owner Andrew B. Calhoun IV with fraud in the sale of “life settlement” investments.

Life settlements are securities structured around when life insurance policies “mature” after the insured individual dies and benefits are paid.  Life settlement investors purchase an interest in a life insurance policy and in exchange receive a share of the death benefit.

The SEC’s complaint alleges that since 2004, Pacific West and Calhoun, a Beverly Hills-based life insurance agent, have raised nearly $100 million from life settlement investors.  Since at least 2012, Pacific West and Calhoun allegedly defrauded investors by using proceeds from the sale of new life settlements to continue funding life settlement investments sold years earlier.  Pacific West and Calhoun did not disclose this practice to investors and undertook it to make life settlement investments appear successful when, in fact, Pacific West had used up the primary reserves to pay premiums on those policies.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Pacific West and Calhoun made false and misleading statements about the risks of investing in life settlements, including the risk of investors having to make increased premium payments as insured individuals lived longer than Pacific West and Calhoun anticipated.  Pacific West and Calhoun also allegedly misled investors about annual returns and have falsely represented to investors that their investments had nothing to do with Pacific West’s efforts and fortunes.

“Investors are entitled to fair disclosures about the risks associated with their investments,” said Michele Wein Layne, Director of SEC’s Los Angeles Regional Office.  “We allege that Pacific West and Calhoun did the opposite here by hiding and minimizing those risks in order to sell more life settlements.”

The SEC’s complaint charges Pacific West and Calhoun with violating the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws.  Also named as defendants are Ohio-based PWCG Trust, which held and serviced the insurance policies, and five sales agents of Pacific West: Brenda C. Barry of Issaquah, Wash., and her company BAK West, Andrew B. Calhoun Jr. of Anderson, S.C., Eric C. Cannon of Lakewood, Calif., and his company Century Point, and Michael W. Dotta and Caleb A. Moody, both of Los Angeles.

PWCG Trust and the sales agents are charged with violating the securities registration provisions, and the sales agents also are charged with broker-dealer registration violations.  The SEC’s complaint seeks permanent injunctions against all defendants and the return of allegedly ill-gotten gains with interest and penalties from Pacific West, Calhoun, and the sales agents.

The SEC’s investigation was conducted by Todd Brilliant, Dora Zaldivar, Kelly Bowers, and Robert Conrrad.  The SEC’s litigation will be led by John Bulgozdy and Kristin Escalante.

VERDICT RETURNED AGAINST INVESTMENT ADVISER IN FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Jury Returns Verdict Against Massachusetts Investment Adviser in SEC Fraud Case

The Securities and Exchange Commission announced that, on August 13, 2014, a federal court jury in Boston, Massachusetts, returned a verdict against registered investment adviser Sage Advisory Group, LLC, and its principal, Benjamin Lee Grant, both of Boston, MA, in a fraud case filed by the SEC.

In its complaint, filed on September 29, 2010, the Commission alleged that starting on or about October 4, 2005, Grant engaged in a scheme to induce his former brokerage customers to transfer their assets to Sage, his new advisory firm.

The Commission's complaint further alleged that prior to October 2005, Grant was a registered representative of broker-dealer Wedbush Morgan Securities and had customer accounts representing approximately $100 million in assets, virtually all of which were managed by California-based investment adviser First Wilshire Securities Management. According to the complaint, Grant resigned from Wedbush on September 30, 2005 so that he could operate Sage, his own investment advisory firm. In a letter dated October 4, 2005, Grant told his former Wedbush customers that, at the suggestion of First Wilshire, their accounts were being moved from Wedbush to a discount broker and that Sage had been formed to handle their investments. The complaint alleged that the letter told Grant's customers that the charge for their accounts was changing from a 1% management fee paid to First Wilshire plus Wedbush's brokerage commissions to a 2% "wrap fee" paid to Sage, and that First Wilshire had indicated that the wrap fee had been historically less expensive than the previous arrangement. According to the complaint, the letter also told Grant's customers that if they wanted to avoid any disruption in First Wilshire's management of their assets, they had to sign and return the new advisory and custodial account documents as soon as possible. According to the complaint, in subsequent communication with customers, Grant told them that First Wilshire was no longer willing to manage their assets at Wedbush and that they had to transfer to the discount broker and sign up with Sage.

The Commission contended that these statements were materially false and misleading because First Wilshire had not required a transfer from Wedbush, had not refused to continue managing the customers' assets at Wedbush, and had not authorized Grant's statements. Moreover, Grant's wrap fee statements were without factual basis. The complaint further alleged that Grant failed to disclose that the switch from Wedbush to the discount broker would result in significant savings that would flow to Grant and Sage rather than to the advisory clients and that, as a result, Grant and Sage's compensation would be substantially increased. Indeed, once Grant's customers transferred their accounts from Wedbush to Sage, Grant more than doubled his own compensation.

After a trial that began on August 4, 2014, the jury deliberated for approximately two hours before rendering its verdict of liability against both defendants under Sections 204A and 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rules 204A-1 and 206(4)-7 thereunder. The Court will later determine whether and what relief to impose against the defendants. The case was tried by Marc Jones and J.R. Drabick, with assistance from Stephanie DeSisto and Frank Huntington, of the Commission's Boston Regional Office.

For further information, see Litigation Release No. 21672 (September 29, 2010).

On September 1, 2011, the Commission filed a separate civil injunctive action against Sage, Benjamin Lee Grant, and his father Jack Grant alleging that Jack Grant, a lawyer and former stockbroker, had violated a Commission bar from association with investment advisers by associating with his son Benjamin Lee Grant's investment advisory firm, Sage, and by acting as an investment adviser himself. The Complaint further alleged that Jack Grant, Benjamin Lee Grant and Sage fraudulently failed to disclose Jack Grant's barred status and disciplinary history to Sage's advisory clients. On May 30, 2013, Jack Grant consented to settle the charges, but the action against Sage and Lee Grant is still pending and a trial date is to be determined. For further information, see Litigation Release No. 22081 (September 1, 2011) (SEC Charges Massachusetts-Based Attorney for Violating an Investment Adviser Bar and his Son for Failing to Disclose his Father's Bar to Advisory Clients); and Litigation Release No. 22708 (May 30, 2013) (SEC Obtains Final Judgment and Issues Administrative Orders against John A. ("Jack") Grant).

SEC CHARGES ILLINOIS MAN WITH SECURITIES SCHEME

The following excerpt is from the SEC website:

“On February 6, 2012, the Securities and Exchange Commission charged Glencoe, Illinois resident Kenneth A. Dachman with misappropriating over $1.8 million in investor funds and making false and misleading statements to investors in offerings for three companies for which he was the Chairman – Central Sleep Diagnostics, LLC (Central Sleep), Central Sleep Diagnostics of Florida, LLC (Central Sleep Florida), and Advanced Sleep Devices, LLC (Advanced Sleep). The SEC also charged Scott A. Wolf and his company, Stone Lion Management, Inc., the brokers for the three offerings, for their roles in selling unregistered securities to investors.

Filed in the U.S. District Court for the Northern District of Illinois, the SEC’s complaint alleges that between July 2008 and June 2010, Dachman raised at least $3,594,709 from investors located in 13 states and 12 foreign countries on behalf of Central Sleep, a purported provider of outpatient diagnostic sleep studies. Between December 2008 and April 2010, Dachman raised an additional $567,399 on behalf of Central Sleep Florida, a purported expansion of Central Sleep into Florida, and Advanced Sleep, a purported provider of medical devices. According to the complaint, Dachman made numerous misrepresentations to investors in each of the companies, including misrepresentations about how their funds would be used and his academic and business backgrounds. Dachman also failed to tell investors that he misappropriated at least $1,875,739 of their funds, over 45% of the total funds raised. According to the SEC’s complaint, among other things, Dachman used investor funds to rent-to-own a 10,000 square foot home, to pay for family vacations to Alaska, Europe and elsewhere, to purchase a new Range Rover, books, collectibles and antiques, and for personal expenses and credit card bills. Dachman also diverted investor funds to a tattoo parlor that he co-owned with his son-in-law.

The SEC’s complaint further alleges that Wolf and Stone Lion acted as unregistered brokers in selling unregistered securities to investors without qualifying for an exemption from the SEC’s registration provisions. The SEC alleges that Dachman violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that Wolf and Stone Lion violated Sections 5(a) and 5(c) of the Securities Act and Section 15(a)(1) of the Exchange Act. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and penny stock bars.

Wolf and Stone Lion each have agreed to settle the SEC’s charges without admitting or denying the allegations against them. Wolf and Stone Lion have consented to the entry of final judgments permanently enjoining them from violating Sections 5(a) and 5(c) of the Securities Act and Section 15(a)(1) of the Exchange Act. Wolf also has agreed to pay disgorgement of $335,216, prejudgment interest of $16,268, and a penalty of $20,000, and to be barred from participating in an offering of penny stock for one year. The proposed settlements are subject to the approval of the District Court.
The SEC thanks the U.S. Attorney’s Office for the Northern District of Illinois and the Federal Bureau of Investigation for their assistance in this matter.”