More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Securities and Exchange Commission on Thursday announced fraud charges against a Spokane Valley, Wash., company and its owner for misleading investors with claims to raise billions in investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.
The SEC alleges that Daniel F. Peterson and his company, USA Real Estate Fund 1, promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms.
The SEC action against Peterson and his company comes before the agency has even finished its rules under the JOBS Act.
According to the SEC, Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. “He preyed upon investors’ sense of patriotism by promising to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington state’s economic recovery,” the SEC said.
The SEC alleges that Peterson used investors’ money for personal expenses, is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.
“We’ve brought this court action to stop Peterson’s fraud in its tracks before it picks up more steam,” said Michael Dicke, associate director in the SEC’s San Francisco Regional Office, in a statement. “The JOBS Act is intended to help small businesses raise capital, not to legalize fraud or give unscrupulous entrepreneurs a right to make false claims to fleece investors.”
According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states.
The SEC says that "in emails and in periodic e-newsletters that he used to solicit USA Real Estate Fund investors, Peterson said that he was preparing to raise billions of dollars in a second offering of additional 'preferred' securities, which he claimed would be 'secured' and have 10-year returns of up to 1,300%." Peterson claimed that two prominent Wall Street financial firms had partnered with him to bring his offering to market, and that the firms had conducted due diligence on USA Real Estate Fund and were structuring sales agreements and pricing. Peterson promised the early investors they would profit massively once the purported future offering was under way.
“Peterson’s claims were false,” the SEC alleges. “He has no guaranteed investment product to offer, the projected returns were either fictitious or based on implausible and unsupported analyses, and he has no affiliation with any financial firm to underwrite his purported future offering.”
The SEC alleges that Peterson used investor money to pay for his rent, food, entertainment, vacations and a rented Mercedes Benz SUV. He also used investor funds on clothing for friends, luggage for his wife and expenses at a Las Vegas casino.
The SEC’s complaint charges USA Real Estate Fund and Peterson with violating the antifraud provisions of the federal securities laws. The SEC is seeking a court order requiring USA Real Estate Fund and Peterson to return their allegedly ill-gotten gains, with interest, and pay financial penalties. It also is seeking a preliminary injunction restraining USA Real Estate Fund and Peterson from engaging in conduct that would allow them to continue their scheme and restraining them from further violations of the securities laws.
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