The Securities and Exchange Commission charged the founder of the failed Fyre Festival in an extensive, multi-year offering fraud that raised at least $27.4 million from more than 100 investors.
The SEC says that New York entrepreneur William “Billy” McFarland, two companies he founded, a former senior executive, and a former contractor agreed to settle charges arising out of this offering fraud.
The SEC’s complaint alleges that McFarland fraudulently induced investments into his companies Fyre Media Inc., Fyre Festival LLC, and Magnises Inc. — including in connection with McFarland’s failed venture to host a “once-in-a-lifetime” music festival in the Bahamas, promoted by supermodels on social media.
Fyre Festival goers, expecting a luxury experience, bought tickets starting at $1,200, only to be greeted by what one attendee called a “disaster tent city” with cold cheese sandwiches.
McFarland, 26, pleaded guilty in March to fraud charges and could face up to 10 years in prison.
With substantial assistance from his chief marketing officer, Grant Margolin, and an independent contractor, Daniel Simon, McFarland induced investors to entrust him with tens of millions of dollars by fraudulently inflating key operational and financial metrics and the successes of his companies.
McFarland also inflated his own personal success. In response to requests from at least three existing and prospective Fyre Festival investors that their investments be collateralized, McFarland created a doctored brokerage account statement purporting to show that he owned $2.56 million in shares in the common stock of Facebook. In fact, McFarland owned just $1,499 worth of Facebook shares, according to the SEC.
“McFarland gained the trust of investors by falsely portraying himself as a skilled entrepreneur running a series of successful media companies,” Melissa Hodgman, associate director of the SEC’s Enforcement Division, said in a statement. “But this false picture of business success was built on fake brokerage statements and stolen investor funds.”
According to the SEC, McFarland used investor funds to bankroll a lavish lifestyle including living in a Manhattan penthouse apartment, partying with celebrities, and traveling by private plane and chauffeured luxury cars.
In early 2016, McFarland founded Fyre Media, which was formed to develop an online, digital platform — fyreapp.com — that would enable buyers to directly book musicians, celebrities and other talent for live performances.
Later in 2016, McFarland established Fyre Festival, which was intended to launch a live music festival in the Bahamas in April and May 2017.
In 2016 and 2017, McFarland — who is not now, and has never been, registered with the SEC in any capacity or associated with any registered entity — raised approximately $7.9 million from at least 43 investors in the Fyre Media offerings and approximately $16.5 million from at least 59 investors in the Fyre Festival offerings.
As an inducement to invest in Fyre Festival, McFarland falsely communicated to actual and prospective investors that they would have the rights to payouts from Fyre Festival event cancellation policies if the festival did not proceed as planned. In reality, however, McFarland never executed any event cancellation policies for the festival. When the festival was canceled, these investors lost their investments in full, according to the SEC.
Prior to this, McFarland founded Magnises in 2013. McFarland promoted Magnises as an exclusive club for millennials, providing its members with priority access to concerts, sporting events, restaurants and social events, and the use of a “Magnises Card” — a black metal credit card linked to the user’s own credit card.
McFarland and Magnises succeeded in raising approximately $3 million from at least 24 investors.
McFarland also made false statements to existing and potential Magnises investors through PowerPoint presentation investor updates, income statements and other documents concerning Magnises’ revenue and membership numbers.
The SEC’s complaint charges McFarland, Margolin, Simon, Fyre Media and Magnises with violating the antifraud provisions of the federal securities laws.
McFarland has admitted the SEC’s allegations against him, agreed to a permanent officer-and-director bar, and agreed to disgorgement of $27.4 million, to be deemed satisfied by the forfeiture order entered in McFarland’s sentencing in a related criminal case.
Margolin, Simon, Fyre Media, and Magnises agreed to the settlement without admitting or denying the charges. Margolin has agreed to a seven-year director-and-officer bar and must pay a $35,000 penalty, and Simon has agreed to a three-year director-and-officer bar and must pay more than $15,000 in disgorgement and penalty.