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Regulation and Compliance > Federal Regulation > SEC

SEC Revokes New York Advisor’s Registration Over Fake-Loan Scheme

By Jeff Berman

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The Securities and Exchange Commission revoked the registration of New York-based International Investment Group LLC Tuesday, after filing a complaint against it in U.S. District Court, Southern District of New York, claiming the investment advisor was operating a Ponzi scheme.

As part of that scam, the firm hid losses in its flagship hedge fund and sold at least $60 million in fake loan assets to clients, according to the SEC.

In the complaint, filed Nov. 21, the SEC claimed IIG significantly overstated the value of defaulted loans in the fund’s portfolio to conceal losses in its Trade Opportunities Fund. In an attempt to continue its deception, IIG allegedly doctored the firm’s records to indicate the defaulted loans had been repaid and the proceeds were used to make new loans, the SEC charged, noting that, in reality, there had been no repayment and the purported new loans were actually fake.

The SEC’s complaint further alleged that IIG attempted to raise money to meet investor redemption requests and other liabilities by selling at least $60 million in fake trade finance loans to other clients. To deceive clients into buying those loans, an IIG employee allegedly had fake documentation created to substantiate the nonexistent loans, including fake promissory notes and a forged credit agreement, the SEC claimed.

Starting in or about 2007, IIG “engaged in a practice of hiding losses in the TOF portfolio by overvaluing troubled loans and replacing defaulted loans with fake ‘performing’ loan assets,” the SEC said in the complaint. “When it was necessary to create liquidity, including to meet redemption requests, IIG would sell the overvalued and/or fictitious loans to new investors, including, ultimately,” to the firm’s Global Trade Finance Fund and Structured Trade Finance Fund, and “use the proceeds to generate the necessary liquidity required to pay off earlier investors,” according to the complaint.

In addition to the private funds, IIG also advised an open-end mutual fund marketed to retail investors and selected trade finance loans for that retail fund’s portfolio, the SEC said.

In or about March 2017, one of the loans IIG had recommended had defaulted on a $6 million payment, according to the complaint. “Concerned that the default would lead the Retail Fund to end the advisory relationship, IIG used funds from an account under its control to make the defaulted payment, making it appear that the borrower was creditworthy and current in its payments,” the SEC said in the complaint, adding: “To plug the $6 million hole it had created in the other account, IIG sold the retail fund a new fake $6 million loan and used those funds to reimburse the account it had raided to make the earlier payment to the Retail Fund.”

Through its alleged conduct, IIG violated multiple securities laws, including Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of that Section, and Section 17(a) of the Securities Act of 1933, the SEC said.

“This case shows that even sophisticated professional investors can fall victim to Ponzi schemes,” according to Daniel Michael, chief of the SEC’s Complex Financial Instruments Unit. “The revocation of IIG’s registration is necessary to protect the public in light of IIG’s egregious breaches of its fiduciary duty as an investment adviser,” he said in a statement.

IIG consented to a bifurcated settlement under which it was enjoined from future violations of the antifraud provisions of the federal securities laws, the SEC said. The judgment, which the court entered Nov. 26, also imposed a preliminary asset freeze, but reserved the issue of any monetary relief, including disgorgement, prejudgment interest and civil penalties, for further determination by the court upon motion of the SEC, it said.

According to an order filed with the court, “in anticipation of the institution of these proceedings,” IIG submitted an Offer of Settlement that the SEC said it had “determined to accept.” IIG didn’t immediately respond to requests for comment.

— Check out SEC Releases FAQ on Form CRS on ThinkAdvisor.

Jeff Berman

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