PRIVATE EQUITY ADVISER BARRED FROM INDUSTRY FOR IMPROPER WITHDRAWAL FROM FUNDS
The Securities and Exchange Commission announced that a private equity adviser has been permanently barred from the securities industry and must pay a $1.25 million penalty to settle charges that he withdrew improper fees from two private equity funds he managed.
The SEC’s order finds that Scott M. Landress formed the funds to invest in real estate trusts with underlying investments in properties throughout the UK. His investment advisory firm SLRA Inc. earned management fees based on the net asset value of the underlying investments. SLRA’s fees shrank and its management costs increased as real estate property values fell during the financial crisis, and the funds’ limited partners declined several requests by Landress for additional compensation to cover the shortfalls.
According to the SEC’s order, Landress directed SLRA to withdraw 16.25 million pounds from the funds in early 2014, purportedly as payment for several years of services provided by an affiliate. He subsequently transferred the money to his personal account. SLRA and Landress did not disclose the related-party transaction and the resulting conflicts of interest until after the money had been withdrawn.
According to the SEC’s order, Landress and SLRA returned the withdrawn service fees to the funds after the SEC began its investigation. Sometimes, having the right SEC Lawyer
on your side can make all the difference.
“Private equity fund advisers have a duty to act in the best interest of their clients, but Landress and SLRA helped themselves to millions of dollars’ worth of fees to which they had no legitimate claim,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement.
Landress and SLRA agreed to the SEC’s cease-and-desist order without admitting or denying the findings.
SEC CHARGES MEXICO-BASED HOMEBUILDER IN $3.3 BILLION ACCOUNTING FRAUD
The Securities and Exchange Commission announced that Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. has agreed to settle charges that it reported fake sales of more than 100,000 homes to boost revenues in its financial statements during a three-year period.
The SEC used satellite imagery to help uncover the accounting scheme and illustrate its allegation that Homex had not even broken ground on many of the homes for which it reported revenues.
The SEC alleges that Homex, one of the largest homebuilders in Mexico at the time, inflated the number of homes sold during the three-year period by approximately 317 percent and overstated its revenue by 355 percent (approximately $3.3 billion). The SEC’s complaint highlights, for example, that Homex reported revenues from a project site in the Mexican state of Guanajuato where every planned home was purportedly built and sold by Dec. 31, 2011. Satellite images of the project site on March 12, 2012, show it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt.
According to the SEC’s complaint, Homex filed for the Mexican equivalent of bankruptcy protection in April 2014 and emerged in October 2015 under new equity ownership. The company’s then-CEO and then-CFO have been placed on unpaid leave since May 2016. Homex has since undertaken significant remedial efforts and cooperated with the SEC’s investigation.
“As alleged in our complaint, Homex deprived its investors of accurate and reliable financial results by reporting key numbers that were almost completely made up,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division. “The settlement takes into account that the fraud occurred entirely under the watch of prior ownership and management, the company’s new leaders provided critical information regarding the full scope of the fraudulent conduct, and the company continues to significantly cooperate with our ongoing investigation.”
Melissa Hodgman, Associate Director of the SEC’s Enforcement Division, added, “We used high-resolution satellite imagery and other innovative investigative techniques to unearth that tens of thousands of purportedly built-and-sold homes were, in fact, nothing but bare soil.”
The SEC separately issued a trading suspension in the securities of Homex.
Without admitting or denying the allegations in the SEC’s complaint filed in U.S. District Court for the Southern District of Utah, Homex consented to the entry of a final judgment permanently enjoining the company from violating the antifraud, reporting, and books and records provisions of the federal securities laws, and the company agreed to be prohibited from offering securities in the U.S. markets for at least five years. The settlement is subject to court approval.
SEC CHARGES FUEL CELL COMPANY AND OFFICERS WITH DEFRAUDING INVESTORS
The Securities and Exchange Commission charged a Utah-based penny stock company and four corporate officers with misleading investors about the research, development, and profitability of their purported business to manufacture power generation products such as fuel cells.
The SEC alleges that while raising approximately $7.9 million from investors in Terminus Energy Inc., the company and its officers claimed to have a viable prototype capable of being sold and earning revenue. According to the SEC’s complaint, Terminus did not have the fuel cell technology or the funding to match their claims, and the officers were instead converting substantial amounts of investor funds to their own use.
According to the SEC’s complaint, the company failed to disclose to investors that Terminus’s operations manager George Doumanis is a convicted felon who went to prison for securities fraud and was secretly acting as an officer of the company despite being barred from participating in penny stock offerings. Emanuel Pantelakis served on the Terminus board of directors despite having been permanently barred by the Financial Industry Regulatory Authority. Also charged in the SEC’s complaint are Terminus’s CEO Danny B. Pratte and its former president, director, and legal counsel Joseph L. Pittera.
Terminus also allegedly used unregistered brokers to sell its securities and paid them more than twice as much in commissions than was disclosed to investors in offering documents. Joseph Alborano is charged in the SEC’s complaint with soliciting and selling investments for which he received more than $1 million in commissions.
“As alleged in our complaint, these company insiders spent massive, undisclosed amounts of investor funds and left the company with no realistic chance of developing a fuel cell product,” said Eric I. Bustillo.
In a parallel action, the U.S. Attorney’s Office for the Southern District of Utah today filed criminal charges against Pratte, Doumanis, and Pantelakis.
The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties as well as officer-and-director bars and penny stock bars.
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