This is a tale of the inventiveness offered to fraudsters by the Internet, and the resulting problems presented to one of the “cops on the beat,” i.e., the U.S. Securities and Exchange Commission (“SEC”). I have previously written about some of the issues posed by the universal connectivity (and not necessarily evident transparency) of the Internet: see my March 30, 2021, Blog “Under the Cover of Darkness: Insider Trading and the Dark Web” and my Aug. 3, 2021, Blog “Insider Tips: And That Is ‘Bull.’” But this case raises the ante to a whole new level.
In Securities and Exchange Commission v. Archer Capital Management Group (“Archer”), Archer Growth Fund (“Fund”), HDR Management LLC (“HDR”), and Silvermoon Group LLC (“SG”), the Complaint, filed on Thursday, Sept. 1, 2022, in the Federal Court for the Southern District of Florida, asserts that from December 2019 through December 2020, the Defendants raised some $2.6 million from at least 20 investors in the Fund, a purported private equity mutual fund. Defendants used the Archer website, other Internet tools (e.g., Google Ads, Microsoft Advertising, and a subscription to Medium.com, an online platform), a toll-free call-in number, and a Live Chat feature on the Archer website. HDR, a Florida limited liability company based in Hollywood, Florida, was formed in March 2020 and administratively dissolved by the Florida Secretary of State, in September 2021. SG, a North Carolina limited liability company based in Cary, North Carolina, was formed in December 2019 and administratively (again by the Secretary of State) dissolved in June 2021; but SG was also a Florida limited liability company formed in June 2020 and administratively) dissolved by the Secretary of State in September 2021.
The Complaint lays out how online bank accounts in the name of SG were opened at Wells Fargo, Bank of America, and JPMorgan Chase in June and July 2020. In June and July 2020, parallel online bank accounts were opened in the name of HDR in the same three banks. According to the Complaint, each online bank account was opened by a “fictitious individual” using a “falsified Lithuanian passport.” So much for the stringent” Know Your Customer” rules applicable to banks, and specifically to opening new accounts. Neither Archer nor the Fund actually existed, nor was either of them registered with the Commission; but someone maintained the website, www.archerfund.com, for the 13 months December 2019 through 2020. The website claimed that the individuals managing the Fund had over 30 years of investing experience, and that they followed a philosophy that “focuses on those investments that have a proven track record including strong management teams and a solid business model.” That website featured pictures of six senior “Archer executives” using stock photos. Defendants published material misstatements of performance (claiming a 43.79% increase in value on net assets in the Fund of $78.94 at year end), including a bogus” Annual Report” for the year ended Oct. 31, 2019, and a “Prospectus” dated Nov. 30, 2019.” Indeed, on March 17, 2020, Defendants published an article in Medium.com that touted the Fund as one of the four best-performing US mutual funds, and conveniently provided a link to the Archer website. The Complaint details other Fund marketing activity, featuring claims equally grand AND equally false. Investor funds were transferred to the SG and HDR online bank accounts, from which “a small portion… was used for personal expenses such as Uber Eats and grocery store bills.” But “[b]y Oct. 14, 2020, all remaining funds were transferred out of the country.”
The Complaint charges the Defendants, whoever and wherever they may be, with fraudulently selling unregistered securities in violation of Sections 5(a) and (c) and Sections 17(a) and (c) of the Securities Act of 1933, as amended; and with violating Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. The SEC asks the Court to i) issue a permanent injunction against the Defendants and any associated persons from future violations of the cited securities laws; ii) require disgorgement of their “ill-gotten gains” together with pre-judgment interest; and iii) order payment of a civil money penalty. The SEC’s Sept. 1, 2022, Press Release about this case notes the assistance of the US Attorney’s Office for the Eastern District of Tennessee and the Federal Bureau of Investigation, so it may well be that a criminal proceeding will be brought against the Defendants, if they can be identified and are amenable to US jurisdiction. The Press Release also urges investors to review some of the SEC’s Investor Alerts to better protect themselves from Internet fraud.
An old Scottish folk song, “The Three Crows,” describes what happens to the three crows of the title, and then concludes in a final verse:
The fourth cra’, was nae there at a’ (the fourth crow, was not there at all).
So, it was with Fund and Archer.
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