You Can't Cheat an Honest Man - James Walsh [116]
• the time and place of each statement and the person responsible for making (or, in the case of omissions, not making) it,
• the context of such statements and the manner in which they misled the investors, and
• what the perps obtained as a consequence of the fraud.
When the charge is based on an offering memorandum or other document, these requirements are “somewhat relaxed.” The document satisfies the time, place and content requirement of Rule 9(b). If you dont have a document, the charges will be difficult to establish. In a similar vein, Section 10b-5 of the federal Securities Act prohibits fraudulent activities in connection with the purchase or sale of securities, whether or not those securities are registered. (This is important in cases involving Ponzi schemes, because the investments usually aren’t registered as securities.) Specifically, Rule 10b-5 states:
It shall be unlawful for any person, ...by use of the mails or instrumentality of interstate commerce...or of any facility of any national securities exchange, 1) to employ any device, scheme or artifice to defraud; 2) to make any untrue statement of material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or 3) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person....
To elaborate this point further, section 12(2) of the Securities Act of 1933 provides that:
Any person who... offers or sells a security...by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact ...and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such securities from him....
There are limits to how these various rules can be applied. As one court has noted, “Congress did not intend the securities laws to be a broad federal remedy for all fraud.” However, the Securities and Exchange Act covers not only the enumerated instruments but also “many types of instruments that in our commercial world fall within the ordinary concept of a security.” This generally includes private placement debt, participation notes, investment contracts and other familiar Ponzi tools.
How State Regulators Fight Ponzi Perps
The Feds aren’t the only regulators who battle Ponzi perps. State attorneys general and consumer protection groups have specific laws that they can use to shut down Ponzi schemes. One example: New York State General Business Law prohibits “chain distributor schemes” which are defined as:
a sales device whereby a person, upon condition that he make an investment, is granted a... right to... recruit for profit... one or more additional persons who are also granted such... right upon condition of making an investment and may further perpetuate the chain of persons who are granted such... right.
Another example: Under Texas law, a person who runs a pyramid scheme violates the Texas Deceptive Trade Practices and Consumer Protection Act, or may be convicted of a state jail felony.
And then there’s Illinois, which takes a noticeably hard line against Ponzi schemes.
Kevin Trudeau said he was an entrepreneur trying to build value— and start companies—at the grass-roots level. Regulators in half a dozen Midwestern states said he was a Ponzi perp who moved from pitch to pitch, leaving burned investors in his wake. In the mid-1990s, Illinois led an investigation into Trudeau’s operations.
Trudeau fit the profile of a Ponzi perp. A convicted felon who had served two years in prison for credit-card fraud in the early 1990s, he had a personal history littered with troubles like a larceny conviction and personal bankruptcy.
When he got out prison in 1992, Trudeau started an eponymous multilevel marketing company which used vitamins and food products made by