The SEC prevailed in a jury trial against hedge fund manager Marlon Quan and his entities in a case tied to the massive Petters Ponzi scheme. Mr. Quan and Acorn Capital Group, LLC and Stewardship Investment Advisors, LLC which were used to manage several hedge funds, were charged with having funneled millions of dollars to the Tom Petters Ponzi scheme and later trying to cover-up their actions as things unraveled. On February 11, 2014 the jury returned verdicts in favor of the Commission on Counts based on Exchange Act Section 10(b), Securities Act Sections 17(a)(2) and (3) and Advisers Act Section 206(4). SEC v. Quan, Case No. 0:11-cv-00723 (D. MN Filed March 24, 2011).
The action began when the Commission obtained an emergency order halting the diversion of settlement payments from the Receiver of the Tom Petters Ponzi schemes. The money was intended to compensate defrauded investors of the feeder funds. The man who operated the feeder funds, and helped facilitate the Petters fraud, was poised to obtain the money until the SEC won a freeze order.
From 2001 through 2008 Mr. Quan raised, according to the complaint, over $459,077,561 from at least 165 investors. Those investors and entities invested in Mr. Quan’s hedge funds. During that period Mr. Quan and his entities were paid over $93 million in fees.
From the beginning, Mr. Quan’s funds fed millions of dollars of investor money to fraudster Tom Petters. Mr. Petters claimed to operate funds in which investor money was used to finance the purchase of merchandise for re-sale to “big box” retailers such as Wal-Mart and Costco. In reality, Mr. Petters operated a massive Ponzi scheme, the assets of which have been seized by a Court appointed Receiver. During its operation, however, the Petters funds received millions of dollars from Mr. Quan and his funds in return for promissory notes.
When soliciting funds from investors, Mr. Quan furnished them with written materials which assured investors that big-box retailers were making payments into a lock box which was controlled by one of his entities. He also told investors that a major accounting firm was retained to examine the books of the entities controlled by Mr. Petters, that there was insurance against default and that proper due diligence had been undertaken. These representations were false, according to the Commission.
In 2007 when the Petters entities began to default on their notes, Mr. Quan and his entities took steps to cover-up, concealing the truth from their investors. Those steps included falsely assuring investors that the Quan funds were in sound financial condition when in fact they were not.
Perhaps the ultimate fraud began as the Receiver for the Petters entitles authorized the payment of $14 million which, according to the complaint, “belongs to the investor-victims of the Defendants’ fraud.” Instead, a Quan controlled entity negotiated a deal to obtain control of the funds and distribute them to others, including to Mr. Quan’s attorneys. The fund investors would receive nothing.
The SEC’s complaint alleged violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4). The emergency order entered by the Court at the request of the SEC froze the settlement funds, preserving the money for the defrauded investors.
During the two week trial the SEC presented its claims which the Court summarized in the jury instructions as follows: “The SEC claims that Marlon Quan and several entities under his control . . . defrauded investors in SCAF and Stewardship Credit Arbitrage Fund Ltd. . . by making material misstatements of fact or material omissions of fact regarding one or more of the following: (1) the ‘lock box’ account; (2) audits of ‘intermediaries’ to be conducted by a ‘major accounting firm’; (3) obtaining insurance against risk of default; (4) performing due diligence; (5) ‘additional cash collateral’ being held in a “Blocked Account’; and (6) defaults and late payments on Petters Notes held by the Funds. The SEC also alleges the defendants engaged in a fraudulent scheme to conceal the fact that Petters Notes were failing.” The defendants deny the SEC’s allegations, the Court told the jurors.
Eight counts were presented for the jury’s consideration based on alleged violations (primary and aiding and abetting) of Exchange Act Section 10(b), each subsection of Securities Act Section 17(a), Exchange Act Section 20(a) and Advisers Act Section 206(4). The jury found in the Commission’s favor and against Mr. Quan and his firms, on each fraud count except those based on Securities Act Section 17(a)(1). See Lit. Rel. No. 22925 (Feb. 11, 2014).
This is the sixth trial verdict since December 10, 2013 and the fifth this year for the SEC. It is the first clear victory for the agency, although it did prevail on some counts in an earlier case (here).
