Fraud

SEC charges additional defendants over USD90m Ponzi scheme

The Securities and Exchange Commission has amended its complaint against New York investment adviser, Brian Raymond Callahan, and Callahan’s investment advisory firms, Horizon Global Advisors Ltd, and Horizon Global Advisors, LLC, in the SEC’s emergency action filed on 5 March, 2012 that halted an ongoing USD90 million Ponzi scheme.

The SEC’s amended complaint additionally charges Callahan’s five offshore funds with fraud and Callahan’s brother-in-law, Adam Judd Manson (Manson) and two of Manson’s entities, with aiding and abetting Callahan’s scheme. The amended complaint also names Callahan’s wife, Sheri Manson Callahan, as a relief defendant. Callahan’s five offshore funds have agreed to be placed under the control of the receiver that the Court appointed in an Order issued on 27 March, 2012.

The SEC’s amended complaint includes the following allegations:

From at least 2005 to January 2012, Callahan raised over USD90 million from at least 45 investors for his five offshore funds. Callahan misused a portion of investor assets to pay certain other investors seeking redemptions, misused investor assets to pay for personal expenses for himself and his wife, and improperly diverted assets of the funds to Manson’s private real estate project on Long Island.
 

Manson and his entities, Distinctive Investments, LLC and Distinctive Ventures, LLC, created a paper trail of inflated false promissory notes and false audit confirmations that helped Callahan conceal the scheme.
 

Manson and his entities provided Callahan with unsecured promissory notes, which falsely stated they were payable on demand even though they were illiquid. In addition, the face value of the promissory notes far exceeded the amount of money that Callahan provided to Manson’s real estate project. Callahan used the false promissory notes to hide his misuse of fund assets and to inflate the amount of assets under management.
 

Manson and Distinctive Investments issued audit confirmations to the auditors of Callahan’s funds that misrepresented: (1) the outstanding principal balances on the promissory notes; and (2) that the promissory notes were callable. By misleading the auditors, Manson helped hide the true financial condition of Callahan’s funds.

The SEC’s amended complaint charges Manson and his two entities with aiding and abetting violations of the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5(a) and (c) thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.  The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against Manson and his entities.

The SEC charges Callahan’s five offshore funds with violating the antifraud provisions of Sections 17(a)(1), (2) and (3) of the Securities Act, and Section 10(b) of the Exchange Act and Rules 10b-5(a), (b) and (c) thereunder.  The SEC is seeking permanent injunctions and disgorgement plus prejudgment interest against the funds.

The amended complaint also names Callahan’s wife, Sheri Callahan, who benefited from Callahan’s fraud, as a relief defendant. For example, Sheri Callahan holds the title to Callahan’s primary residence. The SEC alleges that Callahan made over $500,000 in mortgage payments on his primary residence with investor funds. The SEC is seeking the return of Sheri Callahan’s ill-gotten gains, with interest.

The Court previously issued an Order on 27 March, 2012 preliminarily enjoining Callahan and his advisory firms from violating anti-fraud provisions of the federal securities laws, continuing an asset freeze of Callahan’s and his advisory firms’ assets, requiring Callahan and his advisory firms to repatriate assets, prohibiting Callahan and his advisory firms from soliciting or accepting any new investments, and appointing a receiver for the estates of Callahan’s advisory firms.

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