Fraud

SEC charges attorney and two South Florida residents over USD27.5m investment fraud

The Securities and Exchange Commission has charged an attorney and two others living in South Florida for their roles in a USD27.5m investment scheme that led investors to believe they were purchasing securities consisting of “pre-sold” commodities contracts with a pre-determined profit.

However, the supposed profits actually distributed to investors were largely taken from other investors’ funds.

The SEC halted the scheme last year when it obtained an asset freeze and a court-appointed receiver over the companies involved: Commodities Online LLC and Commodities Online Management LLC. The SEC’s follow-up charges are against the founder and former president of the company, James C. Howard III, as well as the company’s vice president Louis N. Gallo III and outside counsel Michael R. Casey, who later became the president.

“This trio teamed up to employ all the hallmarks of an investment scheme,” says Eric I. Bustillo, director of the SEC’s Miami regional office. “Howard met with prospective investors at a luxury hotel to emanate a false sense of wealth and security, Gallo oversaw an in-house boiler room that drummed up investor interest, and Casey was the company’s purported legal counsel who acted anything but lawyerly.”

In a parallel action, the US Attorney’s Office for the Southern District of Florida today announced criminal charges against Howard, Gallo, and Casey.

According to the SEC’s complaint filed in federal court in Miami, Commodities Online offered investors the chance to participate in its purportedly profitable brokering of physical commodities via pre-sold contracts – for example, the purchase and sale of large amounts of seafood or iron ore. Investors were sold participation units in unregistered private placement offerings, each supposedly tied to a commodities transaction in which Commodities Online had already secured a buyer and a seller of the commodity. These participation units would purportedly generate predetermined profits for investors.

The SEC alleges that in reality, Commodities Online performed only a limited percentage of the commodities transactions that were promised to investors. The majority of “profits” allocated or distributed to investors were not profits from completed commodities transactions, but instead taken from the funds of other investors. Meanwhile, Howard and Gallo were dissipating millions of dollars in investor funds to largely sham companies.

Through these companies, Howard and Gallo stole investor funds for their own use. For example, Howard met with prospective investors at a luxury hotel in Fort Lauderdale and offered Commodities Online membership interests. He told investors that the funds raised from the offering would be used for the company’s start-up costs such as salaries, marketing, and advertising. However, within weeks of receiving USD2m in investor funds for the purchase of the membership units, Howard siphoned USD1.45m to another entity he controlled. Furthermore, Howard failed to disclose to prospective investors that he’s a convicted felon.

According to the SEC’s complaint, Howard stepped down as the company’s president in 2010 after he was arrested for an unrelated investment fraud. He was replaced by Casey, who misled investors about Howard’s continuing control over Commodities Online while also misrepresenting the profitability, structure, and existence of the purported commodities contracts to investors. Casey also failed to tell at least one investor that the funds raised from the purchase of membership interests had previously been misappropriated by Howard.

The SEC alleges that Gallo ran an in-house “boiler room” of telephone sales agents and a network of approximately 20 regional and international sales offices. He failed to disclose to investors that he previously pled guilty to federal bank fraud and other felonies and was serving a term of supervised release while employed at Commodities Online. Gallo also misled investors about Howard’s role at Commodities Online.

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