SEC Charges Lender in Bridge Loan Scheme
The SEC charged a Georgia-based lender and its owner/president with misrepresentation, misappropriation and engaging in ponzi scheme to defraud investors.
According to the Complaint filed in the Northern District of Georgia, the defendants "raised at least $140 million from approximately 300 investors through the sale of loan participation agreements and promissory notes," which were falsely marketed as funding short-term, high-yield "Bridge Loans" to small businesses. The SEC alleged the defendants promoted the investment opportunity through direct solicitations and later through nationwide radio advertisements, online podcasts and a corporate website. The SEC said investors were told their funds would be pooled and used to issue short-term loans to businesses that had already secured approval for SBA or other long-term financing. The defendants allegedly promised annual returns ranging from 8% to 18%, and investors were assured they would be repaid from borrower payments on the underlying loans.
The SEC alleged that, while some investor funds were used to originate loans, the vast majority of those loans failed. The SEC said that by 2021, most of the loans were in default, and the operation was unable to generate sufficient revenue to meet its obligations. The SEC found that despite these defaults, the defendants continued to solicit new investments and used incoming funds to make interest payments to existing investors.
The SEC further alleged that investors were repeatedly misled about the quality of the loan portfolio. The SEC said that the defendants falsely claimed that loan defaults were rare or nonexistent, when in fact the default rate was as high as 90%. The SEC found that investors were also told that borrower loans were secure because they had already been approved for SBA financing.
The SEC contended that the fraud extended to individual misappropriation of investor funds. According to the Complaint, millions were diverted to pay for personal expenses and luxury items. The SEC also found that substantial funds were funneled into affiliated entities that provided no legitimate services and were used primarily to obscure the misuse of investor money.
The SEC charged the defendants with violating SA Section 17(a) ("Use of interstate commerce for purpose of fraud or deceit") and SEA Section 10(b) ("Regulation of the Use of manipulative and deceptive devices") and SEA Rule 10b-5 ("Employment of manipulative and deceptive devices").
The SEC sought (i) a permanent injunction, (ii) civil penalties, (iii) an asset freeze, (iv) disgorgement of ill-gotten gains and (v) the appointment of a receiver to manage the recovery of investor assets. The SEC is also seeking relief from multiple affiliated entities that received investor funds without providing value in return.
According to an SEC news release, "[w]ithout admitting or denying the allegations in the complaint, the defendants and relief defendants consented to the SEC’s requested emergency and permanent relief, with monetary remedies to be determined by the court at a later date."