SEC Charges Two Florida Lawyers for Their Roles in Acting as Escrow Agents for Investor Money Placed in a Ponzi Scheme
On September 23, 2014, the SEC charged two Florida attorneys for their roles in an offering fraud conducted by a transfer agent that was the subject of an SEC enforcement action two months ago.
Cecil Franklin Speight and his company, International Stock Transfer (IST) were running a classic Ponzi scheme where investor funds were being used for Speight’s personal expenses and to pay old investors. Investors were told that their money would be invested in high-yield investments. According to the SEC, attorneys “Jonathan P. Flom and James L. Schmidt II were designated to receive wire transfers of funds from investors who were solicited by cold callers using boiler room tactics.” Wiring the money to an attorney’s trust account enhanced the appearance of safety in the investment opportunity and concealed from investors how the money was really being spent. Flom and Schmidt took a fee of 2 percent of the funds and transferred the balance of the investors’ money to Speight, “who promptly used it for personal expenses or to make Ponzi-like payments instead of investing in the high-yield investments or discounted stock promised to investors.”
Flom and Schmidt were arrested in a parallel criminal action brought by the U.S. Attorney’s Office for the Eastern District of New York. According to the SEC’s complaints filed in federal court in Brooklyn, Flom and Schmidt enabled Speight and IST to steal more than $3.3 million from at least 70 investors. Approximately $2.7 million of scheme proceeds flowed through Schmidt’s account and approximately $580,000 through an account controlled by Flom.
The Securities Law Violations
The SEC’s complaints charge Schmidt and Flom with violating the antifraud provisions of the securities laws, including Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
The SEC’s Comments
The comments made by the SEC make it clear that attorneys have no excuse when they use their trust accounts to aid in a fraud. Andrew M. Calamari, Director of the SEC’s New York Regional Office, said, “Attorneys are critical gatekeepers in our securities markets, and Flom and Schmidt enabled a scheme to occur by using their legal credentials to add the appearance of legitimacy as they collected investor funds.” He added “We will continue to aggressively seek out and prosecute lawyers who abuse their positions of trust and serve as conduits to fraud in our markets.”
It is important to note that Schmidt and Flom did more than simply transfer funds. The SEC alleged that Schmidt and Flom knowingly participated with Speight in the sale of fraudulent securities. Flom apparently received e-mails from Speight that explicitly discussed the misappropriation of investor funds. Schmidt collaborated with Speight to craft misleading responses to numerous investors who complained about the absence of promised coupon payments as well as the counterfeit appearance of the stock certificates they received and the inability to contact the cold callers who solicited them.