SEC v. Capital Financial Partners LLC. - Complaint

In a complaint filed on April 1, 2015 (“Complaint”), the SEC charged Capital Financial Partners, Capital Financial Holdings, and Capital Financial Enterprises (collectively, “Capital”), William D. Allen, and Susan C. Daub with violations of §10(b) of the Exchange Act, Rule 10b-5 of the Exchange Act, §17(a) of the Securities Act, and unjust enrichment. The SEC asserted that Allen and Daug knowingly schemed and defrauded investors through a “Ponzi” style business operation involving the use of professional athletes. 

The Complaint made the following allegations: 

Allen and Daub, acting through one Florida and two Massachusetts companies represented that they made loans loans to professional athletes "who need[ed] money while they wait[ed] to get paid under their sports contracts (i.e., during the off-season)." Investors were told that they could participate in loans for a "specific athlete."  The website indicated that the loans received a stated interest rate within a range of 9%-18%. Capital retained origination fees in the amount of 3% of the original loan. 

In April and May of 2014, Allen and Daub successfully raised $4 million from investors desiring to participate in a $5.65 million loan to a National Hockey League player.  According to the Complaint:  "The purported $5.65 million loan to the NHL player was a sham. The player did not sign the $5.65 million promissory note or the loan agreement shown to prospective investors. Capital Financial did not make a $5.65 million loan to the player."

In August 2014, Allen and Daub secured investors for a $300,000 loan for a Major League Baseball athlete. Allen and Daub represented to investors that Capital had already made the loan to the player. They provided investors with a promissory note and a copy of the loan agreement. According to the Complaint:  "However, Capital Financial's bank records reflect no payments to this player on or before the date ofthe supposed loan. Bank records indicate that Capital Financial used the money obtained from this investor to meet monthly payment obligations to other investors and to fund one of Allen's personal business ventures."  

Over a three-year period from July 2012 to February 2015, Capital received $13.2 million in repayments from athletes and paid $20 million to investors. As the Complaint described:  "Lacking any other significant source in revenue, it is apparent that Capital Financial managed to pay nearly $7 million more to investors than it received from athletes only because Allen and Daub recycled a substantial portion ofthe approximately $31.7 million raised from investors. In other words, they used money from some investors to pay other investors, while at the same time funneling millions ofdollars ofinvestor money to themselves -the hallmarks of a Ponzi scheme."

Based on these allegations, the SEC is pursuing this action against Capital. The complaint seeks final relief in the form of a judgment providing a preliminary injunction and freezing assets of the defendants; a permanent injunction prohibiting the defendants from engaging, directly or indirectly, in conduct to be described hereafter in violation of §10(b) of the Exchange Act, Rule 10b-5, and §17 of the Securities Act; and disgorgement of Defendants ill-gotten gains with directions to pay civil penalties pursuant to §21(d)(3) of the Exchange Act and §20(d) of the Securities Act. 

On June 12, 2015 the SEC announced the U.S. Attorney’s office in Massachusetts had filed criminal charges against Allen and Daub.  

The litigation release is here.  Other primary materials for the post are available on the DU Corporate Governance Website.