According to a Securities and Exchange Commission (SEC) Complaint filed on January 6, 2011, a number of Defendants perpetrated a Ponzi scheme – yet another such allegation against another group of alleged fraudsters.  Securities and Exchange Commission, Plaintiff, vs. Raymond P. Morris, E & R Holdings, LLC, Wise Financial Holdings, LLC, Momentum Leasing, LLC, James L. Haley, Cornerstone Capital Fund, LLC, Vantage Point Capital, LLC, Jay J. Linford Freedom Group, LLC, and Luc D. Nguyen, Defendants (11CV00021, Utah District Court, January 6, 2011)

NOTE: The SEC Complaint contains only allegations. The Defendants are presumed innocent of the charges and it will be the government’s burden to prove the Defendants’ guilt at trial. 

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• Raymond P. Morris (“Morris”), age 42, sole owner of E & R Holdings, Wise Financial, and Momentum. Morris has never been registered with the SEC in any capacity and has never been licensed to sell securities.  Morris formed, owned and operated E & R Holdings, LLC (“E & R Holdings”), Wise Financial Holdings, LLC (“Wise Financial”), and Momentum Leasing, LLC (“Momentum”)
• James L. Haley (“Haley”) age 49, sole owner of Cornerstone Capital Fund and Vantage Point Capital. Haley has never been registered with the SEC in any capacity and has never been licensed to sell securities.
• Luc D. Nguyen, (“Nguyen”), age 40, member of the Utah State Bar and was counsel to Morris and Haley at all times relevant to this Complaint. Nguyen has never held any securities licenses and is not registered with the SEC in any capacity.
• Jay J. Linford (“Linford”), age 49, sole owner of Freedom Group. Linford has never been registered with the SEC in any capacity and has never been licensed to sell securities.

In the Beginning

The Complaint alleges that Morris first approached Haley (who was in a real estate investment group with Morris), about an exclusive investment that was allegdly started by the owner of the Houston Astros and had generated 20% returns per month for nearly eight years.

Wow, that’s too good to pass up, if you ask me – I mean, geez, the Houston Astros owner started it. And, even more compelling, 20% returns for eight years. Hey, no reason to really check any of that out, right?  I mean the Houston Astros are in baseball, and baseball is as American as apple pie, and you got this deal offering 20% returns and -- well, what more need I say? Baseball . . . apple pie . . . 20% returns, why that’s so all-American that this has to be the real thing.  Batter up!

So, the Complaint asserts that things got put in motion when Morris allegedly told Haley that this hot investment opportunity was based on a capital leasing concept (the “Fund”).  Morris purportedly represented that all money invested in the Fund would thereafter be deposited into an account under his sole control and would never leave the account.

Odd how investors’ cash never quite seems to get deposited directly into these troubled investments but always seems to wind up offshore, in a conduit, or in some account under someone else’s control.  Maybe that's the first alarm that potential investors should hear.

I'm not exactly sure why that misdirection of funding doesn't trouble more investors from the get-go. Let me pitch you a variation on that theme and tell me if this doesn't make you uncomfortable: 

You open a brokerage account and decide to buy 1,000 shares of stock but your stockbroker insists that you write the check for the purchase price made payable to him — why?  Oh, well, if you really have to ask, it’s not for you, he says.  If you must know, he reluctantly confides in you, it’s so that the brokerage firm can first verify that you have the dollars to buy the stock. I’m doing you a favor, he says, by allowing you to first give me the money. That way you don’t have to worry about getting cleared to buy the stock. You can trust me, I’m your stockbroker.

It all sounds a bit more fishy when I put it like that, doesn’t it?

Verification for Private Traders

And what supposedly was the point of depositing the investors’ funds into the Morris-controlled account? 

The Complaint alleges that Morris explained to Haley that once investor capital was verified, private traders would obtain large lines of credit and then would invest the proceeds in bonds, hard money lending and small businesses. Morris advised Haley that the return from these investments would be sufficient to guarantee investors a return of 20% per month or more.

Did you get that?

Private traders are out there waiting for those ever-so-urgent phone calls that assure them that cash has been legitimately invested in some account, and once that assurance is given to the private traders, well, you know, they obtain humongous lines of credit. What do the traders do with all that credit? Well, they invest in “bonds, hard money lending and small businesses.” 

Again, you’d think that investors would do some hardcore homework and confirm all of those representations.  However, we would not have these stories and lawsuits if folks went through the trouble of keeping other folks honest – would we?

Still – for some reason there are a lot of folks out there – I’ll call them pigeons, if you don’t mind – who seem to have a fire in their wallets and can’t wait to send dollars into yet another Fund that guarantees 20% once some supposed group of private traders obtains verification of deposit and then goes out and leverages the sums on deposit into impressive sounding investments. 

Apparently, Haley was hot to trot.  You understand why, don’t you? The Houston Astros connection. The 20%. The verified funds in someone else’s account. Tough to ask questions or demand proof about something so enticing. (Yes, that’s sarcasm — dripping and heavy).

Ashes to Ashes

Only one problem.

Morris  told Haley they could not join the Fund unless an existing investor died.

My, isn’t that too bad?  Clearly this deal is for real because folks are literally dying for other investors to get in. I mean, you know, seriously, no one would possibly make such a precondition up. Course not. You’d have to kill some investor off just to make way for another investor. That’s just nuts.

Eureka!

Haley was really, really, really lucky because  Morris called Haley with the wonderful news (albeit, quite sad) that one of the few investors in the Fund just dropped dead less than a week after Morris told Haley about this amazing investment opportunity.  The Complaint asserts that Morris indicated that if Haley could raise $500,000 in three to five days, they could invest in the Fund.

Happy days!

The 20% Solution

The Complaint alleges that without conducting any due diligence into Morris or the Fund, Haley began soliciting investments from friends and neighbors and raised $500,000, which he gave to Morris.

What did Haley tell his acquaintances? Oh, the Complaint says that he simply repeated Morris’s  representations about the whole set-up and further assured the investors that their funds would only be used for “verification of deposit” purposes. 

I like the sound of that, don’t you?  Verifcation of deposit purposes.  Me?  I’ve only been on Wall Street for about thirty years and although I’m not sure what the hell “verification of deposit purposes” means, I must admit that it sounds pretty impressive. Of course, silly me, I would never write out a check to anyone for something like “verification of deposit purposes” without reviewing all the source documents and confirming the bona fides of the supposed traders and the trades but, then again, I’m just another stupid lawyer.

The Complaint alleges that from about August 2007 through June 2008, Haley, through his entities Cornerstone Capital and Vantage Point, raised at least $20 million for Morris’s Fund.

Oh, and there’s this tidbit:  Morris and Haley had entered into an oral agreement that provided a payment of  20% per month on funds Haley raised.  Another thing, Haley could determine what portion of his fee he gave back to his investors. Lemme see, 20% of $20 million is like, what?, about $4 million?  Not bad for simply getting friends and acquaintances into some verification of deposit purposes thingamajig.  I wonder how much of that Haley gave back to the investors?

Enter the Lawyer

Sometime prior to June 2007, Morris and Haley hired Nguyen, a Utah attorney, to assist them with legal matters relating to soliciting investments. Nguyen set up Morris’s and Haley’s investment entities, drafted offering documents, and filed Forms D with the Commission for Morris controlled entities, E & R Holdings, Wise Financial and Momentum, and for Haley controlled entities, Cornerstone Capital and Vantage Point. 

After setting up the investment entities, the Complaint alleges that Nguyen stepped outside his role as counsel and began soliciting investments. Despite having conducted no due diligence on Morris or the Fund, Nguyen allegedly repeated Morris’s misrepresentations about the Fund to investors.

Nguyen is also charged with knowingly making additional false representations to investors, including that he had reviewed the Fund’s documents and had personally spoken with the banks and private traders involved. Nguyen touted the Fund as “one of the best he had ever seen” and told investors he “understood the Fund better than Morris or Haley.”    Allegedly, Nguyen told investors that he was an “SEC attorney,” and that the Fund was “one of the best he had ever seen,” and  that he had done extensive due diligence into Morris’s Fund and knew the program better than Morris or Haley.  Nguyen purportedly told investors he had personally met with the attorneys representing the supposed trading companies involved in the Fund and that he had received copies of all operating agreements between the leasing companies and the trading companies. In fact, Nguyen performed no due diligence on Morris or the Fund, never met with anyone affiliated

Nguyen also falsely told investors that he personally had significant assets invested in the Fund. In fact, Nguyen made no capital contributions to the Fund. Oh, and let’s not forget that Nguyen was allegedly paid at least $330,000 from Morris for raising investment funds and was paid at least an additional $58,000 in legal fees.

One More Player

Sometime during the Spring of 2007, Morris met Linford at an investment seminar , and thereafter, Linford is charged with raising about $1 million for the Fund by misrepresenting that the Fund paid returns as high as 100% in seven days with no risk to investor principal.

It’s All Madoff’s Fault

In April 2008, Morris stopped making regular interest payments to investors.  Morris gave many explanations to investors, including that Homeland Security had frozen the accounts, that the Madoff case had caused banks to hold funds and that typographical errors in wire request forms had caused delays.

Oh, I see, it’s the old Homeland Security-Madoff-Typo-Dog-Ate-My-Homework explanation. Don’t they have a form for that?

As investors complained and threatened to go to the SEC and other government agencies, Morris began disseminating phony bank statements falsely showing that he had over $200 million deposited with Wachovia Bank. In late October 2008, Morris gave Nguyen a purported “Bank Confirmation Letter” from Wachovia. This fraudulent letter states that Wachovia “currently holds funds in the amount of…$201,782,567.89…[and] Mr. Raymond Paul Morris is the signatory on this account.”  The letter also says “the funds are good, clean and of non-criminal origin, are unencumbered and freely disposable.”

In addition to the letter, Morris gave Nguyen a phony “Verification of Depository,” also purporting to be from Wachovia Bank, showing that $201,827,067.89 was in Morris’s account.

Okay, so, let’s at least give these guys credit. It’s not like they came up with a simple round number, such as $201,000,000.00.  No, this is more convincing with every place filled with a seemingly plausible number. Can you find the whole numbers from 0 to 9 that are missing? Can you find Waldo?

After Nguyen received the bogus “Bank Confirmation Letter” and “Verification of Depository,” the Complaint alleges that he agreed to draft a letter to Morris’s investors, assuring them their funds were safe. Unfortunately, Nguyen allegedly did not conduct reasonable due diligence prior to sending this October 30,2008 letter. The letter caused investors to delay their attempts to contact government authorities regarding Morris, Haley, Linford and Nguyen and their investment activities.

Carnage

By the time the Ponzi scheme unraveled, Morris, Haley, Linford and Nguyen, and their respective entities, had allegedly defrauded at least 90 investors out of at least $60 million by offering and selling unregistered and non-exempt promissory notes based on material misrepresentations and omissions.

Many of the investors who lost money in the Fund were inexperienced, unsophisticated and had minimal net worth and annual income. Many investors lost their entire savings.  Some investors went so far as to borrow the money they invested and are now indebted beyond their ability to repay their lenders.

In truth, the Complaint alleges that Morris did not work with private traders to obtain lines of credit that were invested.  As has become the norm with these Ponzi schemes,  Morris is accused of using investor funds to make bogus interest payments to earlier investors from capital raised from later investors.  Moreover, rather than investing the funds in debt and equity vehicles, real estate, commodities and leasing it to private traders, Morris used investor money to support a lavish lifestyle, including a luxurious home and several sports cars, and to make illusory interest payments to early investors in his scheme.

Out of the approximate $20 million Haley raised, the Complaint alleges that he used at least $700,000 for personal expenses, including payments on a new home and $25,000 per month rental payments while building this new home.

The Complaint charges Morris, Haley, Lindford, Nguyen, E&R Holdings, Wise Financial, Momentum, Cornerstone, Vantage Point and Freedom Group with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint also charges Morris, Haley and Nguyen with violates of Section 15(a) of the Exchange Act. The SEC seeks an injunction, disgorgement and civil penalties.