LLC Law Blog

Commission Fines Fountain Hills Company for Unregistered Investment Sales, Sanctions Others for Securities Fraud and Revokes Registration of Fountain Hills Broker

The Arizona Corporation Commission today fined a Fountain Hills limited liability company for its unregistered investment sales in connection with a residential real estate development. Also, the Commissioners sanctioned multiple individuals and their affiliate d companies for committing securities fraud and revoked a Fountain Hills stockbroker’s registration for making unsuitable investments with a couple’s retirement funds.

Promise Land Properties, LLC. The Commission issued a default order against Promise Land Properties, LLC, requiring the payment of $958,000 in restitution and a $25,000 administrative penalty for offering and selling unregistered securities in connection with a residential real estate development. The Commission found that Promise Land Properties—a manager-controlled, Arizona limited liability company based in Fountain Hills—w as not registered to offer or sell securities in Arizona when it offered and sold LLC membership interests to six investors in order to fund the acquisition and development of 1,280 acres near Tombstone, Arizona. The Commission found that the Promise Land Properties’ manager met potential investors through a network of acquaintances, including individuals from Arizona, Nebraska and Minnesota. Additionally, the Commission found that an institutional lender eventually foreclosed on the Tombstone real estate development project.

Patrick B. Hammons, et al. In a separate case, the Commission ordered Patrick B. Hammons of Mesa and his affiliated companies to pay $174,000 in restitution and a $20,000 administrative penalty for committing securities fraud and transacting business as an investment adviser without a license. The Commission found that Hammons and the company he managed, Pacific Ventures & Trading, LLC, fraudulently offered and sold unregistered LLC membership interests to investors. The Commission found that Hammons failed to use investor funds as promised and to disclose aspects of the payments made by Pacific Ventures & Trading to another company Hammons managed, TF6 Advisors, LLC. The Commission found that Hammons and TF6 Advisors violated the Arizona Investment Management Act by providing investment advice for a fee without being licensed. Additionally, the Commission found that Hammons and TF6 Advisors committed fraud in connection with their investment advisory services by failing to do the following: use investor money as promised, follow required auditing procedures while having control over client funds, act in the best interests of their client, accurately disclose the compensation structure of TF6 Advisors, and by misrepresenting the market value of the assets of TF6 Advisors. In settling this matter, Hammons and his companies neither confirmed nor denied the Commission’s findings, but agreed to the entry of the consent order.

Morrie S. Friedman, et al. In another matter, the Commission ordered Morrie S. Friedman of Scottsdale to pay $79,625 in restitution and a $5,000 administrative penalty for fraudulently offering and selling unregistered stock shares to investors. The Commission found that, while not registered to offer or sell securities in Arizona, Friedman offered and sold unregistered stock in connection with two companies, Beyond Juice, Inc. and VIP* ComLink, Inc. The Commission found that Friedman told the Beyond Juice investors that the company stock would soon be going public, resulting in an increase in stock value, but had no factual basis for the prediction. To date, Beyond Juice has yet to become a publicly traded company. Also, the Commission found that Friedman failed to provide stock certificates to a VIP* ComLink investor and to disclose the prior legal actions taken against him in regards to Beyond Juice. In settling this matter, Friedman neither confirmed nor denied the Commission’s findings, but agreed to the entry of the consent order.

Donna Kay Beers Finally, the Commission revoked the securities registration of Fountain Hills resident Donna Kay Beers for her dishonest and unethical conduct, requiring the payment of $86,815 in restitution and a $15,000 administrative penalty. The Commission found that Beers, who was also a former investment adviser representative, recommended unsuitable investments for a senior couple who was searching for a safe and prudent way to invest their retirement funds. The Commission found that Beers recommended the couple sell their well-known stock holdings such as Wal-Mart and Costco and invest the proceeds plus additional cash into multiple private placement investments and direct participation programs, which were risky and illiquid. The Commission found that one of the investments, Fountain Hills Town Square, LLC, involve d a 12.67 acre real estate development in which Beers had an undisclosed financial interest. The Commission found that, despite knowing the real estate project had difficulty obtaining financing, Beers touted the investment as good and safe and pressured her clients to invest. In settling this matter, Beers neither confirmed nor denied the Commission’s findings, but agreed to the entry of the consent order.

More caution for investors: Even when selling a legitimate product, some promoters do not recognize the investment program they have created is a security. Determining whether an alternative investment program is a security is not always easy to determine and depends upon the unique facts and circumstances of the transaction and not on what a promoter calls the investment product. Even when investing with someone they know, investors should verify the registration of sellers and investment opportunities and investigate disciplinary histories by contacting the Arizona Corporation Commission’s Securities Division at 602-542-4242 or toll free in Arizona at 1-866-VERIFY-9. The Division’s investor education website also has helpful information at www.azinvestor.gov .

The Arizona Corporation Commissioners voted to require three individuals and their affiliated companies to stop offering and selling unregistered securities and to pay penalties. The Commission entered into two consent orders, one involving a Mesa man who sold unregistered stock and promissory notes issued by his start-up, air ambulance service company, the other involving a Peoria man who fraudulently sold membership interests in an oil and gas venture. The third order involved a Gilbert man who defrauded investors with an options and foreign currency trading investment scam.

Thomas F. Kelley and International Air Medical Services, Inc. The Commission ordered Thomas F. Kelley of Mesa and his Scottsdale start-up company to pay $1,406,300 in restitution and a $50,000 administrative penalty for offering and selling an unregistered investment program involving a long-range, jet-air ambulance business. The Commission found that, while not registered to offer or sell securities, respondents Kelley and International Air Medical Services, Inc. (International Air) offered and sold stock and promissory notes to at least 14 investors. The Commission found that the majority of investors who were issued promissory notes have not been paid as required under the terms of their notes, and some investors who purchased stock were not issued stock certificates or the issuance of the stock certificates was significantly delayed. Additionally, the Commission found that the respondents failed to provide stockholders the voting rights to which they were entitled under International Air’s bylaws. Further, the Commission found that Kelley, as well as one other International Air officer, used investor funds for their own personal expenses, despite the fact that the board of directors had not approved compensation or salaries for International Air’s officers. In settling this matter, Kelley and International Air neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

Christopher D. Dedmon and SDC Montana Consulting, LLC. The Commission sanctioned Peoria resident Christopher D. Dedmon and his affiliated company, SDC Montana Consulting, LLC, with a $25,000 administrative penalty for fraudulently offering and selling membership interests in an oil and gas venture. The Commission found that, while not registered to offer or sell securities, Dedmon and SDC raised $547,500 from 13 investors, most of whom lived in Arizona. The Commission found that Dedmon and his company failed to disclose to investors a 2005 Commission consent order that prohibited Dedmon and SDC from selling securities or exercising control over an entity that sells securities. To date, each membership interest investor has received distributions from SDC that exceed the investor’s original investment. In settling this matter, Dedmon neither admitted nor denied the Commission’ s findings, but agreed to the entry of the consent order and has paid the administrative penalty in full to the state of Arizona.

Tyrone L. Brooks and 3T Options, LLC.  The Commission issued a default order against a Gilbert man and his affiliated company who defrauded investors with an options and foreign currency trading investment scam. The Commission ordered Tyrone L. Brooks and 3T Options, LLC to pay $95,013 in restitution and a $25,000 administrative penalty. The Commission found that, while not licensed to provide investment advice, Brooks and his company pooled together the funds of at least eight investors from Arizona, California and Nevada, promising certain clients a guaranteed monthly return of at least six percent. The Commission found that Brooks used only a small percentage of his client’s funds to conduct options and foreign currency trading, depositing most of the money into his personal bank account. Moreover, the Commission found that Brooks issued account statements to investors that reflected fictitious value

The Arizona Corporation Commission sanctioned multiple individuals and their affiliated companies whose unregistered investment programs caused investors to lose over $7.8 million. The Commission also revoked the securities registration of a Lake Havasu securities salesman who borrowed money from his brokerage clients, ordering him to pay restitution and penalties for his dishonest and unethical conduct. In total, the Commission ordered over $7.8 in restitution and $291,500 in administrative penalties.

John M. McNeil, Peter Pocklington, and Crystal Pistol Resources, LLC, et al. The Commission ordered former Scottsdale resident John M. McNeil, California resident Peter Pocklington and their affiliated companies to pay $5,149,316 in restitution and a $100,000 administrative penalty for committing securities fraud in connection with a gold mining venture. The Commission found that, while not registered as securities salesmen or dealers in Arizona, respondents McNeil, Pocklington and their affiliated companies—Crystal Pistol Resources, LLC, Crystal Pistol Management, LLC, and Liberty Bell Resources I, LLC—told at least 120 investors that they had obtained mineral rights to a placer mine outside of Quartzite, Arizona, and would begin mining and processing gold on the site within a short period of time. The Commission found that the respondents obtained at least some investors by making unsolicited telephone calls to them and that some investors were taken to the mine site, which was located on U.S. Bureau of Land Management land. Additionally, the Commission found that Crystal Pistol prepared newsletters in which it claimed to be offering one of the most lucrative dividend plans in the mining business and that hedge funds and banks were interested in the project. The Commission found, however, that the estimates of gold resources on the respondents’ website were not supportable with the methods currently available in the industry. In settling this matter, the respondents neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

Casimer Polanchek.In a separate case, the Commission issued a default order against Casimer Polanchek of Chandler, ordering him to pay $2,558,832 in restitution and a $175,000 administrative penalty for defrauding investors with a promissory note scheme. The Commission found that Polanchek was the manager of Pangaea Investment Group, LLC, which was doing business as Arizona Investment Center. The Commission found that Polanchek was not registered as a securities salesman in Arizona when he fraudulently offered and sold promissory notes issued by Tri-Core Companies, LLC and C&D Construction Services, Inc. The Commission also found that Polanchek was jointly and severally liable as the control person of Pangaea for the promissory notes Pangaea fraudulently offered and sold issued by ERC Compactors, LLC and Tri-Core Companies, LLC. The Commission found that on multiple occasions Polanchek participated as a host or presenter on an Arizona radio program called “The Investment Roadshow,” offering alternative investment opportunities and urging prospective investors to attend seminars and webinars about the alternative investments. The Commission found that, among the multiple, material omissions and misrepresentations made to investors, Polanchek or his company represented the alternative investments as being secured by property or equipment, but failed to provide any collateral or other mechanism to securitize the promissory notes.

Lynn R. Goldney. In another matter, the Commission revoked the securities registration of Lake Havasu resident Lynn R. Goldney for borrowing money from his brokerage clients, ordering him to pay $98,8 35 in restitution and a $10,000 administrative penalty. The Commission found that Goldney obtained 45 distinct loans from 26 of his customers, none of whom were family members or persons in the business of lending money to the public. Further, the Commission found that Goldney’s activity constitutes dis honest conduct or unethical practices in the securities industry. In settling this matter, Goldney agreed to the entry of the consent order and admitted to the Commission’s findings only for purposes of the administrative proceeding.

Robert R. Cottrell and RSC Adventures, LLC. A separate matter involved former Peoria resident Robert R. Cottrell and his affiliated company who agreed to pay a $6,500 administrative penalty for offering and selling unregistered limited liability memberships in an oil and gas exploration and development company. The Commission found that Cottrell and his Arizona-based company, RSC Adventures, LLC, were not registered to offer or sell securities in Arizona when they sold to five investors—most of whom lived in Arizona—unregistered membership interests in SDC Montana Consulting, LLC, an Arizona-based oil and gas exploration and development company, which also procured the sale of oil, gas and mineral rights. In settling this matter, Cottrell neither ad mitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

The Arizona Corporation Commission entered an order that requires the prior managers of Radical Bunny, LLC and Horizon Partners, LLC to pay more than $189.8 million in restitution for committing securities fraud in connection with two unregistered deed of trust investment programs. In other cases, the Commission fined a Tucson man and his affiliated company for securities fraud and halted an unregistered real estate program totaling over $1.9 million.

Radical Bunny, LLC and Horizon Partners, LLC. The Commission ordered respondents Tom Hirsch, Harish Shah, Howard Walder and Berta “Bunny” Walder, the former managers of Radical Bunny LLC, and Horizon Partners, LLC, an affiliated entity, to pay $189.8 million in restitution and a total of $4.65 million in administrative penalties for defrauding investors. The Commission found that, while not registered as securities salesmen or dealers, Horizon Partners LLC, Hirsch, Shah, and the Walders raised funds from approximately 900 investors across the U.S. and in four foreign countries. Investors were told that their money would be used by Radical Bunny LLC to purchase fractionalized interests in promissory notes secured by real estate deeds of trust. The Commission found, however, that respondents Bunny pooled investor funds to make unsecured loans to Mortgages Ltd., a Phoenix-based originator of high-interest, short-term loans to real estate developers. Additionally, the Commission found that the respondents continued to raise investor funds despite being advised by lawyers that they had or were engaged in unregistered securities offerings in violation of Arizona securities laws. “The securities statutes were flagrantly, and repeatedly, violated in this case, and the Commission’s actions today demonstrated zero tolerance for this sort of behavior in Arizona,” said Chairman Bob Stump. “The message should be heard loudly and clearly: If you commit securities fraud, this Commission will hold you to account.” Radical Bunny, LLC previously agreed, without admitting or denying the Commission findings, to the entry of a consent order, which order was signed by the Commission on April 28, 2010 as Decision No. 71682.

David Shorey and Westcap Energy, Inc. The Commission ordered David Shorey of Tucson and Westcap Energy, Inc, to pay a $10,000 administrative penalty and to make rescission payments available to investors who want their money returned. The Commission found that Shorey, chairman and chief executive officer of Westcap, and Westcap were not registered to offer or sell securities in Arizona when they fraudulently raised at least $388,495 from 24 investors. The Commission found that Shorey and Westcap failed to disclose in to investors commissions of up to 70%, paid to those salespeople who sold Westcap stock. Parker Skylar and Associates, LLC The Commission issued a default order against Parker Skylar & Associates, LLC, requiring the payment of $1,942,000 in restitution and a $50,000 administrative penalty for its securities violations. The Commission found that, while not registered as a securities dealer, Parker Skylar fraudulently offered and sold membership interests to at least 17 investors. The Commission found that, among the multiple, material omissions and misrepresentations made to investors, Parker Skylar failed to tell investors that a lender claimed to have encumbered all of Parker Skylar ‘s property, failed to transfer all investor funds to the real estate development entity for which Parker Skylar was raising funds, and touted the acumen of Parker Skylar’s manager when, in fact, several of the manager’s creditors had sued him

The Arizona Corporation Commission shut down two unregistered investment programs—one involving gold mining and the other concerning bonds.  In total, the Commission ordered the respondents to pay $641,016 in restitution and $60,000 in administrative penalties.

Brian Langebach and Earth Explorations, LLC

The Commission issued a default order against Brian Langebach of Mesa and his affiliated company, Earth Explorations, LLC, requiring them to pay $322,000 in restitution and $50,000 in administrative penalties for fraudulently offering and selling an unregistered gold mining investment program.  The Commission found that Langebach and his affiliated company—while not registered as a securities salesman or dealer—offered and sold the unregistered gold mining investment program to 23 investors in Arizona, Ohio and Utah.  The Commission found that Langebach and his company misrepresented multiple facts, including claiming that he owned and operated a mine with one of the largest gold reserves in the U.S. and that he could extract gold from the rock material or aggregate material on a cost-effective or economically viable basis by placer mining.

Marvin Wilson and True North Business Ventures, LLC

The Commission ordered Marvin Wilson of Phoenix and his Scottsdale-based company, True North Business Ventures, LLC, to pay $319,016 in restitution and $10,000 in administrative penalties for fraudulently offering and selling an unregistered bond investment program.  The Commission found that, while not registered as a securities salesman or dealer, Wilson and True North issued unregistered bonds to six investors.  The Commission found that Wilson, who was the president and chief executive officer of True North, failed to disclose to investors that his company’s sales were rapidly declining and the business was on the verge of closing.  In settling this matter, Wilson neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.