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Who:Plaintiffs:
Securities and Exchange Commission
Defendant: Small Business Capital
Corp., Mark Feathers, Investors Prime Fund, LLC, and SBC Portfolio
Fund, LLC
What: This complaint stems from a
"Ponzi-like scheme" allegedly perpetrated by Mark
Feathers and three entities he controls: Small Business Capital
Corp. ("SB Capital"), and two mortgage investment funds
managed by SB Capital and Feathers, Investors Prime Fund, LLC
("IPF") and SBC Portfolio Fund, LLC ("SPF")
(IPF and SPF are collectively referred to in the complaint as the
"Funds"). According to the complaint, the defendants
"represented to prospective investors that the Funds would pay
'Member Returns' of at least 7.5% from profits generated by
the Funds' mortgage loan portfolios." However, the
complaint alleges that "[c]ontrary to those representations,
since at least 2010 for IPF and since 2011 for SPF, Feathers and SB
Capital have paid returns to investors in excess of net profits of
the Funds, in a Ponzi-like scheme in which the returns were
partially funded with money from new investors."
The allegations further state that the defendants
"represented to investors that the Funds would use between 96%
and 98% of offering proceeds to make or invest in mortgages, that
the Funds had conservative lending standards and for the most part
were prohibited from making loans to SB Capital, and that the Funds
were secured, performing and current." Notwithstanding these
representations, the complaint alleges that "Feathers and SB
Capital caused the Funds to transfer over $6 million to SB Capital
. . . [and] SB Capital used the money to pay its operating
expenses, including over $485,850 paid to Feathers and companies he
controls." The defendants also allegedly "caused the
Funds to record the amounts taken [by SB Capital] as assets in the
form of receivables, . . . borrowed additional money from IPF to
make interest payments on these receivables, . . . [and] were not
able to assess the collectability of these receivables because of
the uncertainty of SB Capital's cash flow." In addition,
the allegations state that "Feathers and SB Capital caused SPF
to sell eight mortgage loans to IPF at substantial premiums over
the outstanding balance of the loans, and then caused SPF to use
the premiums to pay over $570,000 in management fees to SB
Capital."
Based on these allegations, the complaint asserts four causes of
action: (i) fraud in the offer or sale of securities in violation
of the Securities Act of 1933; (ii) fraud in connection with the
purchase or sale of securities in violation of the Securities
Exchange Act of 1934; (iii) with respect to SB Capital, violation
of the broker-dealer registration provisions of the '34 Act;
and (iv) with respect to Feathers, controlling person liability
under the '34 Act. In the complaint, the plaintiff seeks the
following: (i) judgments enjoining the defendants from violating
the '33 Act and the '34 Act; (ii) a temporary restraining
order and preliminary injunction freezing the defendants'
assets, appointing a temporary and permanent receiver over SB
Capital, IPF, and SPF, prohibiting the defendants from destroying
documents, granting expedited discovery, and requiring an
accounting of each defendant; (iii) the disgorgement of ill-gotten
gains from the alleged illegal conduct; and (iv) the payment of
civil penalties by Feathers.
On June 26, 2012, United States District Judge Edward J. Davila
of the United States District Court for the Northern District of
California granted the plaintiff's Application for a Temporary
Restraining Order and Orders: (1) Freezing Assets, (2) Appointing a
Temporary Receiver, (3) Prohibiting the Destruction of Documents,
(4) Granting Expedited Discovery, and (5) Requiring Accountings. On
the same date, Judge Davila further granted the plaintiff's
Order to Show Cause Re Preliminary Injunction and Appointment of a
Permanent Receiver.
Where: United States District Court of the
Northern District of California
When: June 21, 2012
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