The Arizona Corporation Commission sued multiple related Arizona limited liability companies and their members and managers for allegedly violating Arizona securities laws and defrauding many investors. The defendants in the Arizona Corporation Commission vs. Samuels lawsuit are Terry L. Samuels, Elizabeth Samuels, James F. Curcio, Jill L. Curcio, 3-CG, LLC, Choice Property Group, LLC, Azin Investor Group, LLC, Azin Investor Group II, LLC, Azin Investor Group III, LLC, Azin Investor Group IV, LLC, Combined Holdings IV, LLC and Combined Holdings V, LLC.
The Securities Division (“Division”) of the ACC alleged that the defendants engaged in acts, practices, and transactions that constituted violations of the Securities Act of Arizona, A.R.S. Section 44-1801 et seq.(the ‘Securities Act”). The Division alleged that Terry L. Samuels (“Samuels”) and/or James F. Curcio (“Curcio”) directly or indirectly controlled all entities named as defendants within the meaning of A.R.S. Section 44-1999 and that Samuels and/or Curcio are each jointly and severally liable with, and to the same extent as those entities, for the entities’ violations of the anti-fraud provisions of the Securities Act. The spouses of Samuels and Curcio were named as defendants under A.R.S. Section 44-203 1 (C) solely for purposes of determining the liability of the marital communities.
The Division alleges that Samuels and Curcio and Arizona LLCs they created and owned offered and sold securities, including membership interests in the LLCs, without complying with Arizona’s Securities Act. The defendants allegedly misrepresented material facts and failed to disclose material facts when the solicited money from investors in connection with the entities’ fix and flip real estate business. The Division alleges:
Although SAMUELS formed additional, shell entities for the purpose of limiting liability, SAMUELS operated the Business’s entities as if they were a single company. For example, SAMUELS and his employees held meetings for the Business as a whole, not for each separate entity. Also, there were no written agreements between the entities.
The early investors were treated as lenders who received a promissory note and a deed of trust on an Arizona home to secure repayment of the loan. These notes were not registered as securities with the Division. The Division alleges:
“In the spring of 2007, SAMUELS and CURCIO shifted the Business’s strategy away from having investors select, invest in and receive as collateral an interest in a specific property in the form of a DOT with the investor as the beneficiary. The new strategy consisted of creating several limited liability companies (LLCs) that served as investor pools of approximately $lM each. The investors in these LLCs received LLC memberships in exchange for their investments. SAMUELS and CURCIO then pooled the funds received from these investors (collectively referred to as the “AZIN Investors”) and transferred the funds to CPG and/or 3-CG. Those entities then used these funds as determined by the Business’s managers, i.e. SAMUELS and CURCIO. The AZIN Investors did not participate in the selection of properties or management of the Business.”
“At or around the time they formed the first two AZIN Entities, SAMUELS and CURCIO began soliciting investors to purchase membership interests in the AZIN Entities (the “Membership Interests”). The Membership Interests were not registered as securities with the Commission to be offered or sold within or from Arizona.”
“SAMUELS and CURCIO solicited potential investors, in part, by conducting in person presentations to small groups of potential investors. These groups ranged in size from one
to about ten persons. SAMUELS and CURCIO held these presentations in several states including Arizona, Indiana and New York.”
“SAMUELS and CURCIO provided potential investors with detailed brochures and newsletters (each a “Prospectus” and collectively the “Prospectuses”) that described the benefits of
investing in the Business, current investment opportunities, and the positive opportunities available to Respondents in the Phoenix-area real estate market.”
“SAMUELS and CURCIO encouraged offerees and investors to re-direct their retirement accounts toward purchasing the Membership Interests. A Prospectus titled “3-CG News; Issue # 1 1-2008” provided by SAMUELS and CURCIO to existing and potential investors contained a section written by CURCIO titled “Jim’s Corner.” This section describes how investors could roll over their existing IRA/401(k) funds to purchase LLC memberships and that funds would be invested in a newly-formed LLC with the investor “listed on ‘Title’ to the properties as security” (quotation marks in original).”
“For all practical purposes, the AZIN Investors had no say in the management of the AZIN Entities. Under the terms of the Operating Agreement, the manager of each entity (CURCIO) had almost absolute control over the entity. Additionally, the AZIN Investors lacked experience in real estate investment and management. Thus, they could not have effectively managed the AZIN Entities even if they had any authority to do so.”
“In connection with the offer or sale of securities within or from Arizona, Respondents iirectly or indirectly: (i) employed a device, scheme, or artifice to defraud; (ii) made untrue statements if material fact or omitted to state material facts that were necessary in order to make the statements nade not misleading in light of the circumstances under which they were made; or (iii) engaged in transactions, practices, or courses of business that operated or would operate as a fraud or deceit upon offerees and investors.”
“SAMUELS and/or CURCIO directly or indirectly controlled respondents 3-CG, CPG, and the AZIN Entities within the meaning of A.R.S. 6 44-1999. As a result, SAMUELS and/or
CURCIO are jointly and severally liable with, and to the same extent as 3-CG, CPG and the AZIN Entities for their violations of the anti-fraud provisions of the Securities Act set forth above.”
The lesson to be learned from the case is that the offer and sale of membership interests in a limited liability company can be the offer and sale of securities that must be done in a way that satisfies federal and state securities laws. If your LLC or corporation intends to take any action that solicits money from a person or entity and says to the investor in effect “sit back on your couch and we will make a profit from your investment” then your LLC will be offering to sell a security. Before offerring or selling a membership interest in an LLC that is a security you should consult with an experienced securities law attorney and do what must be done to comply with federal securities laws and the securities laws of each state in which an investor resides.