New Arizona Law Exempts LLC Organizers from Arizona Securities Laws

Arizona House Bill 2303 signed into law by Governor Doug Ducey contains a significant change to Arizona’s securities laws.  The new law allows the issuance of LLC membership interests to as many as ten LLC “organizers” to be exempt from Arizona securities laws.

Arizona Revised Statutes Section 44-1844.A was amended to read (new language is in bold red text):

“sections 44‑1841 and 44‑1842, section 44‑1843.02, subsections B and C and sections 44‑3321 and 44‑3325 do not apply to any of the following classes of transactions: . . .

10.  The issuance and delivery of securities of a corporation, limited liability company or limited partnership to the original incorporators, organizers or general partners, not exceeding ten in number, where the securities are not acquired by the incorporators, organizers or general partners for the purpose of sale to others and are not directly or indirectly sold to a third party within twenty-four months unless an incorporator, organizer or general partner experiences a bona fide change of financial circumstances within such time period, providing original incorporators, organizers or general partners are notified of their right pursuant to title 10 or 29 to review the financial books and records of the corporation, limited liability company or limited partnership at reasonable times.”

The term “organizer” is not defined in any Arizona statutes.  The Arizona Corporation Commission’s hard copy form Articles of Organization contains the following statements in Section 9 of the document:

“ORGANIZERS and SIGNATURE – the individual or pre-existing entity submitting this document is the Organizer – list the name of the Organizer below. If the Organizer is an individual, that individual must sign below. If the Organizer is a pre-existing entity, provide the signature of the individual acting for that entity, then print the individual’s name.”

Without any statutory reference that supports the statements, the first paragraph of the ACC’s instructions for its hard copy Articles of Organization states:

“One or more persons can form an Arizona LLC by signing and filing Articles of Organization with the Arizona Corporation Commission. . . . These persons are called “organizers.” “Person” includes individuals and entities.”

Significance of the New Law

This change in Arizona law is very important for every Arizona LLC that will issue membership interests that the securities regulators would designate as a security.  If you think an LLC must issue stock to investors before it is considered issuing a security you are wrong.

If the promoters of the LLC say to an investor give me your money for an X% membership interest in our LLC and the LLC will make a profit for you the LLC is issuing a security to the investor.  This is an example of an “investment contract,” which is a type of security under federal and state securities laws.

When securities laws apply to the issuance of membership interests in an LLC the LLC must comply with federal and applicable state securities laws or the promoters and the LLC become guarantors of the investors’ investments.  Promoters who cause an LLC to issue membership interests that are securities the issuance of which does not comply with applicable securities laws will have substantial liability to the investors and to the securities regulators.

To learn more about securities laws and how they can affect LLCs read the article my son and I wrote called “California LLCs & Securities Laws.”  Although the article is about California LLCs, many of the concepts apply to Arizona LLCs.

Bottom Line

If your to be formed Arizona LLC will be issuing membership interests to people or entities that are investing substantial amounts of money to purchase their membership interests, you must have EVERY INVESTOR (without exception, but no more than ten) sign the Articles of Organization as an organizer so the LLC can claim the exemptions provided from Arizona securities laws by Section 44-1844.A.10.

If you need your LLC to be able to use the ten exemptions provided in Arizona Revised Statutes Section 44-1844.A.10 hire us to form your LLC.  Our Articles of Organization for LLCs that want to take advantage of Section Section 44-1844.A.10 contain special Section 44-1844.A.10 language.

ACC Sanctions Phoenix Man for Securities Law Violations

The following is the text of a March 11, 2014, press release from the Arizona Corporation Commission:

The Arizona Corporation Commission today sanctioned a Phoenix business man and his affiliated companies for his securities violations in connection with two investment programs , one involving a failed home building venture and the other involving a marketing training website.

The Commission ordered Todd R. Nuttall of Phoenix and his affiliated companies, Todd Robert Homes, Inc., Magdalena Homes , LLC and Rotall Marketing Group, LLC to pay $225,100 in restitution and a $20,000 administrative penalty for committing securities fraud in connection with a failed home building venture and for issuing unregistered securities to finance start – up costs of a marketing training website.

Regarding the home building venture, the Commission found that, while not registered to offer or sell securities in Arizona, Nuttall and his affiliated companies, Todd Robert Homes and Magdalena Homes fraudulently sold unregistered promissory notes to eight investors through a series of workshops held in Arizona and California. The Commission found that Nuttall and his companies issued promissory notes bearing interest of 20 percent over two years . The Commission found that Nuttall and his companies represented a second general partner of Magdalena Homes as an experienced property developer of several multimillion – dollar real estate projects when, in fact, the sole general partner had never created a residential development on his own.

Regarding the marketing training website, the Commission found that, while doing business as Direct Rev Millionaire, Nuttall and Rotall Marketing Group, LLC sold unregistered promissory notes to 11 Arizona investors and other out – of – state investors . The Commission found that Nuttall and his companies promised investors annual returns ranging from 20 to 900 percent.

In settling this matter, Nuttall neither admitted nor denied the Commission’s findings , but agreed to the entry of the consent order. For more details about this case, view the full text of the Commission’s order S-20901A-13-0432. The Commission’s final order against the named respondents will be posted online as soon as it is signed by all of the Commissioners.

Arizona Corporation Commission Takes Action Against Man Who Sold Fake Shares of Company Stock

The following is the text of a news release dated January 14, 2014, by the Arizona Corporation Commission:

The Arizona Corporation Commission today sanctioned a former securities salesman who committed securities fraud by offering and selling fake stock shares to investor s. In a separate case, the Commission denied an investment adviser representative license to a former securities salesman who provided incomplete, inaccurate and misleading information on his application.

James F. Liebes

The Commission ordered former securities salesman-dealer James F. Liebes of Paradise Valley and his affiliated company, Lanesborough Financial Group, LLC, to pay $684,725 in restitution and a $75,000 administrative penalty for committing securities fraud. The Commission found that Liebes and Lanesborough Financial Group’s representation of owning restricted shares in a publicly traded company and options to purchase shares was false as the company had no records indicating Liebes owned the common stock that he had agreed to sell. The Commission found that Liebes and Lanesborough Financial Group were not registered to offer or sell securities in Arizona when they entered into agreements to sell investor s the company shares. Further, the Commission found that Liebes and Lanesborough Financial Group failed to disclose to investors that the Commission’s Securities Division had already filed a case against them for offering and selling securities without being registered. For more details about this case, view the full text of the Commission’s order S-20876A-13-0407 .

Jon Joseph Bauman

In a separate matter, the Commission denied an investment adviser representative license for Phoenix resident and former securities salesman, Jon Joseph Bauman. The Commission denied the license since Bauman’s application contained incomplete, inaccurate and misleading information. Additionally, the Commission found that Bauman had been barred from association with any member in any capacity of the Financial Industry Regulatory Authority (FINRA) for failing to provide information requested by FINRA. For more details about this case, view the full text of the Commission’s order S-20895A-13-0377 . The Commission’s final order against the named respondents will be posted online as soon as it is signed by all of the Commissioners.

 

Arizona Corporation Commission Orders Crackdown on Securities Sales by Infomercial Company

The following is the text of a news release dated September 10, 2013, by the Arizona Corporation Commission:

The Arizona Corporation Commission ordered Stephen Christopher Donovan of Phoenix and his infomercial company, TV Products, LLC, to pay $153,000 in restitution and a $20,000 administrative penalty for committing securities fraud in connection with sales of securities in the company. The Commission found that while not registered to offer or sell securities in Arizona, Donovan, TV Products, LLC and another company employee conducted a nationwide cold – calling campaign to solicit prospective individuals for investment funds. The Commission found that through a private placement memorandum, Donovan and his comp any made material omissions and misrepresentations to 13 individuals located across the U.S. who purchased membership interests in TV Products, LLC.

Specifically, the Commission found that Donovan and TV Products, LLC misled potential investors by promising that the offering had not been disapproved by any state securities commission and was not in violation of any order of any such governmental entity or state statute, rule or regulation, when, in fact, legal action was taken against them by the state of Pennsylvania’s securities regulator.

To date, Donovan and his company have not made any distributions, refunded investment principal or otherwise transferred any money to investors. In settling this matter, Donovan and his affiliated company neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order. The Commission’s final order against the named respondents will be posted online as soon as it is signed by all of the Commissioners.

Arizona Corporation Commission Takes Action Against Gold Processing Venture

The following is the text of a news release dated August 13, 2013, by the Arizona Corporation Commission:

“The Arizona Corporation Commission today sanctioned the promoters of a private placement investment in a gold processing operation that defrauded investors out of more than $1.14 million. The Commission cautions investors about promoters who offer and sell risky private placement offerings that are not always suitable for the typical investor.

The Commission ordered Charles L. Robertson of Texas and his two affiliated companies —Arizona Gold Processing, LLC and AZGO, LLC—to pay $1,142,275 in restitution and a $100,000 administrative penalty for committing securities fraud in connection with their private placement offering. The Commission found that,through a private placement memorandum, Robertson and his two affiliated companies made material omissions and multiple misrepresentations to 63 investors who purchased membership interests in Arizona Gold Processing and AZGO.

The Commission found that Robertson, who was one of the principals of Arizona Gold Processing and one of the managing members of AZGO, either contacted or directed others to contact potential investors through nationwide telephone calls and emails. The Commission found that Robertson claimed his companies’ high-tech processing equipment could extract gold and silver ore at microscopic levels beyond what other equipment could extract. The Commission found, however, that there would be no increase in the amount of precious metals extracted with the equipment touted by Robertson and his companies, assuming the assays were performed by reputable labs.  Further, the Commission found that Robertson and his companies failed to inform potential investors about the temporary cease and desist order issued by the Commission’s Securities Division requiring the respondents to stop committing securities fraud in connection with their private placement offering.

In settling this matter, Robertson and his affiliated companies neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order. The Commission’s final order against the named respondents will be posted online as soon as it is signed by all of the Commissioners. To access the full text of the Commission’s order S-20846A-12-0135, please check the website in a few days: http://www.azcc.gov/divisions/securities/enforcement/enforce.”

Arizona Corporation Commission Takes Action Against Sellers of Unregistered Securities

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 .

Arizona Corporation Commission Enforcement Actions

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

 

Arizona Corporation Commision Enforcement Actions

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.

ACC Goes After Radical Bunny Managers

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

Arizona Corporation Commission Shuts Down LLCs for Violating Securities Laws

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.

Arizona Corporation Commission Nails Real Estate LLCs Selling Unregistered Securities

On April 12, 2012, the Arizona Corporation Commission announced that it sanctioned multiple individuals and their affiliated companies whose unregistered investment programs—most of which involved real estate—caused investors to lose over $8.57 million. The Commissionordered that amount in restitution and a total of $377,500 in administrative penalties.

First, the Commission ordered Kent M. Axtell of Phoenixand his affiliated companies to pay $1,142,747 in restitution and a $75,000 administrative penalty for committing securities fraud in connection with an unregistered real estate investment program. The Commission found that,while doing business as Sherlock Homes and Finding Homes for Investors, and as the sole member of Executive Real Estate Solutions, LLC, Axtell sought investor funds to buy and sell real estate in Arizona. The Commission found that, while not registered as a salesman or securities dealer in Arizona,Axtell and his companies pooled the money of at least 26 investors and issuedpromissory notes, some of which were collateralized by deeds of trust. Further, the Commission found that, through promotional materials, Axtell touted his extensive real estate experience, representing to investors their funds would be secured with a collateral assignment in a sizable life insurance policy owned by Axtell. The Commission found that, in at least one instance, Axtell failed to record a deed of trust to secure the amount invested and used investor funds to repay another investor. In settling this matter, Axtell neither admitted nor denied the Commission’s findings, but agreed to the entry of the consent order.

In a separate case, the Commission ordered James F. Curcio of Sun Lakes to pay over $4.94 million inrestitution and a $40,000 administrative penalty for fraudulently offering and selling unregistered membership interests in limited liability companies that were in the house-flipping business. The Commission found that, while not registered to offer and sell securities in Arizona, Curcio and his affiliated companies—3CG, LLC and Choice Property Group, LLC — sold the unregistered investments to over 50 investors, promising them 15% annual returns. The Commission found that Curcio informed some of the investors they could rollover their IRA funds to purchase the unregistered LLC membership interests. The Commission found that Curcio promised investors their money would be used to purchase real estate, but Curcio and his affiliated companies actually used the money to service loans from institutional lenders who were creditors of the house-flipping business. In settling this matter, Curcio agreed to the entry of the consent order and admitted to the Commission’s findings only for the purposes of the administrative proceeding.

In the next case, the Commission issued a default order against former Scottsdale resident Arthur Fried who bilked more than $1.05 million from 16 investors. The Commission ordered Fried to pay a $150,000 administrative penalty for fraudulently offering and selling the unregistered real estate investment program. The Commission found that Fried managed four companies—Comprehensive Cash Flow Funding, Inc., WeBuyHomesinAZ, LLC, My Bargain Gift Bag, LLC and Loan Mod Shrink, LLC—and, while not registered to offer or sell securities, raised money from investors to fund the purchase, renovation and sale of real estate properties in Arizona. The Commission found that, through various sources—websites, real estate investment clubs, and advertisements in newspapers, including the Jewish News of Greater Phoenix—investors were promised a guaranteed, double-digit return with an investment secured by a first-lien position on real estate. The Commission found, however, that Fried, in some instances, did not even hold title to the real estate, and as a result, issued fictitious deeds of trusts to some investors. The Commission entered a separate default order against Fried’s business entities in March 2012.

In another case, the Commission ordered Robert Coleman Stephens of Cave Creek to pay $1,366,897 inrestitution and a $100,000 administrative penalty for fraudulently offering and selling an unregistered real estate investment program. The Commission found that, while not registered to offer or sell securities in Arizona, Stephens raised money from investors to fund a large, real estate and commercial resort development involving condominium timeshares with access to a golf course, indoor mall as well as air, car and boat racing. The Commission found that, through free seminars in the Scottsdale area, Stephens misrepresented to investors that he was a successful real estate developer when, in fact, his prior businesses had failed, resulting in multiple judgments against Stephens and his companies. Additionally, the Commission found that Stephens failed to inform investors that he would use some of their money to pay for questionable expenses, including personal vehicle repairs. Further, the Commission found that Stephens failed to secure on behalf of the investors liens against his jet aircraft, which Stephens pledged as collateral. In settling this matter, Stephens neither admitted nor deniedthe Commission’s findings, but agreed to the entry of the consent order.

Finally, the Commissionordered respondent G4i Capital Partners, Inc., a Delawarecompany, to pay a $2,500 administrative penalty for offering and selling anunregistered securities offering in Arizona. The Commission found that, while not registered as a securities dealer, G4iCapital Partners, through two websites, made a general solicitation forinvestor money to fund its government contracting and consulting operations,offering potential investors a secure, high-yield return on their investment. The Commission found that G4i Capital Partners sold the unregistered investmentprogram to a least one investor who was subsequently repaid withinterest. In settling this matter, G4i Capital Partners neither admittednor denied the Commission’s findings, but agreed to the entry of the consent order.

More caution for investors:

Evenwhen selling a legitimate product, some promoters do not recognize theinvestment program they have created is a security. Determining whetheran alternative investment program is a security is not always easy to determineand depends upon the unique facts and circumstances of the transaction and noton what a promoter calls the investment product. Even when investing with someone they know, investors shouldverify the registration of sellers and investment opportunities and investigatedisciplinary histories by contacting the Arizona Corporation Commission’sSecurities Division at 602-542-0662 or toll free in Arizona at 1-866-VERIFY-9. TheDivision’s investor education web site also has helpful information at www.azinvestor.gov.

Arizona Corporation Commission Sues LLCs & their Members and Managers for Securities Fraud

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.

Arizona Corporation Commission vs. Joseph Consenza & U.S. Media Team, LLC

The Arizona Corporation Commission issued the following press release on August 11, 2011:

” the Commission ordered Joseph Consenza of Phoenix to pay $205,000 in restitution and a $20,000 administrative penalty for defrauding seven investors in connection with the offer and sale of unregistered securities.  The Commission found that, while not registered to offer and sell securities in Arizona, Consenza, who was the sole manager of Scottsdale-based U.S. Media Team, LLC, sold a promissory note to one investor and misused those funds to pay for personal expenses and to make payments to other individuals.  Additionally, the Commission found that, while president and chief executive officer of Nevada-based Cell Wireless, Inc., Consenza offered and sold his company’s stock to six investors—five of whom were friends and family of Consenza’s initial investor—and represented that investor money would fund the operations and acquisitions of Cell Wireless, Inc. Further, the Commission found that, while promising sizable monetary returns, Consenza represented the risk level of the stock investment as low yet failed to inform investors that U.S. Media Team, LLC had defaulted on a prior merger agreement with Cell Wireless, Inc.  In settling this matter, Consenza neither admitted nor denied the Commission findings, but agreed to the entry of the consent order. “

2016-11-16T08:23:53-07:00August 12th, 2011|LLCs & Securities Laws|0 Comments

Arizona Corporation Commission Orders Restitution for Real Estate Investors Defrauded by a Scottsdale Businessman

ARIZONA CORPORATION COMMISSION
FOR IMMEDIATE RELEASE:  December 6, 2010
CONTACT: Rebecca Wilder (602) 542-0844

Commission Orders Restitution for Real Estate Investors  Defrauded by a Scottsdale Businessman
Sanctions Others for Securities Fraud

PHOENIX, AZ—The Arizona Corporation Commission today issued a default order against a Scottsdale businessman and his company for defrauding investors in a million-dollar, real estate investment program.  In other cases, the Commission ordered two individuals and their affiliated companies to pay restitution and penalties for defrauding investors in an investment program involving music concerts.  In total, the Commission ordered over $3.44 million in restitution for investors and $85,000 in administrative penalties.

The Commission issued a default order against Nathan Nordstrom of Scottsdale and his affiliated company, Norstreet Portfolio, LLC, requiring them to pay $1,076,000 in restitution and a $50,000 administrative penalty for defrauding six investors in a real estate investment program.  The Commission found that, while not registered to offer or sell securities in Arizona, Nordstrom and his company offered and sold limited liability company memberships, telling investors that their money would fund the completion of two residential developments in Hawaii and Washington, D.C.  The Commission found that Nordstrom told investors their funds would be secured by the real estate when, in fact, Nordstrom lacked free-and-clear title to the properties and was unable to execute a deed of trust on behalf of the investors.  Additionally, the Commission found that Nordstrom failed to disclose to the investors that some of their money would be used for outstanding, mortgage interest payments owed on the real estate properties.

In a separate case, the Commission ordered Bobby G. Goodson of Chandler to pay $2,298,236 in restitution and a $25,000 administrative penalty for committing securities fraud.  The Commission found that Goodson, along with Malika S. Smith, formed CAA General Partnership and opened bank accounts solely for the purpose of handling banking transactions related to the so-called concert production activity of Goodson’s former son-in-law, Miko D. Wady.  The Commission found that Goodson and CAA not only received $2,298,236 of investor funds and transferred nearly $1 million dollars to Wady, but also failed to disclose that CAA was not the internationally known talent agency, Creative Artists Agency.  In April 2010, the Commission issued a default order against Wady for masterminding a multimillion-dollar investment scam related to the production of music concerts.  In November 2010, Smith and CAA were ordered to pay restitution and penalties in connection with their violations of the Arizona Securities Act.  In settling this matter, Goodson admitted to the Commission’s findings and agreed to the entry of the consent order.

In a related case, the Commission ordered Thurston Smith of Chandler and his affiliated company, B.Y.B. Entertainment, LLC, to pay $74,000 in restitution and a $10,000 administrative penalty for defrauding investors.  The Commission found that, as the manager of B.Y.B. Entertainment, LLC and the sole signer of its bank accounts, Smith handled banking transactions related to what he believed was the concert production activity of Miko D. Wady.  The Commission found that instead of funding music concerts, Smith transferred investor money received by B.Y.B. Entertainment, LLC to either Wady or to banks accounts controlled by Wady.  In settling this matter, Smith admitted to the Commission’s findings and agreed to the entry of the consent order.

More caution for investors:

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 web site also has helpful information at www.azinvestor.gov.

2016-11-16T08:23:56-07:00December 7th, 2010|Lawsuits, LLCs & Securities Laws|0 Comments
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