The Securities and Exchange Commission today charged three South Florida men with orchestrating a $27.5 million scheme in which they stole investors' money to help fund their own lavish lifestyle.
The SEC claims the three defendants led investors to believe they were purchasing securities consisting of "pre-sold" commodities contracts with a predetermined profit. However, the supposed profits actually distributed to investors were largely taken from other investors' funds.
The SEC closed down the commodities scheme last year when it obtained an asset freeze and a court-appointed receiver over the two sister companies involved: Commodities Online LLC and Commodities Online Management LLC. The SEC's follow-up charges filed today are against the founder and former president of the company, James C. Howard III, 53, of Lauderhill, Fla.; the company's vice president Louis N. Gallo III, 43, of Parkland Fla.; and its outside counsel Michael R. Casey, 65, of Oakland Park, Fla., who later became the president.
Through these companies, Howard and Gallo stole investor funds for their own use, the SEC alleges. The agency described the scheme this way: Howard met with prospective investors at a luxury hotel in Fort Lauderdale and offered Commodities Online membership interests. He told investors that the funds raised from the offering would be used for the company's start-up costs such as salaries, marketing and advertising. However, within weeks of receiving $2 million in investor funds for the purchase of the membership units, Howard siphoned $1.45 million to another entity he controlled. Furthermore, Howard failed to disclose to prospective investors that he is a convicted felon.
The U.S. Attorney's Office for the Southern District of Florida today also filed criminal charges against Howard, Gallo and Casey.
The SEC complaint, filed in federal court in Miami, charges that Commodities Online officials coaxed investors to invest in what they claimed was profitable brokering of physical commodities via pre-sold contracts, such as the purchase and sale of large amounts of seafood or iron ore. Investors were sold participation units in unregistered private placement offerings, each supposedly tied to a commodities transaction in which Commodities Online had already secured a buyer and a seller of the commodity. These participation units would supposedly then generate predetermined profits for investors.
However the SEC claims that Commodities Online performed only a small percentage of the commodities transactions promised to investors. The majority of "profits" allocated or distributed to investors were not profits from completed commodities transactions, but instead taken from the funds of other investors. Meanwhile, Howard and Gallo were dissipating millions of dollars in investor funds to largely sham companies, the SEC says.
Howard eventually stepped down as the company's president in 2010 after he was arrested for an unrelated investment fraud. He was replaced by Casey, who then misled investors about Howard's continuing control over Commodities Online and lied about the profitability of the company's commodities contracts to investors, the SEC claims. Casey also failed to tell at least one investor that the funds raised from the purchase of membership interests had previously been misappropriated by Howard.
The SEC alleges Gallo ran an in-house "boiler room" of telephone sales agents and a network of approximately 20 regional and international sales offices. He failed to disclose to investors that he previously pled guilty to federal bank fraud and other felonies and was serving a term of supervised release while employed at Commodities Online, the agency says, and also misled investors about Howard's role at the firm.
The SEC is seeking the surrender of any ill-gotten gains by the defendants, as well as prejudgment interest and financial penalties as well as permanent injunctions against Howard, Gallo and Casey.
The SEC complaint also names several relief defendants for the purposes of recovering investor money steered to those entities in the scheme: Sutton Capital LLC, J&W Trading LLC, American Financial Solutions LLC and Minjo Corporation.