Brokers

SEC Obtains Asset Freeze for Unregistered Brokers in Alleged $410M Ponzi Scheme

The Securities and Exchange Commission has secured emergency relief from a federal court in New York to halt an ongoing alleged fraud perpetrated by an unregistered broker-dealer.

The U.S. Securities and Exchange Commission headquarters in Washington, D.C.


Al Drago/Bloomberg

The entity was selling shares (including some it did not own) in companies ahead of anticipated initial public offerings, pocketing fees, and pooling client funds, the commission’s complaint alleges. 

The numbers are staggering. The SEC alleges that StraightPath Venture Partners, an affiliated advisor firm, and four individuals raised at least $410 million from more than 2,200 clients from late 2017 through February 2022.

The commission further alleges that the defendants made a series of false statements to investors, including promises that they would not collect any upfront fees, while each client’s buy-in would be kept separate.

Instead, investor funds were freely commingled, and the defendants paid themselves more than $75 million and paid another $48 million to their network of sales agents. The SEC describes those payments as originating from “illegal, undisclosed markups on the pre-IPO shares that were, in some cases, as high as 100 percent.”

The SEC’s complaint names StraightPath Venture Partners, the fund manager, StraightPath Management, the financial advisor, and Brian Martinsen, Michael Castillero, Francine Lanaia, and Eric Lachow as defendants.

A voice message left with an automated answering service at StraightPath Venture Partners was not immediately returned. An attorney for the defendants declined to comment on the case. But the defense team with the law firm Cahill Gordon & Reindel argued forcefully—and unsuccessfully—that the court should deny the SEC’s “draconian” request for an asset freeze. 

In a court filing opposing the commission’s motion, defense attorneys said that StraightPath had been cooperating with the SEC’s ongoing investigation for three years, and “voluntarily undertook a standstill of its business in February 2022 to allay the SEC’s concerns (regardless of their lack of merit).”

They also said that StraightPath had been working with the SEC on a settlement agreement that would address the failure to acquire enough stock for established investors who had bought into one of its offerings, among other compliance issues. The named defendants are prepared to put their own money into escrow to cover that shortfall, the attorneys said, while the firm’s owner, Martinsen, had already put up $3 million to fund a stock purchase to recoup the missing shares.

“There is no actual emergency here nor any other basis for the sweeping temporary restraining order that the SEC asks for, especially before StraightPath has been afforded due process to challenge the merits of the SEC’s allegations,” defense attorneys said in their filing.

The SEC tells it differently, alleging that the defendants’ communications with clients were rife with inaccuracies about the “exorbitant” fees they were charging, and that they were commingling client funds and making “Ponzi-like payments” to earlier investors.

“In essence, Defendants pitched the investment as a way for retail investors to own potentially lucrative, difficult-to-find pre-IPO shares that could not yet be purchased on a public stock exchange,” the SEC said in its complaint.

“Contrary to these representations, however, defendants often were unable to obtain the number of pre-IPO shares they either claimed to already have or needed to back the interests they sold to investors,” the commission added. “And, rather than return the money investors paid them, defendants kept it for themselves and continued to solicit new investors.”

The SEC is also alleging violations of securities laws involving the unregistered funds led in part by a previously barred broker, along with an unregistered broker-dealer composed of unlicensed sales agents and led by another previously barred broker.

The SEC also alleges the defendants concealed from investors the fact that two individuals named as defendants—Castillero and Lanaia—were previously barred from the brokerage industry.

The commission argued that emergency relief was needed to prevent “further dissipation” of the more than $200 million in estimated cash and securities still attached to the funds.

The SEC also alleges the defendants took steps to hide documents from regulators.  “When SEC staff sought copies of the emails sent by the defendants’ sales agents during its investigation, rather than producing them, Castillero and Martinsen allegedly deleted them from their servers and texted that ‘an a***hole regulator would have a field day’ with a particular email,” the SEC said in a statement.

Write to advisor.editors@barrons.com

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