Investment Fraud – Friends and Family Are Not Immune
When a stranger defrauds you of your hard-earned money, you learn an expensive lesson. But when the investment fraud is perpetrated by a supposed friend or family member, the crime touches far more than your pocketbook. Texas, generally regarded as a friendly state where handshake deals do still exist, was the location of Nanban Ventures and other related companies, along with Messrs. Kirishnan, Shanmugam and Gounder that preyed on their friends and family in the Indian community, mostly in the greater Dallas/Fort Worth market. Although even Texas wasn’t large enough for their greed, as some of their victims were not only in the United States, but also located internationally. One caveat—while the SEC has received a permanent injunction against Defendants, they have not been found guilty in a court of law.
The Money
In the course of just over two years, Defendants raised almost $130 million from 360 investors, “including approximately $89.8 million for five ‘Nanban’ private investment funds that Nanban Ventures offered to retail investors, and $39.9 million from selling high-yield promissory notes to so-called ‘friends and family’ investors through GSM, Himalayan, and Centum (‘Founder Companies’).” SEC Complaint
Despite having “little or no experience or training in the investment industry,” the founders started the scam by claiming to have a five-part strategy that never missed. They may have relied on their information technology resumes to convince others their technology was superior and could beat the S&P every time. Of course, the technology did not deliver as promised.
The statements regarding returns when using their software are remarkable. In one YouTube video, Defendants claimed that investors would generate 18-24% returns just on utilizing the first two levels of their program. But using the other three levels, would generate more than 100 percent. “Since 2001, my worst year has been 21 percent up. . . .Just to tell you, in private fund we are able to give 58 percent return every year.”
Hedge Funds
Like many others, Defendants greed kept growing. In order to gain access to bigger investors, the Defendants launched a foundation that offered the first two parts of their financial strategy for free to friends and family to help them achieve financial freedom. However, this list of potential investors became nothing more than sales leads for the Defendants hedge funds. In under two years, the Founders raised $116 million from 395 investors for their four hedge funds, all of which underperformed the S&P 500 Index.
When the performance was so poor that many investors requested their money back, Defendants closed two hedge funds, returned investors’ money and gave them small fake profits. This appears to be where the Ponzi Scheme took hold, as much of the money returned was from other investors. The Ponzi Scheme was perpetuated by “. . .raising funds, overstating profitability of the investments, paying investors and themselves millions of dollars in fake profits using, in substantial part, other investor funds (‘Ponzi payments’).”
Venture Capital Funds
Undeterred, the Defendants replaced the hedge funds by starting five Venture Capital Funds, raising that $89.8 million from over 350 investors in just over two years mentioned earlier. This allowed each of the three individual defendants to earn a two percent management fee based on total assets under management. In addition, the Defendants established a general partnership management company for four of the VC Funds, charging a share of profits exceeding 12-15%.
Investment Notes
Defendants had one final trick to defraud investors, high-yield promissory notes. For the investors who wanted a more traditional investment other than VC Funds or hedge funds, the Defendants obliged. Over two years, Defendants raised almost $40 million from ten note investors promising at least 18% interest payments for five years. At times, Defendants promised 20-25% returns and even 20-40% returns to one investor.
The Nanban investment fraud provides a good example of classic situations that investors should avoid.
- “No registration statements have ever been filed with the SEC or are in effect as to any offerings of the limited-partnership units in the VC Funds or the Investment Notes.”
- Investors were offered the inside track. The story of we’re only offering this opportunity to family and friends is often at the heart of financial investment fraud.
- Unrealistic promises. Throughout all the products, Defendants boasted of returns that are rarely seen, and sound too good to be true. People trust their friends and family. They know people already invested, so they feel safe joining the party.
- Claiming a patented product when no patent exists. Defendants claimed Nanban was powered by GK Strategies. Supposedly the technology was patented and unique. A visit to the U.S. Patent and Trademark website would reveal no such patents existed.
Dallas Investment Fraud Attorney Mark Alexander
Unfortunately, avoiding Ponzi schemes and financial investment fraud remains difficult. New schemes crop up in multiple industries every month. Do your research before investing, even if you are dealing with friends or family. We hope all your real estate, commodities, foreign exchange, crypto-currency and oil and gas investments are safe and profitable. But if you find yourself searching for an experienced investment fraud attorney, oil and gas litigator or a commercial litigation lawyer, Mark A. Alexander, P.C. is here to help.