Joseph Andrew Paul,
John D. Ellis, Jr.,
James S. Quay, and
Donald H. Ellison, the defendants.
Being charged by:
Securities and Exchange Commission (“SEC”)
What: Paul and Ellis are alleged to have created a fraudulent scheme to raise money from investors through their jointly owned investment advisory firm, PEIA. They recruited Quay and Ellison to help them solicit investors through Quay and Ellison’s jointly owned financial planning company, Aptus Planning LLC.
The defendants are alleged to have raised more than $3.9 million from these investors through fabricated representations of their investment performance, strategies, and the amount of investor assets they had.
The defendants are accused by the SEC of having violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934, Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisors Act of 1940. Some individual defendants have been accused of violating additional Securities laws.
Securities laws prohibit fraudulent conduct both criminally and civilly, but the SEC is responsible only for civil enforcement and administrative actions. SEC penalties range from obtaining court orders stopping individuals from committing further violations, requiring funds obtained illegally be turned over and other civil penalties.
Here, the SEC is requiring enjoinment of further violations and a large variety of monetary penalties, including penalties in the amount of funds that were illegally obtained.
Where: The violations allegedly happened within the Eastern District of Pennsylvania, where Paul and Ellis reside. PEIA was formed in Pennsylvania, and Aptus Planning was formed in Florida, where Ellison is from. Quay is from Georgia.
When: The crimes allegedly happened between about 2010 through at least December 2012. The defendants were charged on April 4, 2016.
Why: The defendants initially invested some of the funds they had raised, but soon began to use these funds on legal bills, employee salaries and personal expenses. On at least one occasion, funds were diverted to Quay in the amount of $385,900, which he used for his own personal trading.
Investors lost more than $1.9 million.
How: At the time he started marketing PEIA, Quay was a disbarred attorney, who had been sued in the past for a separate securities fraud. Quay and Ellison misrepresented Quay as an attorney named “Stephen Jameson,” using this fictitious name to raise investor funds. He was also criminally charged and convicted of criminal contempt for providing false testimony in connection with his failure to pay the money he owed from this previous securities fraud.
Paul and Ellis claimed PEIA managed $164 million in client assets and generated annual returns of 8.5% to more than 56%, but documents proved they never managed more than $4 million, and their actual returns were much less.
When PEIA registered with the SEC as an investment advisor, it misrepresented the amount of funds it would have under management and falsely stated the amount of funds they had under management on various other forms, which were grossly overstated.
Paul and Ellis created a variety of marketing materials to solicit investors such as a PEIA prospectus, marketing brochures, and a website, which contained misrepresentations about PEIA’s investment strategy, assets under management and investment performance.
For example, they had charts depicting fabricated annual returns for PEIA, claimed Ellis and Paul had extensive experience generating these high returns, and that PEIA had between $150 million to $164 million in “assets under advisement,” when Paul and Ellis really never managed more than $4 million.
These marketing materials were distributed to numerous registered advisors, broker-dealers and financial planning firms.
They obtained over $2.5 million from at least 1 company through these misrepresentations. A lawsuit filed by this company resulted in a default judgment against PEIA, Paul and Ellis in the amount of $761,426 in 2012.
Paul and Ellis created a 4-page marketing brochure for Aptus Planning, grossly overstating annual returns and misrepresenting how they were using investor funds. Quay and Ellison are alleged not to have done any research on these claims before distributing the materials.
Quay and Ellison hosted free dinner seminars in Florida, where attendees were mostly senior citizens targeted through mass mailings.
During these seminars, Quay referred to himself as attorney “Stephen Jameson” in the presence of the defendants. Quay and Ellison were able to solicit 14 investors who invested over $1 million collectively.
The defendants transferred about two-thirds the investor funds to a PEIA brokerage account, investing the funds in various securities, but the remaining 1/3 was used in ATM withdrawals, debit card purchases, and wire transfers out of the account.
SEC Charges Four in Fraudulent “Free Dinner” SchemeMay 9, 2016