Legal Industry News
September 13, 2012
External Counsel Charged with Other Top Officers of Online Seller of Commodities Contracts in $27.5 Million Investment Fraud
The Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of Florida have charged an attorney and at least two others living in South Florida for their roles in a $27.5 million investment scheme that led investors to believe they were purchasing securities consisting of “pre-sold” commodities contracts with a pre-determined profit. However, the supposed profits actually distributed to investors were largely taken from other investors’ funds.
The SEC halted the scheme last year when it obtained an asset freeze and a court-appointed receiver over the companies involved: Commodities Online LLC and Commodities Online Management LLC.
The SEC’s follow-up charges are against the founder and former president of the company, James C. Howard III, as well as the company’s vice president Louis N. Gallo III and outside counsel Michael R. Casey, who later became the president.
Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and Michael B. Steinbach, Acting Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, earlier announced the unsealing of a twenty-two count indictment charging James C. Howard, 53, of Parkland, FL, Patricia S. Saa, 57, of Naples, FL, Gallo, III, 43, of Parkland, FL, Casey, 65, of Oakland Park, FL, and Rita E. Balbirer 69, of Pompano Beach, FL. The charges include conspiracy to commit mail and wire fraud, in violation of Title 18, United States Code, Section 1349, mail and wire fraud in violation of Title 18, United States Code, Sections 1341 and 1343, conspiracy to commit money laundering, in violation of Title 18, United States Code, Section 1956(h), and money laundering, in violation of Title 18, United States Code, Section 1957.
Howard, Saa, and Gallo are charged with both fraud and money laundering offenses. Casey is charged with fraud offenses. Balbirer is charged with money laundering offenses. Each fraud count carries a maximum sentence of 20 years’ imprisonment.
According to the indictment, Howard, Saa, Gallo, Casey and others conspired to defraud individuals who invested in Commodities Online, LLC (“COL”). From approximately January 2010 through April 2011, these defendants used material false and fraudulent representations and material omissions to obtain over $20 million from over 700 investors.
According to the indictment, Howard, Saa, Gallo, Casey and other co-conspirators used COL to offer potential investors the supposed opportunity to share in the profits of pre-arranged contracts to buy and sell commodities such as fish, iron ore and sugar. Among other things, COL had a website and marketing materials, which boasted of a track record of paying investors returns on investment ranging from approximately 3% within 15 days to 33% within 105 days.
The indictment alleges that these representations were false. COL did not have profitable contracts. Also, Howard, Saa, Gallo and others misappropriated the investors’ funds for other purposes.
According to the SEC’s complaint filed in federal court in Miami, Commodities Online offered investors the chance to participate in its purportedly profitable brokering of physical commodities via pre-sold contracts - for example, 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 purportedly generate predetermined profits for investors.
The SEC alleges that in reality, Commodities Online performed only a limited percentage of the commodities transactions that were 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. Through these companies, Howard and Gallo stole investor funds for their own use. For example, 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’s a convicted felon.
According to the SEC’s complaint, Howard stepped down as the company’s president in 2010 after he was arrested for an unrelated investment fraud. He was replaced by Casey, who misled investors about Howard’s continuing control over Commodities Online while also misrepresenting the profitability, structure, and existence of the purported commodities contracts to investors. 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 that 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. Gallo also misled investors about Howard’s role at Commodities Online.
The SEC’s complaint charges Howard, Gallo and Casey with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. They’re also charged with aiding and abetting violations by Commodities Online and Commodities Online Management of Section 10(b) of the Exchange Act and Rule 10b-5. Howard is further charged with a violation of Section 20(a) of the Exchange Act as a control person of Commodities Online, and the complaint alleges he is therefore jointly and severally liable for Commodities Online’s violations of Section 10(b) of the Exchange Act and Rules 10b-5 thereunder. The SEC is seeking disgorgement of ill-gotten gains plus pre-judgment interest, financial penalties, and permanent injunctions against Howard, Gallo, and Casey. The SEC’s 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.
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