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An investment company and its CEO agreed Thursday to pay more than $4 million to settle a New Jersey federal suit alleging they took in new money to pay off earlier investors in a Ponzi-like scheme and cut the owner an outsize take of the capital raised, the U.S. Securities and Exchange Commission announced.

CEO To Pay $4M In Ponzi-Like Life Settlement Scheme

Firm, CEO To Pay $4M In Ponzi-Like Life Settlement Scheme

By William Gorta of Law360.com

An investment company and its CEO agreed Thursday to pay more than $4 million to settle a New Jersey federal suit alleging they took in new money to pay off earlier investors in a Ponzi-like scheme and cut the owner an outsize take of the capital raised, the U.S. Securities and Exchange Commission announced.

Between 2013 and 2015, William Schantz III and his company Verto Capital Management LLC allegedly raised $12.5 million peddling promissory notes to about 80 investors to fund the purchase and sale of life settlements — life insurance policies sold by their owners for greater than the surrender value but less than the death benefit. But, the SEC alleged, instead of using the money for general working capital purposes as promised, Schantz and the unprofitable Verto used some of the money to pay off earlier investors and awarded Schantz a distribution of $3.4 million — more than 25 percent of the money taken in.

The SEC also alleged in the complaint that Schantz and Verto made misrepresentation in marketing and offering materials for the promissory notes “regarding purported collateral backing the notes, the profitability of Schantz’s companies, Verto’s use of investor proceeds, and Verto’s internal financial reporting.”

Schantz and Verto agreed to disgorge $3.4 million and pay $125,000 in interest along with a $600,000 penalty, without admitting or denying the allegations, the SEC said. To secure the payment, Schantz and Verto provided the commission with collateral assignment of two life insurance policies they hold and granted the SEC mortgages on two of Schantz’s properties in Moorestown, New Jersey.

“As alleged in our complaint, investors were told that the life settlement-backed notes were short-term investments with an unlikely event of default. Schantz and Verto misled investors about the company’s past performance and the value of the collateral, and they diverted significant investor funds for Schantz’s personal use,” Andrew M. Calamari, director of the SEC’s New York Regional Office, said in a statement.

According to the complaint, Schantz was sanctioned and suspended in 2002 by the National Association of Securities Dealers for the sale of unregistered nine-month notes similar to those in the instant case without informing the NASD-member firm he was associated with. He disgorged $7,000 in commissions in that case in 2006.

Counsel for Schantz and Verto did not respond Thursday to a call seeking comment.

The government is represented by Andrew M. Calamari, Lara S. Mehraban, Steven G. Rawlings, Jack Kaufman, Jennifer K. Vakiener and Vincent T. Hull of the SEC and Assistant U.S. Attorney Catherine R. Murphy.

Schantz and Verto are represented by David Laigaie of Eckert Seamans Cherin & Mellott LLC.

The case is U.S. Securities and Exchange Commission v. Schantz et al., case number 1:17-cv-03115, in the U.S. District Court for the District of New Jersey.

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The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.