Failing Calif. Leasing Co. An $80M Ponzi Scheme, SEC Says
Introduction by attorney Scott Starr:
Below is a reprint from Law 360 detailing yet another huge Ponzi scheme, this one occurring in California. You will see from the below article that is alleged by the Securities and Exchange Commission that Ralph Iannelli, the president and founder of Essex Capital Corp., raised approximately 80 million dollars from investors in return for promissory notes, while falsely portraying his business as successful. The Essex Capital Corp. business purportedly was engaged in leasing assets to businesses, and then reporting back to their investors that they were very successful, instead of accurately reporting that the owners were spending the investors’ monies.
Starr Austen & Miller was contacted by a large number of investors in Northern Ohio on a very similar Ponzi scheme a few years ago. The Northern Ohio Ponzi scheme involved convicted fraudster Tim Durham who owned Fair Financial Corporation, who also claimed to be raising capital to buy equipment which was leased to various businesses. The Fair Financial Ponzi scheme caused losses exceeding 400 million dollars, and fraudster Durham and several of his partners were sentenced to long prison terms. Unfortunately, as is so often the case, the poor victims were left substantially holding the bag.
Starr Austen & Miller has worked on dozens of Ponzi scheme cases down through the years. Most Ponzi schemes involve the fraudster selling high interest “guaranteed” promissory notes to innocent investors, promising high returns, together with a “secure” or “safe” protection of the investor’s principal. In reality, the Ponzi scheme eventually collapses and the investors are left with nothing. Included within this website are several articles we have authored in the past to help educate investors on the common traits and dangers of Ponzi schemes. If you or a loved one believe you might be the victim of a Ponzi scheme, or if you or a loved one have either loaned your money or invested in “promissory notes”, you should check your circumstances against those described elsewhere in our website to determine if you may possibly be a victim of a Ponzi scheme. Please feel free to contact our firm for a free no obligation consultation if you believe you might possibly be a victim of securities fraud.
Failing Calif. Leasing Co. An $80M Ponzi Scheme, SEC Says
By Dunstan Prial of Law360.com
The U.S. Securities and Exchange Commission on Tuesday accused the owner of a California-based equipment leasing company of bilking $80 million from investors through a Ponzi scheme that misrepresented the company’s financial health and funneled millions in discretionary bonuses to the owner’s personal accounts.
In a 23-page complaint filed in federal court in Los Angeles, the SEC said Ralph T. Iannelli, the president and founder of Essex Capital Corp., raised tens of millions of dollars from investors in return for promissory notes, while falsely portraying his business as successful.
But rather than using revenues derived from the company’s operations to make regularly scheduled payments to existing investors, the SEC said Iannelli used funds obtained from new investors.
“To maintain Essex’s veneer of financial success, stay current on its obligations to its promissory note investors, and continue to raise new investor funds, defendants … resorted to a pattern and practice of making Ponzi-like payments,” the complaint states.
Messages left for Iannelli and with Essex Capital weren’t immediately returned Wednesday. Counsel information for Iannelli and the company couldn’t be determined.
Specifically, the SEC alleged that between 2014 and 2017, Iannelli and Santa Barbara, Calif.-based Essex convinced at least two investment advisers to invest millions of dollars of their high-net-worth clients’ money in Essex’s equipment leasing business, without revealing that the business was failing.
In one instance, according to the SEC, Iannelli allegedly gave an investment adviser phony financial statements that overstated Essex’s assets by more than $20 million.
In fact, in the years the scam was allegedly taking place, operational revenues from Essex’s leasing business comprised “only a small fraction” of its incoming cash flows, the SEC said. The majority of Essex’s funds, according to the agency, were derived instead from promissory note investors and bank loans.
The complaint states that between 2014 and 2016 about $107 million of Essex’s revenue came from investors and banks, while just $34.4 million came from equipment leasing. During the same two-year span, Essex used about $65 million of its revenues to pay back investors and banks, while spending $39.4 million of its revenues to purchase equipment, according to the SEC.
“Nevertheless, Essex has taken several steps to create the illusion that its business model works, allowing it to be exceedingly successful at raising money from investors and bank lenders despite being unprofitable since at least 2014,” according to the complaint.
Meanwhile, as Essex’s business collapsed, Iannelli and the company “resorted to frequent Ponzi-like payments, paying interest and principal to existing Essex investors with funds raised from newer investors,” the SEC said.
Rather than notifying his investors of Essex’s losses, the SEC said Iannelli “protected his own financial interests” by siphoning millions of dollars out of the company in the form of discretionary bonuses and giving himself interest-free loans with no maturity date. According to the SEC, Iannelli personally owes the company over $6.4 million.
The SEC complaint seeks disgorgement by Iannelli of his allegedly ill-gotten profits. In addition, the SEC asked for an asset freeze against Iannelli and the company and that a receiver be appointed to oversee those assets.
Iannelli founded Essex in 1993 and is its sole owner, the SEC said. The company is currently “on the verge of collapse,” according to the complaint. According to the company’s financial records, the company has $5.9 million in assets but owes at least $78 million to various lenders and investors, the SEC said.
This isn’t Iannelli’s first brush with regulators, according to the complaint. In 1974, the SEC claimed Iannelli attempted to manipulate the price of a stock by fraudulently purchasing 100,000 shares.
Iannelli agreed to a permanent injunction in connection with the allegations, and later to an order permanently barring him from association with any broker, dealer, investment company or investment adviser, the SEC said. In 1976, Iannelli was convicted of criminal contempt for violating the permanent injunction, the SEC said.
Counsel for Iannelli and Essex Capital couldn’t be determined.
The SEC is represented by Yolanda Ochoa, Marc J. Blau, Rhoda Chang, Douglas Miller, Gary Leung and Amy Jane Longo.
The case is Securities and Exchange Commission v. Ralph T. Iannelli and Essex Capital Corporation, case number 2:18-cv-05008 in U.S. District Court for the Central District of California.
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.