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SEC Sues Brokers for Fraud and Halts Ongoing Fraud Scheme (Brennan & Dyer)

JL Law

Some critics of the crowdfunding industry claim that crowdfunding facilitates and encourages fraud.  Sure, there will be fraud in crowdfunding, but there’s no reason to believe that it will be any more or any worse than we find in other walks of life.  As an example of the type of fraud that regularly happens outside of the crowdfunding space, the Securities Exchange Commission (SEC) recently sued some brokers for fraud as outlined in their press release on July 22, 2016, entitled "SEC Halts Ongoing Fraudulent Stock Scheme".

The press release was issued to announce the fact that the SEC won a court-ordered asset freeze to halt an ongoing fraud by two former brokers with disciplinary histories who allegedly raised more than $5 million from investors without using the money as promised.

The Atlanta Regional Office of the SEC filed the action in federal court in order to stop the sale of fraudulent securities by two brokers.  Beginning back as far as 2008, the men allegedly raised more than $5 million from more than 240 investors and then did not use the money as promised. 

The former brokers named in the lawsuit are James Hugh Brennan, III, and Douglas Alan Dyer, who both had disciplinary actions against them in the past. They are alleged to have sold stock in eight fraudulent companies with similar names without ever registering the stock as promised.

According to the SEC, the money raised by Brennan and Dyer ended up in their personal bank accounts (including their spouses' bank accounts). The two men dazzled their prospective investors with tales of their industry experience and expertise. They neglected to mention that the Brennan had been banned from brokerage activities. Similarly, they neglected to disclose that Dyer had an equally bleak past in which he earned a suspension and a fine for conducting unauthorized transactions using customer accounts.

The court's grant of the temporary injunction freezes the assets of the two men and stops them from conducting fraudulent activity with any more investors. The assets of an affiliate, Broadstreet Ventures, LLC, are also frozen.  The SEC complaint asked for the return of the monies as well as interest and penalties.  The SEC also asked for permanent injunctions against the two men prohibiting them from any further broker activity.

The SEC's complaint alleged violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Section 17(a) covers fraudulent interstate transactions and prohibits fraud or misrepresentation in the offer or sale of securities. Section 10(b) of the 1934 Act prohibits any act or omission resulting in fraud or deceit in connection with any purchase or sale of any security. 

So, how can investors protect themselves against such fraud?

One easy thing that investors can do is perform basic internet searches on the principals in the deals that they invest in.  If investing through a broker-dealer, prospective investors should verify the professional status and backgrounds of potential brokers before investing any hard-earned money or retirement assets. The SEC maintains a website that allows investors to check out their investment professionals. The site also provides educational materials as well as publications and research, and tools. The site updates its news/alerts, such as bulletins, and the site publishes other investor alerts warning investors about fraudulent activities targeting seniors and other groups. If the Brennan and Dyer investors had done their research and due diligence, they would have known that the brokers were not properly registered for nearly two decades. They would also have come across the pair's disciplinary problems with the Financial Industry Regulatory Authority and with state agencies.

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