SEC Halts $45M Promissory Note Ponzi Scheme The Commission is on the warpath, bringing charges against the latest promissory note scam, which seem to be cropping up all over this year. By Matthew Dublin The SEC has charged a California man and several entities he controlled with running a Ponzilike promissory note scheme that netted over $45 million. Between October 2004 and March 2007, Terchi “Nelson” Liao, 49, of Arcadia, California, and two companies he controlled, Arcadia AOB Commerce and AOB Asia Fund I raised the $45 million from hundreds of investors nationwide. According to the SEC, they did so selling unregistered promissory notes. Liao touted guaranteed interest rates of up to 5.5% per month. But in reality, the funds collected from new investors were used to make interest payments to existing investors, the complaint states. The Central District Court of California has issued a temporary restraining order against Liao and appointed a temporary receiver over AOB Commerce, AOB Asia Fund, as well as Liaocontrolled relief defendants AOB Vacations, AOB Media, AOB Transportation, AOB Management. It has also instituted an asset freeze against all the defendants. The court also ordered the return of all ill-gotten gains plus prejudgment interest and penalties against the defendants. The court has also issued orders requiring the defendants to provide proper accountings, prohibiting the destruction of documents, and granting an expedited discovery. Liao has been barred from acting as an officer or director of any public company. Liao and his companies told potential investors that they are in the business of loaning funds to companies based in China and other Asian countries. According to the complaint, while the defendants have granted loans to a handful of entities in Asia, the majority of investor funds were used to pay the interest on the promissory notes previously issued to other investors. The defendants also used investor funds to pay commissions to investors who solicited others to invest in the offerings, charged the complaint. The defendants would pay the existing investors who solicited new investors commissions ranging from 2% or 3% per month on the amount they solicited. In a six-month period from July 1, 2006 through December 31, 2006, the defendants raised over $13.7 million from investors, but received less than $375,000 from legitimate business activities, charged the regulator. Despite this lack of revenue, the defendants paid over $6 million in interest and commissions to investors. They also loaned or transferred roughly $6 million to companies Liao controlled. Throughout the scheme, no offering materials or financial statements for AOB commerce or AOB Asia Fund were provided to investors, the Commission stated.
Since at least September 2006, Liao has known that AOB was unable to make interest payments and commission payments from its business activities and that it was using investor principal to make those payments, charged the complaint. The defendant also used investor funds for his own personal use including credit card charges, auto leases, mortgage payments and insurance, stated the complaint. A hearing is scheduled for August 6, 2007 to determine whether a preliminary injunction should be issued against the defendants, and whether a permanent receiver will be appointed. This is one of several recent actions by the Commission this year to combat fraudulent promissory note offerings. Earlier this month, the SEC brought charges against a New York-based individual and his company for a fraudulent promissory note offering that claimed to deliver returns of over 400% within 60 days in a purported bond-trading program. The defendants consented to a preliminary injunction without admitting or denying the Commission’s allegations. On June 18, the regulator closed its case against five Pennsylvania men responsible for two separate fraudulent offering schemes that netted $7 million. The defendants falsely told investors that their funds would be used to purchase consumer debt portfolios and pay for costs associated with those notes. The court ordered the men to pay $2.5 million in disgorgement and penalties. In April, the Commission obtained a temporary restraining order from a Utah District Court against several individuals and the entities under their control for a fraudulent short-term promissory note offering that netted at least $4.8 million. In this case, the defendants purported that 80% of investor funds would be placed in low-risk investments. In reality, almost of the money was placed in high-risk currency futures that resulted in losses of more than $9 million. The Commission recommends that investors ask thorough questions before investing in promissory note offerings. According to the regulator, most corporate promissory notes are not offered to the general public, but instead are sold to sophisticated investors. In addition, if the note is not registered, investors should make absolutely certain that the company in question is able pay its debt. Investors are also warned to be skeptical of promissory notes that are “guaranteed” or “insured,” or of “risk free” returns.