On July 30, 2020, the Securities and Exchange Commission (“SEC”) announced it was bringing charges against San Antonio-based CEO, Victor Lee Farias, and his firm, Integrity Aviation & Leasing (“IAL”), for defrauding investors, including police officers and other first-responders, out of approximately $14 million.
The SEC contends that the fraud was a part of an elaborate conspiracy concocted by Mr. Farias, wherein Mr. Farias and his associates manipulated victims into investing their retirement assets in a private placement scheme to purchase airplane parts that were going to be sold to major airlines while guaranteeing significant returns by making false and misleading statements.
Instead, Mr. Farias used the funds from the private placement to pay other investors as part of a Ponzi-like scheme, invest in a friend’s business, and pay for his own personal expenses, which in turn irrevocably harmed retirement accounts of a number of investors across multiple states due to the callous malfeasance of Mr. Farias and IAL.
Read the full SEC Press Release Here.
Background on the SEC’s Complaint
As stated above the SEC’s complaint alleges that Mr. Farias swindled investors, many of whom were San Antonio police officers and first responders, out of $14 million through the issuance of promissory notes that were supposedly secured by IAL’s assets.
Mr. Farias and IAL misrepresented to investors that the funds raised from the promissory notes would be used to purchase aircraft engines and equipment that would be sold to major airlines and investors would realize returns of 10-12% on their investments.
Investors withdrew significant funds from their retirement accounts and opened individual IRAs to participate in the private placement based on these claims only to have their investments misappropriated by Mr. Farias and IAL. In one instance, a retired police officer pooled and invested a half of a $1 million of his wife’s and his assets into Mr. Farias’s private placement.
In fact the $14 million realized from the promissory notes was used to (i) pay other investors in a Ponzi-like scheme; (ii)invest in a friend’s gas station business; (iii) pay bonuses and commissions to IAL sales staff for sales of the notes; and(iv) payment of Mr. Farias’s own personal expenses, including rent, travel, jewelry, country club memberships, and auto payments.
Additionally, Mr. Farias and his associates failed to file paperwork to secure assets in conjunction with the promissory notes. Further, Mr. Farias failed to disclose that the secured assets allegedly pledged to secure IAL’s promissory notes were already pledged to another one of Mr. Farias’s business.
Lastly, as the funds from the initial investments began to dwindle, Mr. Farias went so far as to present the SECs logo and subpoenas to an investor as evidence that he was working with the SEC to take IAL public.
What Should I Consider When Looking at this Case?
Apart from the obvious fact that you should not engage in any type of fraud, malfeasance or misleading behavior that could harm potential investors or clients, there are some important take-aways for firms seeking to engage in private placements or considering taking their companies public.
First, it is important to consider all of the steps necessary to ensure that the private placement process is transparent and correct. Private placements can experience significant volatility and investors’ funds, which could be potentially locked up, which could inadvertently harm them if they cannot access their investments.
Because of the volatility and illiquidity of private placements, investment in these types of vehicles should be limited to investors that meet certain qualifications as accredited investors and/or qualified purchasers in order for the issuers to qualify for an exemption from registration under the Securities Act of 1933 (“Securities Act”). It is incumbent upon the Issuer, the placement agents, and other intermediaries including broker-dealers and investment advisers, to verify that the investors meet the accredited investor and/or qualified purchaser thresholds.
Second, depending on how the private placement is structured and how and where it is offered to potential investors, the issuer may be required to make additional filings with state regulators (“Blue Sky Filings”) and the SEC in order to offer the private placement to potential investors in different states.
Third, the governing documents for the private placement including the offering memorandum, subscription agreements, and operating agreements, need to be drawn up correctly and include important disclosures including fee, expense, risk, and conflicts of interest disclosures. Failure to properly disclose all material information can result in significant consequences for all involved.
Lastly, if a firm is considering going public, there are a number of important considerations when planning an initial public offering (“IPO”) including evaluating advisers and underwriters, operating agreements, stock issues, corporate governance, and compliance and regulatory requirements including registration filings with the SEC, all of which require careful evaluation and analysis in order to avoid the pitfalls of a bad IPO.
How Can You Help Me with My Private Placement or IPO?
Jacko Law Group can help your firm with reviewing your analyzing and advising you on how to conduct a private placement as well as drafting private placement documents including offering memorandums and subscription agreements, filing for exemption from registration, Blue-Sky Filings, and addressing questions and concerns around how to monitor the private placements correctly. We can also assist you with your IPO needs including drafting your governance and offering documents and coordinating with your service providers to ensure that your IPO goes smoothly. Our team of attorneys will use our extensive experience to assist you with your private placement and/or IPO needs.