Payday lender ordered to pay $39 million in embezzlement lawsuit | Sheppard Mullin Richter & Hampton LLP


On June 29, a Florida court issued a final judgment against a Miami-based payday lender and its CEO, resolving allegations that the defendants misappropriated funds from investors. According to the complaint, the company fraudulently raised more than $66 million through the sale of promissory notes to more than 500 Venezuelan-American investors who were told the company would use their funds to fund payday loans through to the offering and selling of “safe and guaranteed promissory notes”. Investors were promised returns of up to 120%, but it was alleged that the company had not generated income to cover its principal and interest payments due to investors.

The complaint also alleged that the CEO misappropriated investor funds for personal gain and authorized the transfer of funds to friends and relatives with no apparent legitimate business purpose.

The company and the CEO have agreed to a final judgment under which they are permanently prohibited from trading in securities in the future and from committing further violations of the Securities Act and the Exchange Act. The company must also return $39 million to investors. The CEO is liable for approximately $4.5 million, which, if paid, will reduce the amount owed by the company by the same amount.

On July 13, the SEC filed new related charges against four company sales representatives for their role in soliciting dollars from investors in the unprofitable business. The lawsuit, filed in the Southern District of Florida, alleges the representatives sold more than $25 million in unregistered promissory notes to nearly 350 investors. None of the representatives were registered with the SEC as a dealer or were associated with registered dealers.

Put into practice : The misuse of investor funds in this particular case was particularly egregious. However, this series of enforcement actions should serve as a stark reminder that businesses engaged in the sale of promissory notes must comply with federal and state securities laws at every stage and at every level of employment, from representative commercial to the CEO. The SEC, in particular, has signaled that it will vigorously enforce violations at both the corporate and individual level.


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