Misleading Advertising Law

The SEC is reporting that "that it filed an emergency enforcement action today in federal district court in Massachusetts and obtained, by consent, preliminary injunctions, asset freezes and other relief against Frank J. Russo, a Massachusetts-based investment adviser and three affiliated entities in connection with a scheme to defraud investors through investments in limited partnerships. The Commission's complaint alleges that Russo, of Wakefield, Massachusetts, and his investment advisory corporation, FJR Corporation ("FJR"), raised at least $15 million from at least 160 investors in 12 states to invest in two limited partnerships controlled by Russo: Russo Associates Limited Partnership ("Russo Associates") and Eliot Partners ("Eliot Partners")." (my emphasis)

From the allegations, this would appear to be a gradual Ponzi scheme, a business model gone wrong. According to the complaint, Russo was offering investors a 10% return, and foregoing fees if the 10% return was not achieved. The offer to forgo fees works much the same way the offer of a guarantee does. Again, any forms of guarantees indicate that the investment is much riskier than being advertised. Just how much does it cost to fund the guarantee, how is funding it, and how will it be paid?

According to the complaint "Russo told some investors that their funds were being invested in bonds and other investment securities, and that the investments were safe and conservative. However, according to the complaint, Russo diverted at least $11.5 million in investor funds to a private California corporation which Russo co-founded with a college friend. The complaint further alleges that Russo is the California corporation's chief financial officer and that he is one of two directors. According to the complaint, the defendants did not disclose the purported investment in the California corporation to investors in the limited partnerships. To the contrary, the complaint alleges that the defendants sent false and misleading account statements to investors reporting fictional returns in excess of 10% and making false statements concerning the investment strategies of the limited partnerships. The complaint further alleges that, when the purported investment in the California corporation proved unprofitable and illiquid, Russo began paying dividends and investor redemptions with money raised from new investors." (my emphasis.)

The complaint contains other more spectacular claims, claims about returns as large as 66%. Hmm. Oddly, the complaint alleges that the funds were transferred to a California corporation, but does not include said corporation in the complaint. It is simply referred to as the "California Entity."

Technorati Tags: limited partnerships, russo, ponzi scheme, wakefield massachusetts, massachusetts based, limited partnership, associates limited, investors, fjr, investment adviser, investment advisory, injunctions, business model