Payday Lender Ordered to Pay $39 Million in Embezzlement Lawsuit | Sheppard Mullin Richter & Hampton LLP

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

The lawsuit also alleged that the CEO misappropriated investor funds for personal use and authorized the transfer of funds to friends and family for no apparent legitimate business purpose.

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

On July 13, the SEC filed new related charges against four company sales representatives for their role in soliciting investor dollars for the unprofitable business. The lawsuit, filed in the Southern District of Florida, alleges that the representatives sold more than $25 million in unregistered notes to nearly 350 investors. Neither representative was registered with the SEC as a broker or associated with registered brokers.

Putting it into practice: The misuse of investor funds in this particular case was especially egregious. However, this series of enforcement actions should serve as a stark reminder that companies engaged in the sale of notes must comply with federal and state securities laws at every step and at every level of employment, from sales representative to Executive Director. The SEC, in particular, has signaled that it will vigorously enforce violations at both the corporate and individual levels.

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