Tribal Bonds Fraud

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Tribal Bonds Fraud

New defendant charged in $43 million tribal bonds scheme

There’s a new face officially added to the roster of bad apples involved in a $43 million tribal bonds fraud. The Securities and Exchange Commission (SEC) has charged a Los Angeles man for his role in a fraudulent scheme to gain “secret” control over two registered investment advisers so that he, his partner, and their associates could steal $43 million in client funds they promised to invest in Native American tribal bonds.

Who did the SEC target?

The SEC has charged Jason Sugarman, formerly associated with a registered broker-dealer and investment adviser, for allegedly directing the scheme along with previously charged Jason Galanis. Sugarman reportedly secured financing to acquire control of investment advisers so that he and his associates could use client funds to purchase Native American tribal bonds. They then took the proceeds from the bond sales and instead of investing them in annuities to benefit the tribal corporation and repay the bondholders, they misappropriated the proceeds for their own benefit.

The Commission has previously charged Galanis and seven other individuals for their roles in the tribal bonds scheme. Galanis, who pleaded guilty to parallel criminal charges arising from his role in the tribal bonds scheme, is currently incarcerated.

“These charges,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office, “reflect that orchestrating a scheme from behind the scenes does not insulate someone from liability…Sugarman played a crucial role in obtaining control of advisory client funds so they could siphon off those funds for their own personal benefit.”

The SEC’s complaint charges Sugarman with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws and related rules. The complaint seeks monetary and equitable relief against Sugarman.

A scheme that left a trail of financial wreckage

Beginning in late 2013, Sugarman, his business partner Jason Galanis, and others stole $43 million over three years from unwitting pension funds to finance the acquisition of a global financial conglomerate of European and Bermuda insurers, and investment advisers based in Virginia and Connecticut. Along the way, and through a series of complex transactions, the group also victimized a Native American tribal corporation and surreptitiously siphoned millions of dollars in cash from the entities that they acquired.

In its wake, the scheme left the investment advisers defunct, the European insurer in administrative receivership, the Bermuda insurance holding company delisted from the Bermuda Stock Exchange, the Native American tribal corporation nominally indebted for $60 million, and the pension funds with a $43 million investment in worthless securities. Sugarman, however, was the biggest winner from the fraud, ending up with voting control over corporate assets that were acquired with bond proceeds, and from which he ultimately siphoned almost $9 million in cash for his benefit

Sugarman carried out the scheme with eight other individuals who have already been charged by the Commission: Galanis, Devon Archer, Bevan Cooney, Hugh Dunkerley, John Galanis, Gary Hirst, Francisco Martin, and Michelle Morton.

Father and son bad actors

Galanis and his father, John Galanis, kicked off the centerpiece of the scheme in March 2014, when they convinced a Native American tribal corporation, the Wakpamni Lake Community Corporation (WLCC), to become the issuer of limited recourse bonds that the father-son duo had already structured. The proceeds from the Bond sales were supposed to be used by the Tribal Corporation to purchase an annuity as an investment that could generate sufficient income to pay interest to bondholders.

However, from the outset, Jason Galanis and Jason Sugarman intended to use the proceeds from the issuance of the Tribal Bonds for their own purposes and benefit. In April 2014, when an initial issuance of $20 million in bonds seemed imminent, Galanis emailed Sugarman: “We would have discretion over the bond. Let’s discuss how it can be allocated.”

Securing WLCC as the issuer, the two Jasons identified unwitting investors to buy the Tribal Bond by acquiring investment advisers who would use their investment authority to purchase the Bonds for their clients. Through companies that he controlled, Sugarman provided financing to purchase two investment advisers with authority over client funds. Once the adviser firms were acquired, Morton, whom Sugarman and Galanis installed at the helm of the advisers, did what Sugarman and Galanis intended, and used client funds to purchase the Tribal Bonds in client accounts.

Ultimately, Sugarman, Galanis, and others already charged divvied up the misappropriated proceeds. These funds were used either to acquire other entities, shore up the operations of their existing companies, pay back debts, compensate scheme participants, buy real estate, or to make other investments for their benefit.

Sugarman is charged with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws and related rules and the SEC seeks monetary and equitable relief against him.

Was the fraud worth it?

Not when one gets caught. While the two Jasons misappropriated approximately $15 million of the funds, they now are caught in the SEC crosshairs. All of the other charged defendants, in this case, have either pled guilty to criminal charges or have been convicted of those charges after a trial. Archer has been granted a new trial, and Morton has renewed an earlier unsuccessful motion to withdraw her guilty plea.

Public shaming notwithstanding, the story is a case history for compliance and oversight. That’s where Patrina can help. For more than 25 years, Patrina has been helping compliance professionals like you keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.