SEC Accuses 2 Diamond Bar Men in Ponzi Scheme
Federal regulators accused two Diamond Bar men this week of a massive Ponzi scheme that siphoned $156 million through their Brea investment company and diverted at least some of the money to racehorses--using age-old techniques that played on investors’ vulnerabilities.
In a lawsuit, the Securities and Exchange Commission alleges that E. Frank Cossey, 54, and Gary W. Williams, 54, and their TLC America Inc. in Brea and related companies also used Christian Internet sites to help sell unregistered securities mainly to elderly people.
Even by the standards of Southern California, home to one of the nation’s largest concentrations of illicit telemarketing “boiler rooms,” the alleged Ponzi scheme is huge. In one of the largest local scams in recent history, Kenneth Taves of Malibu was found liable several weeks ago for a credit card swindle that cost victims about $45 million.
The suit, filed Tuesday in federal court in Santa Ana and disclosed by the SEC on Thursday, also names as a defendant Thomas G. Cloud of Atlanta, who sold TLC investments through his Christian-themed online investment site, https://www.cloudassoc.com.
The suit contends that $28.3 million of the $156 million, bilked from investors since 1998, was squandered. The money was raised since 1998 from 2,600 investors--many of them elderly, according to the suit.
U.S. District Judge David O. Carter late Wednesday froze the assets of all three men and their companies.
An attorney for Cossey, TLC’s president, denied the SEC charges. Other defendants and their lawyers couldn’t be reached for comment.
The SEC suit alleges that Cloud promoted TLC during his weekly broadcast on https://www.OnePlace.com, another Christian Web site, and represented that he earned no fees from TLC when, in fact, he was paid $1 million. The Web site is not implicated in any wrongdoing, said Lisa A. Gok, an assistant SEC regional director in Los Angeles.
The SEC charges that the business was really a Ponzi scheme, using funds from new investors to pay obligations to old ones. The investments were sold by phone solicitors as well as online, the SEC said.
Investors, who were required to put in at least $20,000, were told the real estate investments were yielding 12% or more annually when they really were losing money, according to the suit.
Cossey’s lawyer, Dean Steward of Capistrano Beach, said, he will “aggressively litigate this whole thing” on behalf of his client. “It’s not a Ponzi scheme. There’s a legitimate investment company, and the SEC is simply wrong in these allegations.”
A hearing in the case is scheduled for Oct. 16.
Cossey, 54, and Williams, 54, TLC’s finance chief, spent at least $4.4 million in company funds on racehorses, the SEC said. The agency accused Cossey of funneling $1.55 million from TLC to a foundation that supports the football program at his son’s high school, including $1 million for a stadium renovation.
The suit alleges that they misrepresented their business by investing $20 million in a fraudulent scheme unrelated to the purchase of real estate. It also contends that Cossey failed to disclose to investors that he had filed for bankruptcy in 1996.
The SEC is seeking refunds for losses and a permanent order barring the defendants from committing securities fraud in the future. The agency also may seek millions of dollars in fines, Gok said.
The suit, she said, combines three major enforcement areas for the SEC, which polices U.S. securities markets: Internet frauds, scams against the elderly and affinity frauds, which prey on special segments of the population.
Scam artists can reach far more victims far more quickly using the new online medium than they could using “boiler room” phone calls, said Claudia Bourne Farrell, a Federal Trade Commission spokeswoman.
“The Internet has breathed new life into old scams,” she said. “At one point Ponzi schemes were virtually gone, but with the Internet’s ability to let operators touch so many people in such short time, the old scams are reemerging online.”
