The Securities and Exchange Commission announces a successful suit against the financial services firm AIC and wins nearly $70 million in damages for defrauded investors. On August 1, 2014 the Securities and Exchange Commission issued a press release detailing the results of one of its latest court cases aimed at fraudulent practices within the financial industry.
The SEC secured a victory in Tennessee court over the Richmond, Virginia based firm AIC Inc., a financial services holding company, Community Bankers Securities LLC (CBS), a subsidiary brokerage firm, and Nicholas D. Skaltsounis, CEO of both.
The nearly three-week trial concluded in October of 2013 and took place in the U.S. District Court of Eastern Tennessee, at Knoxville. After hearing arguments a jury found the defendants guilty of stock fraud perpetrated through negligent misrepresentation of financial materials and omission of pertinent investment information. Their victims were largely “elderly and unsophisticated” investors who had been lured by false statements about the risk of their investments, rates of return, and reinvestment strategies for the proceeds, according to the release.
The SEC investigation into AIC and its subsidiaries found that none of the companies had ever been profitable. Facing financial loss, the jury found that Skaltsounis constructed a Ponzi scheme designed to pay current investors with alleged profits that were, in actuality, simply funds collected from new investors. (See our article on “A Colorado Ponzi Scheme Unraveled” for more information on the history and persistence of this particular type of investment fraud.)
The scheme was allegedly initiated from no later than January 2006 to November 2009 by Skaltsounis, and assisted by two co-defendants, John B. Guyette of Greeley, Colorado and John R. Graves of Pensacola, Florida. (Graves had been imprisoned in Oakdale, Louisiana by October of 2013, according to a previous SEC Press Release on the matter.) Both Guyette and Graves made settlement agreements with the SEC prior to the October AIC trial.
At the conclusion of the trial, Skaltsounis, AIC, and CBS were found liable for fraud and ordered to pay investors combined damages of nearly $70 million. The penalties break down as follows:
- AIC: $6.6 million disgorgement (that is, forced return of illegally gained profits), along with nearly $1 million in interest, and a penalty of $27.95 million.
- Community Bankers Securities (CBS): $2.8 million disgorgement, nearly $400,000 in interest, and a penalty of $27.95 million.
- Skaltsounis: nearly $1 million disgorgement, more than $138,000 in interest, and a penalty of $1.505 million.
The astute reader will note that the penalties and interest together amount to about $58 million of the entire damage settlement. This is a hefty premium on the millions that the SEC discovered Skaltsounis, his firms, and associates had swindled from investors.
Additional information in the SEC complaint explains that Skaltsounis and his cohorts sold some $7.7 million in AIC stock and promissory notes to 74 investors in 14 states. Skaltsounis apparently approached potential investors through direct phone calls and at annual shareholders meetings, as well as indirectly through CBS brokers and other subsidiaries. The complaint explains how Skaltsounis, et al. promised to pay interest rates between 9 and 12.5 percent on their promissory notes and preferred stock.
Another example of fraud from the SEC complaint relates Guyette’s contact with a charitable organization in June of 2006 to solicit the sale of AIC stock. His letter allegedly includes false promises of investment security along with guarantees of future returns. The charity thereafter purchased $100,000 in AIC preferred stock. The SEC complaint notes, however, that while Guyette knew his guarantees were false and even reckless misrepresentations, he was unaware that the company had never earned enough to meet expenses. Graves supposedly made similar investment solicitations between September and October of 2009.
The court also applied a “permanent injunction” against Skaltkounis, AIC, and Community Bankers Securities, thus ordering that they refrain from violating sections 5(a), 5(c), and 17(a) of the Securities Act of 1933. These elements of the code specifically deal with the interstate solicitation and sale of stock and other investment securities.