New York Securities Lawyer Blog
On Thursday, February 21, 2013, the Securities and Exchange Commission (“SEC”) charged James Tagliaferri (“Tagliaferri”), an SEC registered investment adviser, with fraud, and alleged that he withheld facts that he was receiving “kickbacks” for investing his customers’ money in “thinly-traded companies.” See http://www.sec.gov/news/press/2013/2013-25.htm. The SEC Order Instituting Administrative Proceedings (“SEC Order”) against Tagliaferri alleges that until about 2007, Tagliaferri invested TAG clients’ funds in conservative and liquid investments including municipal bonds and blue-chip stocks. Thereafter, Tagliaferri, through his St. Thomas based SEC registered investment advisory firm, TAG Virgin Islands (“TAG”), used discretionary authority of his clients’ accounts to purchase promissory notes issued in various private closely-held companies. These closely held private companies were merely holding companies with which Tagliaferri had personal or “family effected personal and business transactions.” For example, the SEC alleges that Tagliaferri invested at least $40 million of TAG clients’ funds in a private horse racing company, International Equine Acquisitions Holdings, Inc. The SEC’s Order also references other private, closely-held entities through which Tagliaferri perpetrated this fraud which include, but are not limited to, Basileus Holdings, LLC; Emerging Markets Global Hedge Ltd.; IP Global Investors, Ltd., Geomas, Inc.; Hettinger Media Ltd.; Devermont Communications, Ltd.; Equities Media Acquisition Corp. Inc.; Stanwich Absolute Return Ltd.; Mulsanne Enterprises Ltd.; Jamsfield Investments, Inc.; Pacific Rim Assurance Co.; 1920 Bel Air LLC; Drexel Holdings; and Life Investment Company, LLC. In exchange for pledging TAG client funds to these companies, TAG received millions of dollars in cash and other compensation, which was undisclosed to his clients, thus creating a conflict of interest with his clients. Additionally, Tagliaferri misappropriated $5 million in investor funds to a private equity fund, UMS Partners Fund II, L.P. (“UMS”) purportedly in exchange for promissory notes in UMS, however no such notes existed.
Furthermore, when clients would demand payment on promissory notes that matured, Tagliaferri orchestrated a Ponzi scheme by misusing other client funds to meet these demands. Tagliaferri would use his discretionary authority to purchase stock for certain clients in thinly publicly-traded microcap companies and used the proceeds to make payments due to other clients on matured promissory notes. Indeed, Tagliaferri caused approximately $80 million in TAG client funds to purchase securities in these public companies. The SEC Order alleges that some of these public companies include, but are not limited to, Fund.com, Gerova Financial Group Ltd., Rineon Group, Inc., and Recovery Energy, Inc. It is alleged that TAG received at least $1.75 million in cash, and approximately 500,000 shares of stock in Fund.com, Inc., in exchanges for placing various investments with that company. The SEC Order alleges that Tagliaferri sent an e-mail in April 2010 to the individual behind one of the private closely-held companies and stated that the intention for investing TAG clients was to use the proceeds to pay off other clients demanding payment of their promissory notes: “Where is the $125mm. As you are aware, this money was earmarked to clear all of the notes and other issues facing us both . . . [the] shares you transferred are being sold to clients. With those proceeds, you’re buying back your own notes.”
According to the SEC Order, as of February 2009, Tagliaferri, through TAG, had over 100 clients with approximately $252 million in client funds under management. These 100 victims were unaware that Tagliaferri, through TAG, was perpetrating a fraud with their funds. The SEC’s Order alleges that Tagliaferri’s actions constitute willful violations of the Securities Act of 1933 and the Adviser’s Act. Andrew M. Calamari, Director of the SEC’s New York Regional Office stated, “Tagliaferri was anything but forthcoming with his clients and he repeatedly failed to act in their best interests . . . He didn’t tell them about the compensation he received from the companies they were financing, and then compounded his fraud by using client assets to pay other clients when the conflicted investments came due.”
Lax & Neville LLP effectively assists investors, on both a regional and national level, that may have suffered losses as a result of their registered investment adviser’s fraud sales practice abuses, and is actively prosecuting various claims against TAG and Tagliaferri. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.