Garden Variety Securities Fraud Hyped as “JOBS Act cited in Fraud!”

The JOBS Act is prominently cited in stories about Daniel F. Peterson, and his company, Real Estate Fund 1, Inc.  On April 24,2013, the Securities and Exchange Commission charged him with securities fraud as he raised more than $400,000 in an offering of common stock from 21 investors.

But the JOBS Act is not the story, fraud is.  The kind of fraud that has existed since the SEC was created.

If the SEC’s action should provoke a public policy question, it should be “How can investors know if a securities offering is legitimate?”  Unfortunately, the question that media coverage encourages is “Is the JOBS Act a bad idea?”  Its sensational, not substantive.

According to the SEC[1], Peterson raised the money between November 2010 and June 2012.  The JOBS Act was signed into law in April 2012, two months before the last money came in!

The complaint says Peterson made false JOBS Act claims, but the material ones don’t make good headlines.  Peterson raised money years before the JOBS Act was passed–$300,000 was raised in 2008 using promissory notes that he had defaulted on.  To escape liability, he persuaded the noteholders to convert the judgments they had against Peterson into common stock in his company.  Other investors apparently bought about $100,000 in the company’s stock as well.

Allegedly, Peterson told investors he was about to raise billions of dollars in a secondary offering with reputable financial firms who had performed enough due diligence on his firm and business plans that they were “structuring..sales agreements and pricing as we speak.”  The complaint says these claims were false; there was no credible secondary offering underway, and he had no affiliation with the financial firms he claimed would underwrite it.

The complaint details false or misleading claims that Peterson made, but guess which one is picked up in the media?  His claim that the future secondary offering “would be made possible by” the JOBS Act.

Headlines and excerpts from three media sources are:

SEC Fraud Case Cites Spokane Man’s JOBS Act Pitch to Investors [2] –Bloomberg News

  • “A Spokane, Washington man sued for defrauding investors used the 2012 Jumpstart Our Businesses Act to tout his plan to raise billions of dollars in capital, according to the U.S. Securities and Exchange Commission”.

SEC aims to protect investors from fraud under new law [3] – Washington Post

  • “The rules aren’t even in place yet, but allegations of fraud are already flying.  The Securities and Exchange Commission is crafting rules to implement a new law that makes it easier for private firms to raise money. But it has been struggling over how to do so in a way that protects investors from fraud.  In a civil complaint, the SEC accused Peterson of telling investors that the law — known as the JOBS Act — would enable him to raise billions of dollars from the general public and generate 10-year returns of up to 1,300 percent for early investors.”

SEC says man used JOBS Act to lure investors into fraud scheme [4] – Thomson Reuters

  • “The Securities and Exchange Commission on Thursday filed charges against a man accused of luring investors into a fraudulent investment scheme by promising big returns under a provision of the 2012 Jumpstart Our Business Startups Act.  Daniel Peterson and his company, USA Real Estate Fund 1 of Spokane Valley, Washington, allegedly told investors that the JOBS Act would let him raise billions of dollars because of a measure that lifts restrictions on general advertising, the SEC said.  But Peterson, 63, did not really have a guaranteed investment product or any affiliation with a financial firm, the SEC said. He allegedly took investors’ money and then used it to pay for rent, food, entertainment, vacations, a rented Mercedes Benz SUV and expenses at a Las Vegas casino, among other things.”

Reporters should try to find out why the investors converted their $300,000 judgment into stock.  What due diligence did the new investors do?

The real story is “What should investors do to determine whether a securities offering is fraudulent?” That is a large and complex question.

Some products offer ways for the consumer to help determine whether they are authentic (i.e. drugs, software, clothing, liquor and cigarettes).  There is no “seal” or authentication code for a securities offering.

Investor education is an obvious way to combat fraud.  What other avenues–proactive ones–should be looked at?  Can securities regulators make a registry of “legitimate” offerings available to investors before they invest?