The Securities and Exchange Commission today announced that it has filed an emergency action and obtained a temporary restraining order and asset freeze against a California-registered investment adviser and his entities to halt an ongoing Ponzi scheme targeting senior citizens in Southern California.
According to the SEC complaint, from at least January 2018 through the present, Paul Horton Smith, Sr. offered and sold securities in his company, Northstar Communications, LLC, and used his investment advisory firm, eGate, LLC, and insurance and estate planning company, Planning Services, Inc., to market the securities. Smith and Northstar, through free workshops and other investor events, allegedly promised investors guaranteed annual interest payments between 3 percent and 10.5 percent if they invested in so-called “private annuity contracts.” In reality, as the complaint alleges, Smith did not invest the funds raised in any securities and instead used new investor funds to pay investor returns in a Ponzi-like fashion. According to the complaint, Northstar raised more than $5.6 million from at least 35 investors and paid out $5.2 million to those investors as interest payments or principal returned. Smith also allegedly used investor funds to settle investor fraud lawsuits.
The SEC’s complaint, filed on May 19 and unsealed late yesterday in the U.S. District Court for the Central District of California, charges Smith, Northstar, eGate, and Planning Services with violating the antifraud provisions of the federal securities laws. The complaint seeks injunctions, return of ill-gotten gains plus interest, and civil penalties.
On May 20, in addition to granting a temporary restraining order and an asset freeze, the court ordered an accounting and appointed a temporary receiver. A hearing is scheduled for June 3, 2020 to consider continuing the asset freeze, issuance of a preliminary injunction, and appointment of a permanent receiver.
In a parallel action, the United States Attorney’s Office for the Central District of California announced on May 21 that it filed a criminal complaint against Smith.
The SEC’s complaint charges the defendants with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Smith and eGate with violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
The SEC’s investigation was led by David S. Brown, with assistance from Dora Zaldivar, and was supervised by Finola H. Manvelian in the SEC’s Los Angeles Regional Office. The litigation will be led by John B. Bulgozdy and supervised by Amy Jane Longo.
The SEC appreciates the assistance of the United States Attorney’s Office for the Central District of California, the Federal Bureau of Investigation, and the California Department of Business Oversight.