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Note: Donald James Worswick (“Fraudster”), who was assisted by Michael Patrick Brown (“Brown”) and Michael Nicholas Grosso (“Grosso”), acting through Spectrum Concepts, LLC (“Spectrum”), a Florida limited liability company which was created supposedly to sponsor and promote concerts, offered and sold USD 465,000 of investments in "Private Joint Venture Credit Enhancement Agreements" ("Enhancement Agreements") to at least five elderly investors. The investments were fictitious, and the Enhancement Agreements only vaguely described how investor funds would be used. Fraudster falsely guaranteed that the investors “would earn returns ranging from 900% in 20 days to 4,627% annually” and represented that the investors were investing in a standby letter of credit issued by Advance Funding Group. Four of the investors were promised full return of the principal within a short period of time.

Spectrum never had any corporate assets or business operations, never registered an offering of securities under the Securities Act or under the Securities Exchange Act but “served only as a vehicle for [Fraudster’s] fraud.” Fraudster used the investments for his own living expenses and paid money to a variety of people including Grosso who received USD 27,500. For a disguise of legitimacy, Fraudster “arranged for an escrow agent to receive funds from the investors and then release the funds to Spectrum at the direction of the investors once Spectrum had met certain pre-conditions,” including the creation of the "trade slot" or "credit facility" which never existed.

The Securities and Exchange Commission ("SEC") brought a cease-and-desist proceedings against Spectrum, Fraudster, Grosso, and Brown pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 from committing violations of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.

The SEC ordered that a public hearing be convened not earlier than 30 days and not later than 60 days from service of the Order, that Spectrum must respond within 20 days after the service of the Order, and that an Administrative Law Judge be designated and issue an initial decision no later than 300 days from the service of the Order.

Text in Opinion Regarding Escrow Agent: The opinion noted that:

“To add legitimacy to the offering, [Fraudster] arranged for an escrow agent to receive funds from the investors and then release the funds to Spectrum at the direction of the investors once Spectrum had met certain pre-conditions. These pre-conditions included the creation of the “trade slot” or “credit facility,” which [Fraudsters] would tell the investors had occurred or, in the case of two investors, the provision of a “financial guarantee” from an insurance company, insuring the investors against the loss of their principal. In actuality, the use of an escrow agent provided a facade of legitimacy. Investors in the Enhancement Agreements had no means to verify independently whether Spectrum had created the “trade slot” or “credit facility,” as represented. Moreover, the financial guarantee provided to two investors in was fictitious.

The escrow agreement also gave the escrow agent responsibility for receiving profits from the trade platform and disbursing those profits to the investors.

According to the vague terms of the Enhancement Agreement, Spectrum would establish a credit facility and trade slot “approximately 7 banking days” after it received investor funds from escrow. Afterwards, the credit facility and trade slot would be “blocked for the benefit of a trade platform.” The Enhancement Agreements further represented that the trade platform would begin making profit payments to the escrow attorney within 30 banking days of the trade platform being blocked, and that the escrow agent would disperse profit payments to investors within one business day of the escrow agent receiving them. In addition, Spectrum itself would somehow participate in the investment with the investors and share in the profits accordingly.”

[GJL]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.