RIA Compliance Blog
On December 1, 2016, the Securities and Exchange Commission (“SEC”) announced that it had filed a complaint for injunctive and other relief in the United States District Court for the Southern District of Florida against Onix Capital LLC (“Onix Capital”), an asset management company, and its owner, a Chilean national by the name of Alberto Chang-Rajii (“Chang”). The complaint alleges that Onix Capital and Chang “violated the federal securities laws by fraudulently raising approximately $7.4 million from investors based on material misrepresentations regarding the investments offered, the use of the funds raised, and the background and financial success of Chang himself.”
Onix Capital was not an SEC-registered adviser, nor was Chang registered as an investment adviser or broker-dealer. However, the SEC alleged that Onix Capital and Chang violated the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the SEC alleged that Chang, “for compensation, engaged in the business of advising… investors… as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,” and therefore met the definition of an “investment adviser” subject to the anti-fraud provisions of the Advisers Act.
According to the SEC’s complaint, Onix Capital and Chang claimed that Chang was “a successful investor and entrepreneur” through various misrepresentations about Chang’s education and past investment activities. For example, Chang and Onix Capital stated that he had earned an M.B.A. from Stanford University. In reality, he never attended Stanford. The complaint also alleges that Chang claimed that he made a $10,000 investment in Google, Inc. (“Google”) while it was a start-up and that this investment resulted in him earning approximately $700 million. In fact, according to the SEC’s allegations, Chang made no such investment in Google and did not earn approximately $700 million. Finally, the SEC’s complaint alleges that Onix Capital and Chang represented to investors that Chang was an “angel investor” who received an award in 2011 from the Angel Capital Association, when in fact Chang had received no such award.
The SEC’s complaint also alleges that from about June 2012 through March 2016, Onix Capital and Chang sold promissory notes to investors for about $5.7 million. Onix Capital’s 2013 Private Placement Memorandum (“PPM”) stated that Chang’s Chilean company, Grupo Arcano, was the primary guarantor, while Chang was the secondary guarantor. According to the SEC’s complaint, the PPM, in order to give credibility to the value of Chang’s guarantee, stated that Chang had more than $100 million in J.P. Morgan accounts as of March 2013. However, according to the complaint, Chang had less than $1 million in J.P. Morgan accounts. Moreover, the PPM stated that Chang and Onix Capital planned to invest the funds in various start-up companies. However, it appears that in reality, Chang commingled more than half of the investor funds with his own, and he and Onix Capital used these funds to pay other investors.
The SEC also alleged that from April 2013 through January 2016, Onix Capital and Chang sold equity interests in various “Relief Defendants,” limited liability companies that Chang formed to hold securities in companies such as Uber and Snapchat. These ventures raised at least $1.7 million, and Chang and Onix Capital told investors, both in oral and written representations, that they would receive membership interests in the Relief Defendants. The SEC alleged, however, that like the funds from the promissory notes, Chang commingled the funds that he received from these investors with his own and used them to pay other investors.
Finally, the SEC’s complaint alleges that Chang transferred over $11 million from Onix bank accounts containing investor proceeds, which he converted it to his own use.
Chang and Onix Capital’s supposed fraud was revealed when, in March 2016, various news articles raised questions about Chang’s financial background and the solvency of his businesses. As a result, Chang left the United States for Malta and transferred approximately $4 million, which included funds from Onix Capital investors, to accounts in Malta, Australia, the United Kingdom, and Switzerland.
The SEC’s complaint calls for a permanent injunction restraining and enjoining Chang and Onix Capital from violating federal securities laws anymore. The complaint also requests that the court issue an order that would temporarily freeze the assets held by Chang, Onix Capital, and the Relief Defendants. Finally, the complaint calls for the appointment of a receiver, disgorgement of any ill-gotten gains, civil penalties, and other forms of relief.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.