RIA Compliance Blog
On May 4, 2017, the Securities and Exchange Commission (“SEC”) reached a settlement with Verto Capital Management, LLC (“Verto”), a New Jersey-based life settlement firm, and its CEO, William Schantz III (“Schantz”). Verto and Schantz consented to pay the SEC about $4 million, which includes both disgorgement and a penalty, to settle claims that they used funds from new investors to pay older investors in a Ponzi-type manner. The SEC also alleged that Verto and Schantz diverted investor funds for Schantz’s personal use.
The settlement resulted from a complaint filed by the SEC in the United States District Court for the District of New Jersey alleging that between November 2013 and November 2015 Verto and Schantz issued about $12.5 million worth of nine-month 7% promissory notes to investors. Verto and Schantz claimed that the funds from these promissory notes would be used to purchase “life settlements,” which are life insurance policies that have been sold by their original owners to third-party buyers. The SEC’s complaint alleges that Verto and Schantz made a variety of misrepresentations in the sale of these promissory notes.
For example, Verto and Schantz allegedly made false statements regarding the collateral on the promissory notes. Collateral, in the promissory note context, is an asset that secures the promissory note. In this case, the collateral backing the promissory notes would have been the life insurance policies. Verto and Schantz claimed that the promissory notes were “fully collateralized” and that the “Life Settlement assets will have a minimum ratio of 2:1 or 200%. In reality, however, the face value of the Verto insurance policies was materially less than 200% for most of the relevant time period.
Verto and Schantz also claimed in marketing materials that Verto had been a “growing and profitable business” over a period of years and that the chances of a business failure were unlikely. However, evidence showed that Schantz’s entities, including Verto, had lost about $1 million or more each year from 2011 to 2013. Moreover, evidence showed that the promissory notes did not receive sufficient returns from life settlement sales to cover expenses of Verto’s operations.
Verto and Schantz also allegedly made misrepresentations pertaining to third party sales and to Verto’s financial statements. For example, Verto’s Collateral Assignment and Pledge Agreement stated that insurance policies could only be sold to unaffiliated third parties. However, in June 2015, Schantz transferred two insurance policies to Green Leaf, a company solely owned by him. Verto and Schantz also provided in an information booklet that Verto would publish income statements and balance sheets that the public could access, when in fact it did not.
Finally, Verto and Schantz made false statements regarding use of investor funds. According to the SEC’s complaint, Verto’s Promissory Note Purchase Agreement provided that investor funds would be used for “general working capital purposes including but not limited to fund [Verto’s] purchase and acquisition of life insurance policies and the cost and expenses necessary to maintain the life insurance policies in full force and effect.” In reality, however, Schantz diverted about $3.4 million in investor funds to himself. Moreover, evidence showed that Schantz frequently repaid older investors with newer investors’ funds in order to cover up the fact that he was diverting investor funds.
As a result, the SEC alleged that Verto and Schantz committed fraud by gaining possession of the funds through making false statements of material fact and omitting material facts. To settle the matter, Verto and Schantz consented to pay the SEC $3,433,666 in disgorgement, including interest of $124,851, and a $600,000 penalty. They also agreed to be subject to permanent injunctions barring both of them from further violating the Securities Act of 1933 (“Securities Act”) and Schantz from making any more sales that would violate the Securities Act.
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.