The British Columbia Securities Commission (BCSC) has ordered four respondents in a civil action to pay penalties of $26 million for operating a Ponzi scheme and to surrender $16 million in illegal profits.
In forceful findings that may echo throughout the HYIP and autosurfing universe, BCSC said the schemers tried to skirt securities laws by selling a fraudulent HYIP currency-trading program in Canada through an MLM-syle operation while hiding behind “non-disclosure” agreements and operating in an environment of secrecy.
AdViewGlobal (AVG), an autosurf firm with close ties to the alleged AdSurfDaily (ASD) Ponzi scheme in the United States, created a similar structure in which participants were advised to keep news within “association” walls and not to disclose information to outsiders.
BCSC also found that the companies named in the Canadian complaint disseminated false information and used intimidation tactics in a bid to prevent participants from cooperating with authorities.
“Because of those [non-disclosure] agreements, and because of false but intimidating statements made to them by the respondents, many investors refused or were reluctant to cooperate with the Commission’s investigation,” BCSC said.
In recent weeks, some ASD members have circulated emails that suggested participants should not cooperate with the U.S. Secret Service in the ASD probe. During the summer, AVG, which had suspended member cashouts, threatened to sue members for sharing information with outsiders and also threatened to contact the Internet Service Providers of participants who complained on a company forum.
In yet another similarity to the ASD case, some of the purveyors of the Canadian scheme also pushed what Canadian authorities described as a “private common law spiritual trust.â€
Some of ASD’s and AVG’s most ardent supporters have used similar phrasing and referenced common law in defending the surfs.
BCSC minced no words as it laid out the penalties against Hal (Mick) Allan McLeod, David John Vaughan, Kenneth Robert McMordie (also known as Byrun Fox) and Dianne Sharon Rosiek.
BCSC pegged losses at $13 million, saying the respondents “fraudulently distributed securities and made misrepresentations” through Legacy Capital Inc., Legacy Trust Inc. and Manna Trading Corp Ltd.
The Canadian respondents also cited a tie to an entity known as the Manna Humanitarian Foundation.
AVG, in promotional material, cited a tie to the World Rain Forest Movement in what some observers saw as a bid to sanitize the AVG business by linking it to a worthwhile cause.
“At AVGlobal Association we believe we should go beyond the basics of ethical business practices and embrace our responsibility to people and to the planet,” AVG said on its website. “We believe this brings sustained, collective value to our members, our employees, our customers and society.”
AVG announced a suspension of payouts June 25. It is unclear if any worthwhile cause ever received money from the company.
A BCSC panel fined McLeod $8 million. Vaughan, Rosiek and McMordie were dispensed penalties of $6 million each. The panel also ordered each respondent, including the companies, to disgorge the $16 million the scheme obtained from investors.
The suggested payout percentages of the Canadian entities actually were significantly lower than the suggested payout percentages of both ASD and AVG.
“Manna promised investors 7 [percent]Â monthly returns (later reduced to 5 [percent]), sometimes compounded,” BCSC said.
ASD and AVG both promoted compounding. Some ASD members promoted returns of 365 percent a year, claiming $100,000 in ASD returned $1,000 a day.
Similar to ASD and AVG, investors who became “affiliates†or “consultants†of the Canadian companies could bring in new investors.
“When they did so, they earned a commission on the amount invested and a continuing share of the return on the new investment,” BCSC said.
The private, common-law spiritual trust “was a mechanism Fox concocted ostensibly to avoid the application of tax and securities laws to investments in the Manna scheme,” BCSC said.
BCSC pegged losses in the Canadian scheme at $13 million, saying as many as 800 people lost money.
“They created a multi-level marketing structure to maximize distribution of the Manna securities,” BCSC said.
“The respondents knew exactly what they were doing when it came to dealing with securities laws,” a BCSC panel said. “They were well aware of the requirements of the Act, and of the role of the Commission in enforcing the Act. They took numerous actions calculated to escape detection. They attempted, unsuccessfully, to construct the Manna scheme in a form that would fit within a specific exemption in the Act.”
Authorities said the scheme was inexcusable.
“Nothing strikes more viciously at the integrity of our capital markets than fraud, and this case represents a particularly aggressive and flagrant assault on the public’s confidence in our markets,” BCSC said.
BCSC’s announcement followed on the heels of announcements Oct. 15 by the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission that they were targeting a Florida company that allegedly tried to hide behind a corporate registration in Panama.
The actions by the SEC and CFTC expose the vulnerability of autosurfs that register as corporations offshore and arrange web-hosting overseas, but do not comply with securities laws of the United States and foreign countries in which they have a paper footprint or are not regulated in the foreign countries.
The moves also demonstrate that U.S. securities regulators — no matter where a company arranges webhosting — intend to treat American owners who flout laws as issuers of unregistered securities, unregistered investment advisers and operators of unregistered foreign investment companies from inside the United States
Named defendants in emergency actions filed Oct. 15 in U.S. District Court for the Middle District of Florida were David F. Merrick, Traders International Return Network (TIRN), MS Inc., GTT Services Inc., MDD Consulting Inc. and Go ! Tourism Inc.
