Ponzi scheme lawsuit with Cayman link dismissed in US

U.S. financial regulators’ lawsuit against five defendants – two of them with Cayman Islands ties – in an alleged quarter-billion-dollar pyramid scheme was dismissed weeks ago, court records show, because the agency waited too long to sue.

The Securities and Exchange Commission accused the five, including former Cayman Islands residents Fred Davis Clark Jr. and his wife Cristal R. Coleman, of running a US$300 million investment scam out of Florida.

Mr. Clark and Ms. Coleman, who no longer live in Cayman, had denied all such allegations through their attorney.

According to the Final Order of Dismissal in the case, which also cleared defendants Barry J. Graham, David W. Schwartz and Ricky Lynn Stokes, the SEC lawsuit was dismissed “with prejudice” because it was effectively statute barred. The lawsuit was filed after the five year statute of limitations.

“This is a case in which the SEC – the agency whose principal mission it is to ‘protect investors and the markets by investigating potential violations of the federal securities laws’ – failed to meet its serious duty to timely bring this enforcement action,” U.S. District Judge James Lawrence King wrote in his May 12 order.

The judge ruled that, after seven years of investigation, the federal regulators had not established that the court in the U.S. Southern District of Florida had jurisdiction over the allegations made by the SEC.

“In this case, the SEC presents the tale of a far-reaching graft perpetrated by defendants upon upwards of 1,400 unsuspecting investors and to the tune of more than US$300 million,” court records stated. “According to the SEC, defendants directly, and through a vast web of entities collectively known as Cay Club Resorts and Marinas offered and sold to these investors what were, in fact, unregistered securities, but under the guise of real estate investments.”

Whatever the truth of those allegations, Judge King stated the SEC’s claims should be dismissed “with prejudice” because the court lacked subject-matter jurisdiction, in other words, the authority to deal with the matters alleged.

“The very purpose of statutes of limitation support this conclusion and ‘even [alleged] wrongdoers are entitled to assume that their [alleged] sins may be forgotten,’” the judge wrote, quoting from an earlier U.S. district court case.

A pyramid or Ponzi scheme is an investment scam where old investors are paid off with money earned from new clients until the cash runs out and the unlucky investors at the end of the line are defrauded of their funds with no recourse to reclaim them.

According to 2013 court filings by the SEC: “Cay Clubs was purportedly in the business of renovating aged and abandoned condominium projects at 17 locations, located primarily in the Florida Keys, Central Florida, and Las Vegas, Nevada into luxury five-star resorts with lavish amenities and operating a rental pool of units in these projects for profits.”

According to the filing, Mr. Clark was Cay Clubs co-founder, president and CEO, while Ms. Coleman was a managing member and registered agent of certain affiliated entities.

“Cay Clubs was not the successful business Clark, Coleman, [Barry J.] Graham, and [Ricky Lynn] Stokes claimed it was. By April 2005, in Ponzi scheme fashion, Clark and [David W.] Schwarz, Cay Clubs CFO, started using new investor funds to pay leaseback returns to earlier investors,” according to the filing.

“Cay Clubs did not pay the guaranteed leaseback returns to all investors and beginning in mid-2006, failed to pay them to the vast majority of investors,” according to the filing, which states that Cay Clubs collapsed in mid-2008.

Ken Hazouri of Orlando law firm De Beaubien, Knight, Simmons, Mantzaris and Neal LLP, legal counsel for Mr. Clark, Ms Coleman and Mr. Schwarz, said in 2013 that his clients absolutely refuted the SEC’s allegations.

“My clients categorically deny, and intend to disprove, all allegations of wrongdoing in the SEC’s most recent complaint, which is the third one the SEC has now filed in an effort to state a valid claim,” Mr. Hazouri said.

“These are the bottom lines: a) Cay Clubs sold real estate, not securities and, therefore, the SEC has no jurisdiction over the matter; b) all persons who contracted to purchase a condominium from Cay Clubs received the units for which they bargained; c) neither Cay Clubs nor its representatives committed any fraud or other misconduct, as falsely alleged by the SEC or otherwise; and d) Cay Clubs failed for no reason other than historic collapses in the real estate and credit markets,” Mr. Hazouri said.

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