Federal Court Allows SEC Action against Co-Conspirator in Wakpamni Lake Community Corp. TED Bond Fraud to Proceed

Here are the materials in SEC v. Sugarman (S.D. N.Y.):

6 Complaint

39 Motion to Dismiss

42 Opposition

45 Reply

55 DCT Order

Details on the scheme from the order:

II. Sugarman’s Businesses and Relationship with Galanis
 The SEC alleges that Sugarman and Galanis were business partners in the Tribal Bonds scheme. (Compl. ¶ 19.) The two maintained a close relationship, and other scheme participants referred to them as the “two Jasons” and “50/50 partners.” (Compl. ¶ 19.) Before—and during—the Tribal Bonds scheme, Sugarman was an officer, director, and indirect owner of Wealth Assurance Holdings Ltd. (“WAH”), a Bermuda-based insurance company.3 (Compl. ¶¶ 14, 17.) He was also a director, indirect owner, and member of the investment committee of Burnham Securities (“Burnham”), a then-SEC-registered broker-dealer and investment adviser. (Compl. ¶¶ 14, 16.)
Prior to the Tribal Bonds scheme, Sugarman and Galanis helped WAH acquire Wealth-Assurance AG (“Wealth-Assurance”), a Liechtenstein-based insurance company, through allegedly fraudulent means. (Compl. ¶¶ 17(1), 21–29.) On January 7, 2014, following Sugarman and Dunkerley’s presentation to the Wealth-Assurance board of directors (on which they both sat), the Wealth-Assurance board approved a €4 million investment ($5.4 million) of the company’s capital in an Ireland-based fund called Ballybunion Caplain UK Focus Growth Fund (“Ballybunion”) for the fund to manage. (Compl. ¶ 24.) Sugarman then directed his assistant to incorporate a limited liability company in Nevada bearing the Ballybunion name, even though that entity had no connection to the Ballybunion fund in Ireland. (Compl. ¶ 25.) Wealth-Assurance wired the €4 million investment to the “fake” Ballybunion company in Nevada. (Compl. ¶¶ 26–27.) After various intermediary transactions, the bulk of that money was transferred to WAH to purchase Wealth-Assurance.4 (Compl. ¶ 27.) Put simply, Sugarman and Galanis directed WAH to acquire Wealth-Assurance using Wealth-Assurance’s own capital. In the following months, Galanis covered up these transactions—with “Sugarman’s knowledge and approval”—by taking steps to deceive Wealth-Assurance employees about the status of what they considered a legitimate investment. (Compl. ¶¶ 30–31.)
III. Tribal Bonds Scheme
Beginning in March 2014, Galanis and his father, John Galanis, initiated the larger scheme by convincing the WLCC to issue three tranches of limited recourse bonds totaling approximately $60 million. (Compl. ¶¶ 32–33.) According to the issuing documents, the WLCC planned to use the proceeds from the bond sales to purchase an annuity from Wealth-Assurance. (Compl. ¶ 33.) However, the SEC alleges that Sugarman and Galanis intended to gain control over the bonds for their own benefit. (Compl. ¶¶ 34–35.)
As part of the scheme, Sugarman helped finance the purchase of Hughes Capital Management, LLC (“Hughes”), a Virginia-based investment adviser with approximately $900 million under management. (Compl. ¶¶ 7, 36–37.) In June 2014, Morton presented Hughes’s then-owner with a document titled “Introduction to COR Capital,” which was authored by Galanis. (Compl. ¶ 38.) It listed several businesses that COR Capital purportedly owned, such as Wealth-Assurance and Burnham Securities. (Compl. ¶ 38.) Sugarman held himself out as a member and manager of COR Capital, and approved the introductory document. (Compl. ¶ 39.) A month later, Galanis sent Sugarman a copy of the executed term sheet for the Hughes acquisition and noted: “[W]e get discretion over $900 million.” (Compl. ¶ 40 (alteration in original).)
According to the SEC, Sugarman had Galanis ghostwrite a memo to the board of directors of Wealth-Assurance recommending the acquisition. (Compl. ¶ 41.) The SEC alleges that Sugarman sought to conceal Galanis’s involvement because of Galanis’s prior securities violations. (Compl. ¶ 41 & n.3.) In August 2014, the Wealth-Assurance board of directors (which included Sugarman) discussed the memo and approved the purchase of Hughes through its subsidiary, BFG Investments.5 (Compl. ¶¶ 43–44.)
Soon after the acquisition of Hughes, Galanis forwarded Sugarman a spreadsheet and trade blotter indicating that nine of Hughes’s clients purchased approximately $27 million of the Tribal Bonds. (Compl. ¶ 45.) Burnham served as the placement agent for this transaction. (Compl. ¶ 45.) According to the SEC, Sugarman knew from Galanis that the proceeds from the Tribal Bond sales were meant to be used to purchase an annuity from Wealth-Assurance. (Compl. ¶ 46.) To supplement this allegation, the SEC also contends that Sugarman knew (or was reckless in not knowing) this information because he was a member of Burnham’s investment committee. (Compl. ¶ 46.) Galanis then sent Sugarman a spreadsheet describing the proposed allocation of the Tribal Bond proceeds, without any reference to an anticipated annuity. (Compl. ¶ 47.) As described below, Sugarman and Galanis then gained access to and misappropriated the proceeds from the sale of Tribal Bonds to Hughes’s clients. (Compl. ¶ 8.)
Sugarman and Galanis replicated the Hughes scheme with their acquisition of Atlantic Asset Management LLC (“AAM”), an investment manager with $11 billion in assets under management. (Compl. ¶¶ 7, 54.) In November 2014, Sugarman and Galanis arranged for Wealth-Assurance to purchase Valorlife Lebensversicherungs AG (“Valorlife”), a Lichtenstein-based insurer, using $11 million in Tribal Bond proceeds. (Compl. ¶ 17(2).) At Sugarman’s direction, Dunkerley provided AAM’s general counsel with a letter on behalf of the “COR Group of Companies, Inc.” regarding financing. (Compl. ¶ 57.)
In April 2015, Sugarman and Galanis obtained authorization from Valorlife’s board of directors to finance the purchase of AAM. (Compl. ¶ 58.) After the purchase, Galanis kept Sugarman apprised by email about possible investment decisions. (Compl. ¶¶ 62–63.) Thereafter, Burnham acted as the placement agent of the new $16.2 million issuance of Tribal Bonds. (Compl. ¶ 65.)

IV. Misappropriation
The SEC alleges that Sugarman directly and indirectly misappropriated bond proceeds meant for the WLCC. Galanis set up a sham entity, Wealth Assurance Private Client Corporation (“WAPCC”), as a purported annuity provider even though it had no relationship with Wealth-Assurance. (Compl. ¶ 48.) Most of the Tribal Bond proceeds were diverted from WAPCC to Thorsdale Fiduciary and Guaranty Company Ltd. (“Thorsdale”), a Galanis company. (Compl. ¶¶ 15, 49.) The proceeds were then sent directly to various scheme participants or their related entities, such as Wealth Assurance Holdings, Ltd. (“WAH NV”). (Compl. ¶¶ 67–68.) And as was typical in this scheme, WAH NV bore a similar name to WAH, but maintained no real relationship with the company. (Compl. ¶ 68.) Overall, Sugarman netted approximately $9 million through this scheme, including $524,500 directly from the Tribal Bond proceeds in five transfers to him or his wife, including one directly from WAPCC. (Compl. ¶¶ 2, 70.)
*4 The Complaint describes a laundry list of related transactions under the umbrella of misappropriation, such as: (1) Sugarman and Galanis using bond proceeds to purchase new tranches of Tribal Bonds (the “Rosemont Bond” and “Cooney Bond”) to acquire companies like Valorlife, and meet Burnham’s net capital requirements, (Compl. ¶¶ 51–52, 71–91); (2) repaying a $1.3 million debt that Sugarman and Galanis owed to Hirst as part of their purchase of Wealth-Assurance, (Compl. ¶¶ 92–94); (3) injecting Hughes and AAM with cash, including a portion of the bond proceeds that were supposed to be invested in annuities, (Compl. ¶¶ 95–99); (4) purchasing securities in Code Rebel Corporation, a company that was engaging in an IPO, and in which Sugarman had investments, (Compl. ¶¶ 100–09); and (5) in September 2015 following Galanis’s arrest, wiring money to WAPCC—the fake annuity provider—to cover its interest obligations due to bondholders, (Compl. ¶¶ 110–12).