Securities Lawyers Blog
The Securities and Exchange Commission filed a complaint against Larry J. Dearman (Dearman), Sr. Marya Gray (Gray), Bartnet Wireless Internet Inc., The Property Shoppe, Inc., and Quench Buds Holding Company LLC. Dearman and Gray allegedly created an illegal scheme that fraudulently raised at least $4.7 million from thirty (30) of Deaman’s advisory clients. Dearman promised the clients that their money would be invested into lucrative investments. However, according to the SEC, Dearman and Gray squandered the funds by gambling, paying for personal expenses, and making payments to other businesses controlled by Gray.
Dearman is currently not registered as a broker with FINRA; however Dearman was registered with various brokerage firms from 2005 until 2012. From April 2002 until February 2005 Dearman was registered with the firm AXA Advisors, LLC. Upon leaving AXA Advisors, Dearman joined Brecek & Young Advisors, Inc. until January 2009. From January 2009 until February 2010 Dearman joined Securities America, Inc. Finally, Dearman was a broker with Cambridge Legacy Securities LLC from February 2010 until May 2012.
The SEC Complaint explains between December 2008 and August 2012 Dearman raised $1.7 million through the sale of promissory notes for Bartnet, a wireless internet service, whose majority shareholder was Gray. In addition, Dearman raised $2 million for a second Gray-controlled company, the Property Shoppe. Finally, in 2012 Dearman recommended his clients invest in Quench Buds, four convenient stores owned by Gray. Instead of investing the capital raised, Dearman and Gray allegedly allocated the funds to personal gambling expenses and payments to investors in the ponzi scheme.
The SEC alleges Dearman violated Section 206 of the Investment Advisers Act of 1940 (“Advisers Act”, Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Exchange Act Rule 10b-5. Under the Advisers Act, any investor adviser must not engage in or employ any device, scheme, or artifice to defraud a client or prospective client. The Adviser Act establishes that the investor adviser has a fiduciary duty to the client. In the matter at hand, Dearman breached his fiduciary duty to his clients by defrauding his clients.
The SEC determined that Dearman violated the Securities Act which prohibits fraud and misrepresentation in the offer or sale of securities. The anti-fraud provision is designed to protect investors against fraud and promotes ethical standards of honesty and fair dealing. The broad scope of the Securities Act, places the burden on the SEC to prove that the defendants misstatements or omission were used directly or indirectly in the fraudulent scheme. Dearman misled the investors through an illegal scheme by using a sham corporation, The Property Shoppe. Dearman and Gray disseminated written offerings, promotional materials and oral representations, which contained untrue statements of material fact and misused investors proceeds to pay returns to earlier investors.
Finally, Rule 10-5 is promulgated under the Exchange Act’s antifraud provision 10b. Rule 10b-5 creates liability for any misstatement and omission of material fact to an investor. Examples of such behavior include misleading statements about company filings used to sell securities and insider trading. In the matter at hand, Dearman and Gray knowingly misrepresented and omitted material facts to investors by allocating the investments into sham corporations and ponzi schemes.
The investors advised by Dearman suffered extraordinary losses. The current case may only be the tip of the iceberg. Dearman may have misled other investor in similar schemes. Furthermore, Dearman’s employers may bear the burden of liability. Brokerages are required to supervise their brokers. A brokerage must monitor and advise their broker’s conduct and recommendations. Investors should know be aware of fraudulent schemes in order to avoid being deceived.