On August 20, 2021, the Securities and Exchange Commission (SEC) announced the filing of an emergency action to stop a $110 million Ponzi scheme which it alleges was operated by a former Oppenheimer stockbroker, John Justin Woods and two companies he controls: Livingston Group Asset Management Company, d/b/a Southport Capital (Southport), and Horizon Private Equity, III, LLC (Horizon). The case was filed in the United States District Court for the Northern District of Georgia, which granted a temporary restraining order which froze the assets of Woods and Horizon.
The Ponzi Scheme Raised over $100 Million from Over 400 Investors
According to the SEC’s complaint, the defendants raised over $110 million from more than 400 investors in 20 states by selling them membership units in Horizon. Woods and other Southport investment advisers allegedly represented to investors – many of whom were elderly retirees – that they would receive returns of between 6-7% in interest, guaranteed for a period of two to three years, for investments in the “Horizon Private Equity” fund. Investors were told that the investments were safe, would pay this fixed rate of return, and that they could get their principal back after a brief waiting period. Woods and others at Southport generally told investors that Horizon would be investing in such things as government bonds, stocks, or small real estate projects. Instead, in a classic Ponzi scheme, later investors’ funds were used to pay returns to earlier investors. Defendants were only able to pay these guaranteed returns to their existing investors through new investor money. According to the SEC, Horizon has not earned any significant profits from legitimate investment. The SEC complaint also alleges that Woods lied to the SEC during its regulatory examinations of Southport.
Woods Began his Ponzi Scheme at Oppenheimer
Woods began his career at Lehman Brothers and, in 2003, he moved to Oppenheimer & Co., Inc., where he was a Financial Advisor through 2016. The SEC complaint alleges that the conduct by Woods occurred “from at least 2008 to the present.” Woods was a Financial Advisor at Oppenheimer during a portion of this time period. Upon information and belief, this conduct began at Oppenheimer and clients were encouraged to transfer their assets to Southport with the promise of high investment returns.
According to the SEC, Woods was the President of Southport as well as its majority owner, and had full control over Horizon, which had no employees. Investors were steered to Horizon through Southport which had Investment Advisors working for it. The SEC alleges that several Investment Advisor Representatives at Southport sold Horizon Private Equity, III, LLC, including Michael Mooney, John Woods, Jim Woods and Arthur Brown.
Woods and his brother, cousin and others, were also former Financial Advisors of Oppenheimer , working in the Atlanta, Georgia branch office. In or around 2015, Oppenheimer became suspicious that Woods was affiliated with Southport or Horizon. A significant number of Oppenheimer’s customers had invested in Horizon at that time. Because Woods was employed by Oppenheimer, investors were lulled into believing that Oppenheimer approved the product and investment recommendation. In truth, Horizon Private Equity, III, LLC was neither offered nor approved for sale by Oppenheimer. In 2016, John Woods left Oppenheimer to form Livingston Group Asset Management d/b/a Southport Capital and, upon information and belief, solicited Oppenheimer customers to follow.
Woods was “Selling Away” While at Oppenheimer
“Selling away” is a term for when a securities broker solicits or sells securities that were not approved by the firm or recorded in the firm’s official books and records. Selling away is a violation of FINRA Rules 3270 and 3280, as well as other securities laws. Any security can be the subject of selling away, but some of the largest selling away cases involve financial fraud or Ponzi scheme investments.
In most selling away scenarios, the investor is unaware that the broker is acting outside of the authority of his or her employer . Sometimes, the broker will even create false account statements or confirmations to fool the investors. Even if the broker is caught in the act, their employer firm may still allow the broker to resign without reporting this to FINRA or other authorities. This violates FINRA rules, which mandate that brokerage firms disclose this where the reason for termination is a result of an investigation for suspected violation of securities laws. The situation might be made even more harmful to the customers if the brokerage firm fires the broker but does not notify the customer of the sale of an investment to the customer not approved by the firm.
Ignorance of the Selling Away is Not a Defense
In responding to customer complaints, broker dealer defendants usually defend them by claiming that they did not know about the selling away. However, under FINRA Rule 3110, firms have an affirmative duty to supervise their employees. Rule 3110 (a) states that
Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Final responsibility for proper supervision shall rest with the member.
Rule 3110(b) requires that firms have written supervisory procedures:
Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
Failure of a firm to have sufficient supervisory procedures in place to detect fraud, or failure of a firm to follow its supervisory procedures allowing the fraud to continue, give rise to liability under a “failure to supervise” or “negligent supervision” claim.
If Oppenheimer failed to properly supervise Woods and the other brokers who were selling an outside product, Horizon Private Equity, III, LLC, to their customers, the securities laws allow for buyers of securities to bring claims against Oppenheimer for actions that Wood engaged in while employed by Oppenheimer. FINRA regulations state that the employer—here Oppenheimer— had a duty to supervise the sales activities of Wood, its broker. It seems that it is likely that Oppenheimer failed in its duty to supervise Woods in his sales of the Horizon investment. Many of Oppenheimer’s customers were induced by Wood to invest millions of dollars into the Horizon Private Equity Fund, III, LLC. Facts indicate that there were red flags present in these transactions which Oppenheimer failed to detect but which should have been detected by Oppenheimer’s supervisors. If this is the case, it is possible that Oppenheimer may have liability for its failures to supervise the activities of Woods and other brokers at Oppenheimer involved in the sales.
If you or a family member invested in Horizon Private Equity, III, LLC, during the time that the brokers were employed by Oppenheimer, you must take action now to preserve your legal rights.
CONTACT US TODAY FOR A FREE CONSULTATION
If you or a loved one have suffered investment losses as a result of an investment in Horizon Private Equity, III, LLC or Southport Capital, or any other type of investment fraud or broker negligence, contact the offices of Investment Fraud lawyer Melanie Cherdack for a free consultation. Because she has been in the trenches as a former Wall Street attorney, Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers represent individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 844-635-1609 or 305-349-2336.