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SEC Says Buffalo Man Running Ponzi Scheme

On Feb. 27, the U.S. Securities and Exchange Commission obtained an emergency order from a federal judge in Buffalo, freezing the assets of a venture capital fund manager accused of running a “Ponzi-like scheme.” Regulators believe the fund manager made false promises to investors about his ability to obtain pre-IPO shares of popular stocks at a discount. Then, to cover up his failures, the manager transferred money among different accounts, cheating investors along the way.

SEC v. Gray

Gregory W. Gray, Jr., is founder and managing partner of Archipel Capital, LLC, a shell company that serves as Gray’s brand, and is majority owner of a number of business entities established for the stated purpose of investing in various securities. Gray marketed Archipel as a “venture capital” firm that solicited small investors with promises to invest in companies about to undergo a major event, such as a merger or initial public offering.

For example, one of Archipel’s subsidiaries, Archipel Capital – Social Media Fund, LP, raised approximately $5.2 million from 51 investors for the purpose of purchasing shares of Twitter, Inc., during the company’s initial public offering. The investors purchased shares in Social Media Fund, LP, which was managed by BIM—another entity controlled by Gray through Archipel—with the understanding that the money would be used to buy about 230,000 shares of Twitter at pre-IPO prices.

In reality, according to the SEC, Gray only managed to buy about 80,000 shares. Although Gray had raised enough money to by all the promised shares, the SEC said he “transferred more than half” of the Social Media Fund’s cash to other Archipel entities, which then forced him to use money from other entities to cover the Social Media Fund. When it came time for Gray to distribute the proceeds to investors (six months after Twitter’s IPO), the SEC said he was 150,000 shares short.

In order to make up for the shortfall, the SEC said Gray diverted more than $5.8 million in money invested in other Archipel subsidiaries to pay off Social Media Fund investors. Gray then purchased shares of Twitter after the IPO and used those proceeds to pay off the investors whose money he improperly diverted to the Social Media Fund.

The SEC claims this was just one part of a much larger ongoing fraud. The agency identified at least three Archipel entities that were continuing to raise money up until the court-ordered asset freeze.

Be Wary of Exaggerated Pre-IPO “Discounts”

As always, the SEC’s complaint represents one side of the story, and Gray is only accused of violating federal securities laws at this time. But the SEC’s case still serves as a useful warning to investors about the dangers of purported pre-IPO sales. As one commenter told a financial industry website, “That investors actually believed retail investors can buy pre-IPO shares at a substantial discount shows we have a long, long way to go with investor education.”

If you have been the victim of a Ponzi-like scheme or other ripoff involving the sale of pre-IPO shares, contact Florida securities fraud attorney Gregory Tendrich, P.A. to learn about your rights and what you can do to hold the responsible parties accountable.

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