SEC Charges Student with Running Ponzi Scheme Out of Frat House

The SEC has charged a recent college graduate with running a Ponzi scheme from a college fraternity house that targeted college students and young investors.

The SEC’s complaint alleges that 22-year-old Syed Arham Arbab orchestrated the fraud from a fraternity house near the University of Georgia campus in Athens.

Arbab allegedly offered investments in a purported hedge fund called “Artis Proficio Capital,” which he claimed had generated returns ranging from 22% to 56% in one year. Although the name of the fraternity wasn’t mentioned, the address listed for the fund is the same address of the university’s chapter of Phi Kappa Tau fraternity.

Arbab also allegedly sold so-called “bond agreements,” which promised investors the return of their money, plus a fixed rate of return. The SEC’s complaint alleges that no fewer than eight college students, recent graduates, or their family members invested at least $269,000 in the investments.

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According to the complaint Arbab began soliciting investors in May 2018 for investments in the fund, which he told investors he managed and controlled. The SEC alleges that Arbab targeted individuals associated with the university and earlier friends and associates. In text messages and emails to investors and potential investors, he made multiple representations about the fund, including that money invested in the fund was “guaranteed and backed up to $15,000.”

However, no hedge fund existed, according to the SEC, which said the returns Arbab claimed were “fictitious” as he never invested the funds as represented. Instead, as money was raised, Arbab allegedly placed a large portion of investor funds in his personal bank and brokerage accounts, which he used for various living expenses. These expenses allegedly included more than $10,000 in cash withdrawals, and more than $5,000 in hotel and nightclub expenses during a December 2018 gambling trip to Las Vegas with friends.

The SEC said Arbab tricked investors into unwittingly sending Ponzi payments directly to other investors. He allegedly did this by telling investors to send money via smartphone applications such as Zelle, Venmo, or Cash App to a recipient Arbab would falsely describe as one of the fund’s partners, when the recipients were in fact earlier investors looking to withdraw their assets.

The complaint further alleges that in his personal brokerage account Arbab engaged in unprofitable options trading, losing more than $300,000 between September 2018 and March 26, 2019, and that when the account was closed it only had a balance of approximately $350.

“We allege that Mr. Arbab used his college affiliations to operate a Ponzi scheme that drained valuable resources from current and former students,” Richard Best, regional director of the SEC’s Atlanta Office, said in a release. “This is a reminder that investors of all ages and experience levels—whether long-time investors or recent graduates investing funds from their first few paychecks—should carefully research investment opportunities and the people offering them.”

The SEC’s complaint, which was filed in federal district court in Athens, Georgia, charges Arbab, Artis Proficio Capital Investments LLC, and Artis Proficio Capital Management LLC, with violating the antifraud provisions of the federal securities laws. In addition to an order freezing certain assets of Arbab and his entities, as well as a temporary restraining order, the SEC is seeking preliminary and permanent injunctive relief, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties.

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Tags: Arham Arbab, Artis Proficio Capital, Hedge Fund, Phi Kappa Tau, Ponzi Scheme, SEC, University of Georgia

The SEC is suing Canada’s Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens without registering its offer and sale as required by the US securities laws.

According to the SEC’s complaint, Kik, a private company that owns and operates a mobile messaging application called Kik Messenger, had lost money for years on its only product. The regulator said that despite Kik Messenger’s initial success, and the backing of venture capital funding, the company’s costs were significantly greater than its revenues, and it has never been profitable. It also said that the company’s management forecast internally that it would run out of money in 2017.

In an attempt to stave off the company’s demise, Kik changed its business model, which it financed through the sale of digital tokens. The SEC alleges that from May to September 2017, Kik offered and sold 1 trillion digital tokens called “Kin.” More than 10,000 investors worldwide purchased Kin for approximately $100 million in US dollars and digital assets, more than $55 million of which came from US investors. However, the SEC said that Kik’s offer and sale of Kin was not registered with the regulator, and investors did not receive the disclosures required by the federal securities laws.

“By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” Steven Peikin, co-director of the SEC’s Division of Enforcement, said in a release. “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”

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The complaint also alleges that Kik marketed the Kin tokens as an investment opportunity, telling investors that rising demand would drive up its value.

Kik “enthusiastically” described the Kin offering and Kik’s plans to create, develop, and support what the firm called the “Kin Ecosystem.”

The SEC alleged the company said it would help boost demand for the digital assets by incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that adopt Kin.

“From the initial May 2017 announcement through September 2017, Kik relentlessly pitched Kin and the prospect that Kik’s future efforts to develop the Kin Ecosystem would drive an increase in Kin’s value,” said the SEC in its complaint. “Kik emphasized that only a finite number of tokens would be created and that rising demand for the tokens would cause their value to appreciate.”

However, the SEC alleges that when Kik offered and sold the tokens, these services and systems did not exist, and that there was nothing to purchase using Kin. Kik also allegedly claimed that Kin tokens would immediately trade on secondary markets, and that it would profit from the increased demand that this would generate because it would keep 3 trillion Kin tokens for itself. The Kin offering involved securities transactions, which means the company was required to comply with the registration requirements of the US securities laws.

“Kik told investors they could expect profits from its effort to create a digital ecosystem,” said Robert Cohen, chief of the SEC Enforcement Division’s Cyber Unit. “Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”

The SEC’s complaint charges Kik with violating the registration requirements of Section 5 of the Securities Act of 1933, and the regulator is seeking a permanent injunction, disgorgement plus interest, and a penalty.

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Tags: Cryptocurrency, Kik, Lawsuits, SEC