James C. Tao and Donna Chen, of Houston Texas, stockbrokers and investment advisors formerly associated with Sunbelt Securities, were charged by Securities and Exchange Commission (SEC) in a Complaint alleging that Tao engaged in fraudulent securities transactions, and Tao and Chen offered and sold securities as unregistered brokers by selling away. Securities and Exchange Commission v. James C. Tao, et al., No. C.A. No. 4:17-cv-3678 (Dec. 5, 2017).
According to the Complaint, between 2012 and 2016, Tao and Chen worked as stockbrokers and financial advisors for Sunbelt Securities – a broker-dealer and SEC registered investment advisor. Apparently, Tao and Chen controlled one of the firm’s branch office locations in Houston, Texas, servicing at least one-hundred and twenty investment advisory customers.
The Complaint stated that in August of 2012, they created Presidio Venture Capital, LLC (PVC) – a private equity fund that was designed to supposedly invest in start-up technology businesses in the Houston area. The Complaint stated that Tao and Chen never applied for PVC to be offered through Sunbelt Securities as an alternative investment; but rather, they solicited monies from investors directly without making Sunbelt aware of their activities, taking steps to conceal those activities from the firm.
The Complaint stated that between January of 2013 to July of 2016, Tao and Chen accumulated $860,000.00 from twenty-five investors by effecting sales of PVC membership units. Apparently, fourteen of those investors included advisory and brokerage customers of Sunbelt Securities, and they were positioned PVC as a way to allocate their funds in alternative investments. Tao and Chen allegedly engaged prospective investors in sales meetings, and took part in negotiating and closing sales as well as providing advice to them about investing in PVC. The Complaint stated that Tao and Chen also served as the liaison between the investor and PVC, and Tao was responsible for the private placement memorandums and other marketing documents that investors received.
The Complaint stated that omissions and misrepresentations were made by Tao upon offering and selling the PVC membership units. Tao reportedly claimed that the investors’ monies would be placed into an escrow account and then returned to the customers in the event that PVC failed to accumulate at least $2,500,000.00. Yet, there was reportedly no escrow account. That is, despite only half of the minimum offering amount having been raised, Tao still spent or invested nearly all of the investors funds.
Tao purportedly failed to inform investors that $200,000.00 in investments were made by PVC in businesses including a health care company and a concert promotion business that Tao owned or maintained a personal interest. SEC alleged that investors were deprived of information about the conflicts of interest in that regard, preventing them from assessing the lack of Tao’s independence before making contributions.
Moreover, investors were reportedly misled about how their money would be utilized by Tao, which included funds from new investors having been used to repay other investors as well as funds that had been misappropriated by Tao for his own personal gain. Particularly, a $4,000,000.00 business loan was allegedly sought by Tao to increase the fund’s money under management, where he intended on investing loaned amounts in PVC and categorizing them as interests owned by Tao, Chen and others. SEC alleged that Tao’s conduct in that regard was not permitted through the private placement memorandum; however, he effected the loan without investors’ knowledge.
Tao also reportedly lied about the basis of a $40,000.00 loss incurred by PVC in a quarterly update, where he claimed that the loss was due to an unsuccessful project launch when he knew that the loss was prompted by his own relative having taken the funds and disappearing without ever owning up to the terms of a loan arrangement.
Apparently, Sunbelt became aware of Tao’s and Chen’s outside business activities and private securities transactions when a customer complained to Sunbelt about PVC in 2016. The Complaint revealed that $75,000.00 was paid to the aggrieved investor; however, $35,000.00 of those funds came from two new PVC investors. Critically, the Complaint stated that Tao never notified those new PVC investors that their funds would not be utilized as the private placement memorandum called for; but instead utilized to pay off the aggrieved investor. Tao also reportedly misused funds to pay off at least three other investors in 2016 and for expenses that were not permitted through the private placement memorandum’s authorized uses.
SEC alleged that Tao’s conduct was violative of Securities Act of 1933 Section 17(a), Securities Exchange of 1934 Section 10(b), SEC Rule 10b-5, and Investment Advisors Act Sections 206(1), 206(2), 206(4) and Rule 206(4)-8. Moreover, SEC alleged that Tao’s and Chen’s conduct was violative of Securities Exchange Act of 1934 Section 15(a), as they engaged in business as unregistered brokers in the offer and sale of the PVC membership units.
FINRA Public Disclosure reveals that Tao and Chen were fired by Sunbelt Securities, Inc. in March of 2016, based upon allegations that they sold away from the firm and engaged in unapproved outside business activities. Subsequently, on August 29, 2016, they were barred from associating with any FINRA member in any capacity based upon allegations that they failed to provide FINRA personnel with information about their business activities.
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