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SEC charges Risher and partner in Ponzi scheme

By Staff | Aug 29, 2011

A Sanibel resident and his business partner were charged by the Securities & Exchange Commission (SEC) on Aug. 29 with operating a Ponzi scheme disguised as a purported private equity fund that fraudulently raised approximately $22 million from more than 100 investors nationwide and in Canada.

According to the SEC’s complaint filed in the U.S. District Court for the Middle District of Florida, James Davis Risher of Sanibel was responsible for handling the fund’s trading operations, while his partner Daniel Joseph Sebastian of Lakeland distributed offering materials and solicited investors for the fund.

Risher boasted to investors that he had substantial experience in trading equities and providing wealth and assessment management services. The 61-year-old had no such experience but rather a lengthy criminal history, spending 11 out of the last 21 years in state and federal prisons instead of growing a thriving retail brokerage business as he claimed.

The SEC alleges Risher and Sebastian falsely told investors the fund earned annual returns ranging from 14 percent to 124 percent by investing in public equity securities through a broker-dealer. The pair sent investors fabricated account statements indicating such high returns to support their false claims.

Only $2.5 million of the $22 million raised was actually invested and according to bank and brokerage statements, Risher lost nearly $900,000 through his trading activity. Risher misspent investor funds on such personal purchases as jewelry, gifts and property in North Carolina and Florida. Additionally, Risher and Sebastian paid themselves millions of dollars in phony management and performance fees

“Risher, who masqueraded as a highly successful equity trader, teamed up with Sebastian to tout sophisticated trading strategies they claimed would generate substantial profits for investors,” said Eric Bustillo, director of the SEC’s Miami Regional Office. “Instead, Risher and Sebastian used investor’s life savings and retirement nest eggs to line their own pockets.”

The SEC complaint states Risher and Sebastian marketed the fund under the names Safe Harbor Private Equity Fund, Managed Capital Fund and Preservation of Principal Fund. They described themselves in fund offering documents as “two unique individuals” who used their expertise to “create an investment vehicle that would allow investors to capitalize from both bull and bear markets.”

The SEC claims Sebastian often solicited his former clients at his prior job as an insurance broker. He primarily pitched the investment opportunity to educators, retirees, and members of several Florida churches, but also solicited investors in California, other states and Canada.

Sebastian persuaded former customers to roll over money in their insurance and annuity products into the fraudulent fund. He told them the fund would provide a higher rate of return than they could receive from the products he previously sold them. At least one investor liquidated an annuity she had purchased from Sebastian and invested the proceeds in the fund.

During the scheme, Sebastian did not have access to the bank or brokerage accounts where investor funds were held, and Risher denied him access when requested. Risher was also frequently late in wiring the distribution funds to Sebastian, along with his share of the performance fee.

Throughout the fraud, Risher and Sebastian made a number of material false statements and omissions to investors about Risher’s criminal history, the fund’s investment strategy, the fund’s investment returns, the safety of investors’ principal and the existence of audited financial statements.

Risher misrepresented that the fund was registered in Bermuda and he and Sebastian falsely claimed the fund was audited annually by a Bermuda auditor. Sebastian verbally told investors during telephone calls and meetings that they would never lose their principal investment in the fund. He even provided some investors with written guarantees from a company he owned that would reimburse any loss. In reality, Sebastian knew that the company had no assets to reimburse investors for losses, making his guarantee meaningless.

The SEC charged Risher and Sebastian with violating the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC further charged Risher with violating the Investment Advisers Act of 1940 and Sebastian with aiding and abetting Risher’s violations of the Advisers Act.

“We are currently waiting on an answer to the claim,” stated Bustillo about the next step in SEC’s proceedings. “If they don’t decide to settle on monetary return of ill-gotten gains, this could ultimately end up at trial.”

Bustillo further stated the SEC is seeking to have Risher and Sebastian barred from the securities industry. In May, Risher was pulled from a flight bound for Bermuda and federally charged with conspiracy to commit mail and wire fraud, committing mail and wire fraud and money laundering charges he previously served time for between 1990 and 1996 in Georgia, including violating that state’s securities act.

Sebastian has not been charged in the Ponzi scheme by the U.S. Attorney’s office at this time. “The investigation is ongoing,” stated William Daniels with the U.S. Attorney’s office in Tampa.