Ponzi Schemes, Franchises & The Commercial Lawyer
Reports of investment fraud and Ponzi schemes are becoming almost as common as political scandals. The amount of money lost each year is staggering. However, the case against Thomas Caufield appears slightly different than the usual story. There’s no mention of a lavish lifestyle or a group of aggressive sales people. Ferraris, Lamborghinis and Rolls Royce’s are never mentioned. So while reading the SEC Litigation Release , one question kept nagging me. Would the story have a much better ending for Caufield and his investors if Caufield (or his investors) had sought the counsel of a commercial lawyer during any of the first few years of his new business?
Background. Thomas J. Caufield, a resident of Colleyville, Texas and owner of DAT Capital Advisors, was an investment advisor with about $13 million under advisement. In 2013 Caufield expanded his operation by purchasing an investment school franchise. He convinced some of his clients, other investors, and some of his students to invest in his company. SEC’s Complaint. Why should he continue to advise his clients to invest money elsewhere when he could keep their money “in the family?” You know what happens next, right?
Owning and running the school in addition to his investment advisory services became more than Caufield could handle. He raised $6.8 million from 30 investors during a four year period by selling notes with 60 day to 24 month maturities, promising 10 to18% annual returns. But the business was not making money. Caufield ended up using investor funds just to pay the on-going franchise fees and other business expenses. Unfortunately, he allegedly lied to investors about the financial status of the company, used investment funds improperly, and the result was a Ponzi scheme wherein he paid prior investors with new investor funds. SEC’s Complaint
Unlike so many of these investment fraud cases, Caufield was able to return all but about 10% of investors’ original investment. And as the SEC’s scrutiny continued, Caufield sold his franchise, resulting in a distribution to student investors of around $1.3 million. SEC’s Complaint
Learning from others’ mistakes. Whether Caufield set out to intentionally defraud investors or not, we can all learn from mistakes made with his franchise.
- Before investing, research if offerings are registered with the SEC, or fall within an exemption.
- Before investing in less mainstream investments, the person seeking your investment should determine that you are an “accredited investor.” For a review of what offerings must be registered and more about accredited investors, see links available at SEC Fast Answer .
- Be skeptical of self-dealing. When your investment advisor seeks to cut out the middle man, be skeptical no matter how long you’ve worked with the advisor.
- After investing, keep a close eye on your investment. Don’t throw good money after bad. Don’t be the “nice guy” that goes along with the easy excuses as to why your investment isn’t paying off. Contact a commercial lawyer at the first sign of trouble.
Business Owners Seek Help
- Employ a contract lawyer or commercial litigator to review and negotiate any franchise agreement terms to avoid committing to fees that a business may not support.
- Employ a breach of contract lawyer to renegotiate franchise fees, leases and other agreements when the business isn’t going the way you hoped.
- Seek advice of business professionals, accountants and lawyers before cash flow becomes an issue. Professionals can offer alternative solutions in the way of capital, cash flow, revenue and expenses so as to avoid commercial lawsuits.
Would the situation have been different if Caufield sought legal advice before purchasing the franchise or during the first few years of business? From the start Caufield didn’t follow SEC rules. However, some of the facts, in this case, might lead us to believe that Caufield chose the wrong solutions to resolve issues with a failing business, resulting in fraud, rather than intentionally setting out to develop a Ponzi scheme. We don’t know the truth, but it makes for an interesting discussion.
When investing your money, take your time and do your research. We hope your due diligence pays you great dividends. And, whenever you find yourself in need of a commercial lawyer or a breach of contract attorney we are ready to help.