SEC Halts “Prime Bank” Scheme Targeting Construction Industry

On May 14, the U.S. Securities and Exchange Commission filed a civil complaint against six individuals and several companies accused of participating in a scheme to sell non-existent financial instruments to unsuspecting investors seeking financing for construction projects.

SEC v. North Star Finance LLC

According to the SEC’s complaint, in February 2014, Thomas Ellis, a senior partner at North Star Finance, LLC, gave a presentation at the annual convention of the National Association of Home Builders. The SEC said Ellis “described a risk-free way for NAHB members to secure millions of dollars’ worth of financing for real estate projects through North Star at highly favorable rates.” The SEC said several NAHB members believed Ellis’ pitch and wired North Star hundreds of thousands of dollars to cover “application fees.”

The SEC said one unidentified investor paid North Star $30,000 to apply for $4.8 million in financing for a project. The application fee was supposed to be held in an escrow account, but the SEC said it was simply misappropriated by Ellis and other North Star partners. Another participant in the North Star scheme, Thomas Vetter, allegedly said the purported financing program was “being funded by a group of seven billionaire investors” and the investor would receive his promised funding right away. Neither of these claims were true, the SEC said.

Once investors paid their “application fees” to North Star, the SEC said they were targeted for a bait-and-switch: Ellis, Vetter and others told investors they had to provide additional funds to cover “processing” costs. At that point investors would receive access to funds through what North Star described as a “bank instrument” from a “top 10 bank” that would be “monetized” to provide the funding sought by the investors.

The SEC said this was nothing more than what is commonly known as a “prime bank” fraud. “Prime bank instruments” are wholly fictitious investments. They do not exist, yet investors believe they do based on the use of technical jargon by the scheme’s proponents. As the Federal Bureau of Investigation has noted, scam artists claim to have access to “bank guarantees” which can be monetized. These sound similar to letters of credit, which are used by banks to guarantee payment for goods shipped in international trade, but such guarantees are never bought or sold on securities markets.

In the North Star case, the SEC said investors never received any funding promised through the supposedly “monetized” bank guarantees. The SEC stated the money already paid by investors was merely converted for the personal use of North Star’s partners and associates. A federal judge in Maryland has already granted the SEC’s request to freeze the North Star defendants’ assets and enjoined them from continuing to sell their apparently non-existent investment products. A formal hearing on the SEC’s complaint is scheduled for later this month.

Never Fall for a “Prime Bank” Scheme

It bears repeating that “prime bank” investments do not exist. If anyone offers you a chance to purchase a “bank guarantee” or a letter of credit from an established financial institution, do not believe them. As the SEC, FBI and other federal authorities have repeatedly warned, these types of financial instruments are not securities bought or sold on normal U.S. markets. If you have been the victim of a prime bank or similar type of financial or investment scheme and need legal advice, contact Florida securities and investment fraud attorney Gregory Tendrich, P.A., right away.