On Dec. 8, 2016, in the United States District Court for the Central District of California, the Federal Court granted the SEC’s Motion for Summary Judgment in the matter of Securities and Exchange Commission v. Steve Chen.
The SEC’s Motion for Summary Judgment was predicated on allegations that Chen, through his twelve (12) entities, engaged in an international Ponzi Scheme, in which hundreds of thousands of investors worldwide were deceived into believing that they were purchasing membership interests in a multi-billion-dollar multinational company in the business of processing and selling amber and amber jewelry, with $50 billion in worldwide assets. However, in reality, Chen was operating a Ponzi Scheme with these companies, with total assets of about $77 million, in which he offered investors a “bonus program” to bring in new investors, whose investment would in effect pay off the investments of the earlier investors. As part of his scheme, Chen also offered Gemcoins, a cryptocurrency, to investors in exchange for their investment, which he represented would increase greatly in value and were backed by $5 billion in gemstones. In reality, the represented billions in gem stones and jewelry maintained by Chen at USFIA was valued by the SEC and amounted to a little more than $300,000.
From Jan. 1, 2010 to 2015, approximately $195 million was received by the entities, with over 400 transfers of funds between the 12 entities in excess of $74 million, and another approximately $100 million in disbursements by the entities, with only $19 million remaining in the accounts when Chen was stopped. During this period, approximately $47 million was spent by Chen on properties and personal expenses for himself and his dependents, alone.
Although Chen adamantly argued that he, through his several entities, was only in the business of selling amber and amber jewelry, and not the sale or offer of securities, the Court held otherwise.
In its ruling on the SEC’s Motion for Summary Judgment, the Court found that Chen’s actions did in fact involve the sale of securities by way of the marketing materials of Chen’s companies, USFIA, including selling unregistered securities and investment contracts by use of a pyramid scheme. With respect to the pyramid scheme utilized by Chen, the Court noted, USFIA’s actions were “certainly … done to spur additional recruiting activities. The promise of “big [, quick] profits” under the Bonus System enticed investors to become USFIA Distributors. …” and that, “[t]he evidence shows that USFIA ran a pyramid scheme.”
The Court granted partial summary judgment as to Mr. Chen and granted the SEC’s requests for a permanent injunction under the Securities Act. In so granting, the Court stated that it was proper, as “Defendant acted with a high degree of scienter; the violation took place of years and involved elaborate schemes; Defendant has shown no sign of recognition of wrongdoing and has offered no assurances against future violations. The Court finds that a reasonable likelihood of future violations exists without a permanent injunction. Thus, the Court must grant an injunction under the law.”
The impacts of the Court’s decision on the present class action case filed against Steve Chen on behalf of all defrauded investors in the U.S. and worldwide will be addressed by local attorney Long Z. Liu in San Gabriel.