By Stephen C. Baker, Katherine Villanueva, Nolan B. Tully and Joseph Evangelista

On November 10, 2015, the Securities and Exchange Commission (“SEC”) filed a complaint in the Northern District of Georgia against James Torchia and the companies under his control alleging that Torchia is running a Ponzi scheme involving two different investments: one related to the sale of bogus promissory notes and the other selling fractional interests in life settlements.

According to the SEC, Torchia, through his company Credit Nation Capital (“CN Capital”), raised tens of millions of dollars by selling promissory notes which promised 9% returns.  The complaint states that CN Capital enticed its investors by promising that the notes were “100% asset backed” and “backed by hard assets dollar for dollar.”  The complaint further states that those assets were actually a pool of life settlements.

The SEC disputes CN Capital’s claims regarding its returns and asset-backed scheme, and instead alleges that CN Capital operates as Ponzi scheme and that would be unable to make good on promised returns without new investor money.  According to the complaint, as of December 31, 2014, Torchia and his companies had only $9 million in assets and owed approximately $30 million to note holders.

In addition, the complaint alleges that Torchia’s second scheme involves selling unregistered fractional interests in life settlement contracts through a company called Credit Nation Acceptance (“CN Acceptance”).  The SEC contends that CN Acceptance improperly sells investors a share of a life insurance policy owned by CN Capital and the investor then receives a pro rata distribution when the insured dies.

The SEC also asserts that despite the fact that CN Capital sells the fractional interests in life settlements as stand-alone investments, the reality is that “Torchia disregards corporate formalities and commingles CN Acceptance’s funds with CN’s Capital’s, such that the [life settlement interests] are now threatened by CN Capital’s insolvency.”  Thus, the complaint states that CN Acceptance now lacks the funds needed to pay premiums on the policies fractionally sold to investors.

According to the complaint, for each life insurance policy sold by CN Acceptance, there is a projected life expectancy for the insured and CN Acceptance agrees to pay the premiums for two years after the projected life expectancy, assuming the insured is still alive.  Further, according to the SEC’s allegations, if an insured is still alive two years after the date set in the life expectancy report, then CN Acceptance has the right to tell the investors that they must pay ongoing premiums on a pro-rata basis.  According to the allegations, if the investors do not agree to pay ongoing premiums, CN Acceptance would sell that fractional interest to the highest bidder.

In sum, the lawsuit asserts that all of the claims made by CN Capital and CN Acceptance to investors are false.  The SEC asserts that the notes are not backed by assets and “the company’s liabilities dwarf its assets and the company has sustained multimillion-dollar per year operating losses.”  Accordingly, the SEC has sought emergency relief and requests that the court freeze the assets of Torchia and the related entities, and appoint a receiver.

The SEC has asserted claims for fraud (under the Securities and Exchange Acts), unregistered offering securities, and multiple claims of aiding, abetting, and causing.

Source: Life Insurance & Annuities Client Alert