Securities and Exchange Commission v. Duncan J. MacDonald, III and Gloria Solomon, Civil Action No. 3:13-cv-02275 (Northern District of Texas filed June 17, 2013)
SEC Charges Two Executives in Ponzi Scheme At Dallas-Based Medical Insurance Company
The Securities and Exchange Commission recently charged two executives at a Dallas-based medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.
The SEC alleges that Duncan MacDonald and Gloria Solomon solicited investments for Global Corporate Alliance (GCA) by promoting it as a proven business with a strong track record of generating revenue from the sale of limited-benefit medical insurance. However, in reality GCA was merely a start-up company with no operating history and virtually no revenue. As they raised investor funds, MacDonald and Solomon used proceeds from new investors to pay returns to existing investors. Once they couldn't find any new investors, MacDonald and Solomon used a stall campaign of purported excuses to delay making any further payments to investors.
In a parallel action, the U.S. Attorney's Office for the Northern District of Texas has filed criminal charges against MacDonald and Solomon.
According to the SEC's complaint filed in federal court in Dallas, MacDonald set out in 2008 to start an insurance company that would market medical insurance to large groups. He tried for months to find a single investor to fund the company's initial capital needs, but was unsuccessful. Meanwhile, MacDonald and Solomon began spending money on the business before raising any capital. They hired employees, heavily marketed the program, and secured a sponsorship agreement with a large national membership group. MacDonald was GCA's president and chairman, and Solomon was chief administrative officer.
The SEC alleges that when unable to land a major investor, MacDonald fractionalized his efforts and sought individual investors who could contribute smaller amounts. When pitching GCA to investors as well as brokers assisting him in identifying investors, MacDonald significantly misrepresented the history and state of his business. Besides misleading investors to believe there were more than 100,000 premium-paying members, MacDonald misrepresented that GCA had previously sold a portion of its revenue stream from paying members to a Chinese hedge fund. GCA had no relationships with a Chinese hedge fund or any other institutional investors.
According to the SEC's complaint, MacDonald and Solomon began fabricating enrollment numbers to make it appear that GCA was enrolling new members each month. They created a so-called "Monthly Overage Disbursement Statement" that purported to show the monthly member enrollments and cancellations. The statements were meant to look as if they were generated from a database, but they were actually made in Excel and populated by Solomon. These monthly statements were provided to the brokers by MacDonald and Solomon so they could be used to induce investments from potential investors and serve as the basis for payments to existing investors. At MacDonald's direction, Solomon was primarily responsible for making the monthly payments to investors based on the false enrollment numbers. In reality, these were Ponzi payments rather than revenues from policyholders.
The SEC alleges that by the time the scheme collapsed, GCA had raised nearly $10 million from investors and returned about $2 million to investors in the form of Ponzi payments. MacDonald and Solomon each took around $1 million of investor funds, and spent the remaining investor funds on various business-related expenses until GCA's accounts were left with a negative balance. After investor money was gone and GCA could no longer make monthly payments to investors, MacDonald and Solomon spent the next year concocting various reasons to investors about why they could not make payments. Meanwhile, MacDonald was pursuing alternative means of financing the company and redeeming the investors, but no more money ever came.
The SEC's complaint charges MacDonald and Solomon with violating Sections 5 and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking various relief including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
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