WASHINGTON – The Securities and Exchange Commission is charging a father, his son, and five of their associates with defrauding investors by using Native American tribal bonds for personal use, including paying for luxury items and legal costs associated with prior fraud charges.
The SEC filed its complaint in the U.S. District Court for the Southern District of New York in Manhattan on Wednesday. It names Jason Galanis, who was charged last year with committing stock fraud, his father John Galanis, as well as their associates: Devon Archer of Brooklyn, N.Y.; Bevan Cooney of Incline Village, Nev.; Hugh Dunkerley of Huntington Beach, Calif.; Gary Hirst of Lake Mary, Fla.; and Michelle Morton of Colonia, N.J.
The commission is seeking payment of unspecified penalties and disgorgement of ill-gotten gains plus interest as well as permanent injunctions that would bar them from various positions in the industry.
"We allege that Jason Galanis and his associates embarked upon a brazen and complex scheme in cold and calculated fashion to steal millions of dollars from unwitting investors," said Andrew Calamari, regional director of the SEC's New York office. "Galanis persisted in this alleged scheme even after he was arrested by criminal authorities and charged by the SEC in a different case."
The U.S. Attorney's Office for the Southern District of New York took parallel enforcement action against the seven individuals on Wednesday. All seven individuals were arrested and face one count of conspiracy to commit securities fraud, which carries a maximum sentence of five years in prison and a maximum fine of either $250,000 or twice the gross gain or loss from the offense.
Jason Galanis, Hirst, and Morton were also charged with conspiracy to commit investment advisor fraud, which carries the same penalties as the first count as well as investment advisor fraud, which carries a maximum sentence of five years in prison and a maximum fine of $10,000.
"The defendants' alleged fraud has left devastation in its wake: a tribe with tens of millions in bond obligations it cannot pay, and investors out tens of millions, left holding bonds they did not want," said Preet Bharara, the U.S. district attorney.
Susan Brune, Dunkerley's lawyer, said her client looks forward to addressing the charges.
Matthew Umhofer, Cooney's lawyer, said, "The SEC has it wrong. Mr. Cooney was a victim here, not a participant. He's a respected businessman with an unblemished record, and he's been swept up in an overbroad, overly aggressive government push. We're going to fight this."
Lawyers for Archer, Jason Galanis, and Hirst could not be reached for comment. John Galanis and Morton did not identify any counsel.
The alleged scheme began in March 2014 when Jason and John Galanis allegedly convinced a Native American tribal corporation, the Wakpamni Lake Community Corp., which is affiliated with the Wakpamni District of the Oglala Sioux Nation, to issue limited recourse bonds the father and son had already structured. Between August 2014 and April 2015, John and Jason Galanis arranged for WLCC to issue three tranches of tribal bonds.
After the WLCC approved the issuance, Jason Galanis emailed Archer and Cooney saying "my primary objective is to get us a source of discretionary liquidity. Sick of begging," the SEC said in its complaint.
Then, in July 2014, Jason Galanis arranged to purchase investment advisor Hughes Capital Management as a first step in locating investors to buy the tribal bonds. He put Morton in control of the investment advisory firm as chief executive officer and part-owner. In April 2015, he arranged for Hughes to acquire Atlantic Asset Management, another investment advisor, and put Morton in charge of the consolidated enterprise.
Galanis directed Morton to hire Hirst in August 2014 and Morton authorized Hirst to purchase $27 million of tribal bonds on behalf of nine of Hughes' clients. Morton, again at Galanis' direction, used $16.2 million of an AAM client's funds to buy more tribal bonds in April 2015.
The bond proceeds were supposed to primarily be invested in an annuity to benefit WLCC and generate enough income to pay interest and ultimately repay the principal to the bondholders. The proceeds also were supposed to be managed by an independent investment manager that the SEC calls "Investment Management Company A." But the company was a fake entity created at Jason Galanis' request. Galanis paid an associate $150,000 to sign the annuity contracts as the alleged control person of the company, the SEC said.
Instead of using the proceeds for the annuity as promised, Jason Galanis "gained undisclosed control over the bond proceeds" and, at times with the other named individuals, used them to pay for: luxury goods from stores like Valentine, Prada, and Gucci; criminal defense costs for himself and his father related to a previous case; an increase in the net capital of two broker-dealers with which Archer and Cooney had interests; and the financing of the initial public offering of a technology company in which Jason Galanis, Hirst, Cooney, Dunkerley, and Archer held shares.
Archer, Cooney, and Dunkerley allegedly took part in the scheme as high ranking officials or owners in various firms and companies that were employed during the course of the plan allegedly masterminded by Jason Galanis.
The two advisory firms led by Morton received a combined $655,000 as a result of the alleged scheme, the SEC said, with Hughes receiving $350,000 on Sept. 8, 2014 and AAM receiving a $305,000 payment on April 23, 2015. John Galanis received $2.35 million even though the WLCC was never informed he would receive any fees in connection with the bonds.
Jason Galanis arranged for a transfer of $3 million to lenders and others for the mortgage on, and maintenance of, his estate. He also arranged to have $497,210 spent on criminal defense attorneys and wired $214,000 to his mother, wife, and father-in-law.
Additionally, Archer received $700,513 between November 2014 and April 2015, Cooney received $4.37 million between August 2014 and April 2015, Dunkerley was transferred $20,485 in September 2014, and Hirst received $1.3 million in August 2014, the SEC found.
Both Jason and John Galanis have a history of SEC enforcement actions, with Jason settling with the commission in 2007 over charges of accounting fraud and financial reporting violations. Also pending is a September 2015 lawsuit from the SEC and indictment by a federal grand jury based on allegations that he orchestrated fraudulent and unregistered public distribution of millions of dollars of shares of a public company. Hirst and John Galanis, who have been the subject of numerous criminal proceedings and enforcement actions dating back to the 1960s, were also involved in the 2015 enforcement action, the SEC said.
The SEC is asking the court to permanently restrain and enjoin Jason Galanis, Archer, Cooney, Dunkerley, John Galanis, and Hirst from violating federal securities laws. It is also asking that Morton and her associates be enjoined from violating fraud prohibitions outlined under Section 10(b) of the Securities and Exchange Act of 1934.
Additionally, the commission is asking that Jason Galanis, Dunkerley, and Archer be permanently barred from acting as an officer or director of a public company under the Securities Act of 1933 and that Morton receive the same bar under the Exchange Act.
