SEC Says Ex-DC Atty ‘Minimizes’ Role In $14M Ponzi Scheme

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Law360, New York (September 20, 2017, 8:35 PM EDT) — The U.S. Securities and Exchange Commission on Tuesday pushed its fraud case against a former Washington, D.C., lawyer accused of helping with her brother’s $14.5 million Ponzi scheme, telling a Massachusetts federal court that her “attempt to minimize her conduct falls flat.”

Cheryl L. Jones, who was sued by the SEC in July and accused of participating in Mark A. Jones‘ Bridge Fund scheme, has urged the court to toss the agency’s complaint as “fatally flawed,” but the SEC fired back Tuesday that Jones has ignored its allegations of her “substantial” participation in order to recast herself as another one of the scheme’s victims.

“The commission’s allegations, which must be taken as true, paint the picture of a participant who, for approximately eight years, had significant and substantial involvement in the unlawful transactions, who profited from the scheme at the expense of investors she solicited and who was made whole when the Bridge Fund collapsed when other investors lost some if not most of their investment,” the SEC said. “Cheryl Jones was certainly no victim.”

The SEC’s complaint alleges that Jones engaged in the offer or sale of unregistered securities by recruiting her friends and other associates to invest in a bridge loan funding enterprise run by her brother, who later pled guilty to wire fraud and money laundering charges in connection with the scheme.

Jones’ bid to dismiss the complaint argued that the SEC failed to plead any facts showing that she made any sales or offers within the applicable five-year statute of limitations. In fact, according to Jones, the complaint never actually alleges that she personally made any sales or offers, or that she was a “necessary participant” in her brother’s scheme.

But the SEC responded Tuesday that the court isn’t limited to looking at only the past five years but can and should examine the “totality of circumstances” surrounding her conduct, some of which the agency said did fall within the statute of limitations “red zone.”

“After all, the question is whether Cheryl Jones participated in an illegal distribution which comprises the entire process by which in the course of a public offering the block of securities is dispersed and ultimately comes to rest in the hands of the investing public,” the SEC said.

Where the five-year window does apply is in the determination of disgorgement and other remedies after liability has been found, making Jones’ arguments for dismissal premature at this stage, the agency said.

The SEC argued further that it didn’t matter whether Jones herself made any sales or offers because liability reaches to so-called underwriters. That label can apply to those who participate or have “direct or indirect participation” in an offering, and the SEC said its complaint’s allegation that Jones not only participated in the Bridge Fund scheme but was also a key player ensures the suit’s survival.

“Stated conversely, the allegations cannot be read to state conduct so insubstantial to warrant dismissal of the complaint,” the SEC said. “To the extent defendant is disputing the extent of her participation as a matter of fact, that is not an appropriate basis for dismissing the complaint.”

The suit is seeking disgorgement of Jones’ allegedly ill-gotten gains, which included referral fees for other victims, a higher rate of return than others got and a monthly legal retainer.

According to the SEC, Jones not only got back her own $875,000 investment in her brother’s scheme but also picked up another $515,000 while others lost money. The agency says Jones made 10 percent commissions on referred investors’ principal, got a 24 percent interest rate on her investment — higher than her brother paid anyone else, including their mother — and received a legal retainer from her brother that reached as high as $7,000 a month, even though she does not maintain an active legal practice.

Jones told the court in her filing last month that she, like her brother’s other investors, “suffered significant losses representing all of her life savings.”

Counsel for Jones did not immediately return a request for comment on Wednesday. The SEC does not comment on pending litigation.

The SEC is represented by Frank C. Huntington, J. Lauchlan Wash and Xinyue A. Lin.

Jones is represented by Raymond Sayeg of Krattenmaker O’Connor & Ingber PC.

The case is Securities and Exchange Commission v. Jones, case number 1:17-cv-11226, in the U.S. District Court for the District of Massachusetts.

–Additional reporting by William Gorta. Editing by Brian Baresch.