On September 27th, 2021, the Securities and Exchange Commission (“SEC”) announced affinity fraud charges against a Miami payday lender, Sky Group USA LLC (“Sky Group”), and its CEO, Efrain Betancourt. [1] The SEC’s complaint lists eight violations of federal securities law centering on allegations of material misrepresentations and omissions regarding Sky Group’s use of investor funds, its profitability, and the safety and security of the promissory notes it sold. [2]
According to the SEC’s complaint, Sky Group ran its fraudulent scheme from at least January 2016 through March 2020. During this time, Sky Group raised approximately $66 million through the sale of promissory notes while representing itself as a payday lender soliciting investors to fund its business. [2]
In particular, Sky Group targeted Venezuelan-American investors in South Florida, who in turn often spread information about the investment opportunity by word-of-mouth. Betancourt specifically pitched Sky Group investments as “a great opportunity for members of the Venezuelan immigrant community to generate investment income,” touting its supposed $70 million loan portfolio as evidence of the investment’s safety.
Sky Group investors each signed a Sky Group “Loan Agreement and Promissory Note” which formed the basis of the agreement in which the investors would receive monthly interest payments and the return of their principal after one year. [2] Annual interest rates were advertised from 24 to 120 percent, and such rates often served as one of the main factors in securing investors. [2]
In all, Sky Group recruited between 505 and 685 retail investors under this guise, most of whom purchased promissory notes with principal values ranging from $10,000 to $150,000, with an outlier having invested $1.1 million. [2] Sky Group and Betancourt employed outside sales agents to contact and pitch the investment to potential investors; none of whom were registered as brokers nor associated with registered broker-dealers. [2] Betancourt also frequently met investors in person, over the phone, and via email to secure their buy-in personally. [2]
While Sky Group investors were assured that their investments would be used solely for consumer payday loans and any costs associated with them, the reality was quite different. Of the $66 million it raised from investors, Sky Group used less than 20% for consumer payday loans. [2] It also only received $20.5 million in customer loan repayments, a far cry from the $70 million loan portfolio it advertised to investors as a reserve for repayment if needed. [2]
As for the remaining 80% of investor dollars, Sky Group improperly used about $12 million on its operating expenses, almost $10 million to pay its sales agent commissions, $19.2 million to simply repay prior investor’s principals and interest, and at least $6.5 million on personal and family expenses. [2]
In its complaint, the SEC alleges that Sky Group and Betancourt’s fraudulent actions and omissions violated several provisions of the Securities Act of 1933 and the Exchange Act of 1934.
This case is of unique importance because Sky Group and Betancourt relied heavily on the insidious tactic of affinity fraud. At a base level, affinity fraud targets a specific, often tight-knit group of people who share something in common – here, a common nationality. Fraudsters then attempt to gain trust within the group and use that trust to financially exploit the group through their fraudulent investment scheme. [3]
The SEC has published an investor alert on the topic of affinity fraud, which urges investors to take the following steps to avoid falling prey to an affinity fraud scheme:
- Carefully research the background of any person who makes an investment offer, even if they seem trustworthy.
- Do not make investment decisions based solely on a recommendation from a member of a group you belong to.
- Be on the lookout for investments with unusually high or “guaranteed” returns – investments are rarely risk-free, and when an investment seems too good to be true, it often is. [3]
While this case is ongoing, our attorneys are available to guide you through any inquiries you might have related to affinity fraud or to this complaint.
Sources:
[1] https://www.sec.gov/litigation/litreleases/2021/lr25234.htm
[2] https://www.sec.gov/litigation/complaints/2021/comp25234.pdf
[3] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/investor-60