Los Altos Investment Manager Indicted on Securities and Mail Fraud Charges
SAN JOSE, CA—A federal grand jury in San Jose returned a 29 count indictment charging a Los Altos investment manager with securities and mail fraud, relating to a multi-million dollar investment scheme, announced United States Attorney Melinda Haag, FBI Special Agent in Charge David J. Johnson, and Special Agent in Charge Kari Overson, Small Business Administration’s Office of Inspector General.
According to the indictment, which was unsealed yesterday, Mark Feathers is named as the sole defendant in all counts, including 17 counts of securities fraud and 12 counts of mail fraud between 2009 and 2012.
The indictment alleges that Feathers, 51, of Los Altos, Calif. was the founder, CEO, and a director of Small Business Capital Corporation (SBCC), a privately-held California corporation formed in 2004 with its principal place of business in Los Altos. SBCC was the sole manager of three investment funds that were marketed as investing in loans secured by first deeds of trust on commercial and income-producing residential real estate.
According to the indictment, Feathers, raised more than $50 million from over 250 investors through the offer and sale of securities in the form of membership interests in investment funds. The defendant and SBCC represented to prospective investors that the investment funds would pay “Member Returns” of at least 7.5% from profits generated by the investment funds’ mortgage loan portfolios. However, by June 2012, as a result of his fraudulent scheme, Feathers had allegedly booked over $5 million in unsecured loans from the investments funds to his management company, paid returns to investors in excess of net profits of the investment funds, a “Ponzi” scheme in which the returns were partially funded with money from new investors, and in the process, diverted approximately $2 million to his own personal benefit.
According to the indictment, despite owing a fiduciary duty to the investment funds’ investors, the defendant failed to disclose significant conflicts of interest arising from causing the investment funds to transfer over $7 million to SBCC so it could pay its expenses, and recording a majority these transfers as assets of the investment funds. In addition, the defendant sent regular newsletters to investors reassuring them that the funds were making loans secured by first and second deeds of trust and that all loans were performing. However, as alleged in the indictment, the investment funds had unsecured loans to SBCC, these loans were not generating returns, and the investment funds themselves were not generating returns as represented in the Offering Documents or the subsequent account statements transmitted to investors.
The defendant made his initial appearance in federal court in San Jose yesterday before the Honorable Judge Paul S. Grewal, United States Magistrate Court Judge, who unsealed the indictment. The defendant was released on a $250,000 bond and subject to various terms and conditions. His next scheduled appearance is on Wednesday, Nov. 19, 2014, at 1:30 p.m., for status and further setting before Judge Grewal in San Jose.
The maximum statutory penalty for each count of securities fraud is thirty years’ imprisonment, a fine of $1,000,000 or twice the amount of gain or loss, whichever is greater, five years of supervised release, and restitution if appropriate. The maximum statutory penalty for each count of mail fraud is twenty years’ imprisonment, a fine of $250,000 or twice the amount of gain or loss, whichever is greater, and restitution if appropriate. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.
Timothy J. Lucey is the Assistant United States Attorney who is prosecuting the case with the assistance of Laurie Worthen. The prosecution is the result of an investigation by the FBI in coordination from the Small Business Administration’s Office of Inspector General and with substantial assistance from the Securities Exchange Commission’s Los Angeles Regional Office.