Finance, Investments Investment Fraud, Advice Needed

[Robert Carson]

Jurisdiction

Texas

4 years ago, a friend approached me regarding a company he was a co-founder of. He asked me for financial help in forming the company. He approached at least 5 other people.

He never gave this in writing, but in calls, he informed me of his plan: He stated that he would take my money, and within an anticipated 6 months, he would sell the company for millions and maybe even billions, and I would receive multiple times my money. I, along with 5 others, invested substantial amounts of money into the company in the hopes of money returned.

However, the company was never sold, and it's been 4 years. I have spoken with my friend and the other co-founder regarding where my money was and why I am not receiving it. Every time I would ask one of them, they would say something along the lines of "something big will happen next month". Nothing 'big' ever happened, and I still have not received even a cent of my money back.

Also, he also said he was very careful with money. Later, however, we found out he was burning through money every month faster than through any money coming in, and from what I can gather the company has issued additional shares to others for additional money put in. Thus, I sense a mishandling of money.

I signed multiple of their documents which insured that it would be possible that I would lose money and that I had the financial standing ($1M in the bank) to account for any financial blow this would cause me. The co-founder of the company also made me sign documents to say I was an accredited investor in his company but he accompanied me to the bank so he could get the bank cashiers check directly.

He continuously lied to me and said he would take stay on top of things until the company was sold, but for last two years, he has moved away from the company into additional ventures. He doesn't respond to my emails any more.

For reference, I invested 100,000 USD into the company. Another one of the investors invested 150,000, and another invested a couple million dollars. I have spoken to the guy who invested a couple million dollars, and supposedly he hasn't received his money back either (I don't know if this is fully true). I know for a fact that the guy who invested 150,000 has not received his money back either.

End Point: Even though we signed where he told us to - to say we are accredited investors and that we could lose our money - he fraudulently misrepresented how well the company was doing.

Since possibly 6 people have been swindled out of their money for a lost cause, I am wondering what legal actions I can take to get my money back (and to sue for fraud).

Instead of suing the company, however, we want to be able to sue him personally as well. Is there a statute of limitations for starting legal action? We have tried to get answers but get nothing.

 

[Zigner]

Sounds like you made an unsound investment.

If you want to explore your legal options, then you need to speak to an attorney. For a matter of this magnitude, an internet forum is NOT going to help.

 

[Zigner]

See my reply at Investment Fraud, Advice Needed. There is no need for multiple threads on the same matter.

 

[Tax Counsel]

He never gave this in writing, but in calls, he informed me of his plan: He stated that he would take my money, and within an anticipated 6 months, he would sell the company for millions and maybe even billions, and I would receive multiple times my money.

You fell for one of the oldest lines out there — "give me some money for investment and you're guaranteed to make a fortune from it within [some short time period]." Very, very rarely does that ever actually pan out as promised. If the company was that sure of a winner, the founders would have sought ways to raise money that would not have involved sharing a substantial portion of their guaranteed fortune with others. When you hear a line like that, you should be seeing a huge red flag waving in your face telling you that what you are hearing is almost certainly entirely BS.

End Point: Even though we signed where he told us to - to say we are accredited investors and that we could lose our money - he fraudulently misrepresented how well the company was doing.

The nature of the investment (did you purchase stock, bonds, grant a loan, etc) and what was disclosed to you in writing are extremely important. If they did it right you may be in a tough spot to recover for the alleged fraud. If you were given written disclosures that differ from what the founder told you orally, the written disclosures are what will be given more weight. Moreover, proving those oral promises is difficult if it comes down to just your testimony of what was said versus the founder's testimony. That said, if they didn't take care to follow federal and state securities laws then you and the other investors may indeed have a very good recourse here. You'll need to consult a securities law attorney in your state for advice on that.

Is there a statute of limitations for starting legal action?

Yes. Which statute of limitation (SOL) applies will depend on the nature of the claim(s) you have available to pursue. It's been 4 years now since the investment was made, so time is not your friend here. See the attorney ASAP. If the SOL is not yet expired you don't want to be in the position of having it run out while you sit around doing nothing more even more months or years. So get off the computer and start calling some securities lawyers.

 

[Robert Carson]

You fell for one of the oldest lines out there — "give me some money for investment and you're guaranteed to make a fortune from it within [some short time period]."

I understand this - however, it wasn't just me, and hearing about the funds given by others (the gentlemen who invested millions and others), and conducting due research into the company, I saw this as a great investment. They had a solid business plan, however, they failed to execute it. Multiple times, I informed them that what they were doing would drive the company to the ground. Despite this, they continued to lose money each month.

The nature of the investment (did you purchase stock, bonds, grant a loan, etc)

This was simply through a loan - I expected to receive multiple times my money.

If they did it right you may be in a tough spot to recover for the alleged fraud. If you were given written disclosures that differ from what the founder told you orally, the written disclosures are what will be given more weight. Moreover, proving those oral promises is difficult if it comes down to just your testimony of what was said versus the founder's testimony.

There's a bit of information through text and email, though I'm sure that if all 6 investors produce a statement with all texts/emails received from the company, a case can be made for fraud. If 6 witnesses are able to explain (with text and email evidence) how the founders of the company - on multiple occasions - noted that the company was doing well, even though it wasn't, is this sufficient to develop and have a good chance at winning a case against the founders?

Also, I'd like to better understand the law regarding this. If in a contract they say that I will have the financial standing to take a blow, but I am able to prove that this fraudulent company caused financial damages to me, am I able to sue for something like this, especially with the backing of 5 other investors? I only signed the contract because I was told that the company would do well, and throughout the continuing months, I was told the same thing, that something big would happen or that the company was doing great.

See the attorney ASAP.

I have contacted lawyers before, but I haven't gotten much information. This is why I am resorting to this to see if I can receive any information to become better organized in building this case. Eventually, I will want to take this to a lawyer, but right now I need to formalize an argument.

 

[Zigner]

I understand this - however, it wasn't just me, and hearing about the funds given by others (the gentlemen who invested millions and others), and conducting due research into the company, I saw this as a great investment. They had a solid business plan, however, they failed to execute it. Multiple times, I informed them that what they were doing would drive the company to the ground. Despite this, they continued to lose money each month.

You investigated the plan, but not the people.

This was simply through a loan - I expected to receive multiple times my money.

Are you now claiming this was a loan and not an investment?

There's a bit of information through text and email, though I'm sure that if all 6 investors produce a statement with all texts/emails received from the company, a case can be made for fraud. If 6 witnesses are able to explain (with text and email evidence) how the founders of the company - on multiple occasions - noted that the company was doing well, even though it wasn't, is this sufficient to develop and have a good chance at winning a case against the founders?

Also, I'd like to better understand the law regarding this. If in a contract they say that I will have the financial standing to take a blow, but I am able to prove that this fraudulent company caused financial damages to me, am I able to sue for something like this, especially with the backing of 5 other investors? I only signed the contract because I was told that the company would do well, and throughout the continuing months, I was told the same thing, that something big would happen or that the company was doing great.



I have contacted lawyers before, but I haven't gotten much information. This is why I am resorting to this to see if I can receive any information to become better organized in building this case. Eventually, I will want to take this to a lawyer, but right now I need to formalize an argument.

If it's a loan, then none of this matters. However, I suspect that, as a loan, your expectation of "making money" runs afoul of your state's laws against usury.

So, which was it? A loan or an investment?

 

[Tax Counsel]

This was simply through a loan - I expected to receive multiple times my money.

Ok, this was loan. What were the repayment terms for the loan and were they in writing? And importantly, did the company breach contract by failing to repay as agreed? If so, when did the first breach occur — when did the first required repayment get missed? Is the company located in Texas and is that where the loan was executed?

You might have a problem here if the loan charged an interest rate in excess of the rate allowed under the applicable state's usury law.

There's a bit of information through text and email, though I'm sure that if all 6 investors produce a statement with all texts/emails received from the company, a case can be made for fraud. If 6 witnesses are able to explain (with text and email evidence) how the founders of the company - on multiple occasions - noted that the company was doing well, even though it wasn't, is this sufficient to develop and have a good chance at winning a case against the founders?

No way to know if there might be a case for fraud without seeing all the available evidence. If they misrepresented the facts to you about the company and you relied upon that false information in making the loan then you have a potential fraud case, assuming you can prove the false statements that were made to you prior to you granting the loan. It's the statements made to induce you to make the loan that are most important here.

Eventually, I will want to take this to a lawyer, but right now I need to formalize an argument.

No, you don't have to come up with the legal argument before seeing a lawyer. That is what the lawyer is there to do. I certainly would not expect my clients to come to me with a legal theory already perfected. What I want to see is the facts of the matter and the evidence the client has regarding it. From there I can figure out what potential legal strategies may be available. That's pretty much the way any lawyer is going to approach it.

What you don't want to have happen is that the SOL expires while you're trying to figure all this stuff out yourself. Because if the SOL expires then even the best legal case is worthless. Once the SOL is gone, the defendant can get the case easily dismissed and you are done.

 

[Robert Carson]

It definitely wasn't a loan. Sorry - my apologies, I got confused. It was in the form of stock in the company. I still own the stock in the company. The company is located in Texas.

Does this still count as fraud: A couple month after I invested my money, I realized something was going on, so I asked to take my money out, and they convinced me that the company was doing great and that a buyer was approaching them. This, of course, never happened.

I will check on further details including SOL.

 

[adjusterjack]

Does this still count as fraud:

Hype is not fraud. Inept is not fraud. Failure is not fraud.

You really have to sit down and pay an attorney to carefully examine all of the details and advise you accordingly.

 

[Zigner]

It definitely wasn't a loan. Sorry - my apologies, I got confused. It was in the form of stock in the company. I still own the stock in the company. The company is located in Texas.

Then I'm back to my earlier statement that you investigated the plan, but not the people.

Does this still count as fraud: A couple month after I invested my money, I realized something was going on, so I asked to take my money out, and they convinced me that the company was doing great and that a buyer was approaching them. This, of course, never happened.

Why do you believe you can just take your money out of the investment? Was that part of the agreement you signed?

 

[Robert Carson]

It's like the example with this: There is a job for 500 dollars, so you cancel the original job for 450 dollars, and then the 500 dollar job calls you to say they are actually offering 350.

Since I would have invested my money is something else (probably just put it in the bank), doesn't this count as damages to me?

Why do you believe you can just take your money out of the investment? Was that part of the agreement you signed?

Yes.

Hype is not fraud.

But does falsely stating how well a company is doing to maintain my money count as damages to me as I would have put it in the bank and it would have grown with interest?

 

[adjusterjack]

Since I would have invested my money is something else (probably just put it in the bank), doesn't this count as damages to me?

Not even close. Your damages would be the loss of your $150,000 if you could prove that you were defrauded. Trouble is, I don't see fraud (yet) and you haven't provided any evidence of fraud, just buyer's remorse since the investment isn't working out the way you expected it to.

If you don't want to stick it out, maybe you can sell your shares to somebody else. Probably at a loss but you still would have no case against those with whom you invested your money.

Why do you believe you can just take your money out of the investment? Was that part of the agreement you signed?

Yes.

Really? You have a piece of paper signed by corporate officers saying you can take your money back any time you want to? I'd love to see that. Please note that you can upload a redacted copy here.

But does falsely stating how well a company is doing to maintain my money count as damages to me as I would have put it in the bank and it would have grown with interest?

Again, no.

Besides, "falsely stating" is your opinion and perhaps not exactly what was said.

What you did is no different than going to a stock broker and buying $150,000 worth of stock in a start up company that has great expectations. A few years later, the company fails and the stock price tanks and you lose all your money. Were you defrauded? Of course not. You just made an investment that turned out bad.

That being said, if you really think hanky panky was afoot regarding the solicitation of the investments, you and other investors are free to file a complaint with the Securities and Exchange Commission.

SEC.gov | HOME

 

[Tax Counsel]

It definitely wasn't a loan. Sorry - my apologies, I got confused. It was in the form of stock in the company. I still own the stock in the company. The company is located in Texas.

That makes a big difference. You need to provide accurate information to get good answers. So you were sold stock in the venture. That is the sale of a security, which is governed by federal and state securities laws. The details then of what information he gave you on the venture prior to your investment matters a great deal. Federal securities laws require an extensive disclosure of information to potential investors as well as reporting that information to the U.S. Securities and Exchange Commission (SEC) unless the company qualifies for exemption. Companies qualifying for exemption may still have reduced disclosure requirements depending on the exemption claimed. The failure to do that can give investors a cause of action to seek recovery of their investment. Moreover, providing false or misleading information in connection with the sale of a security is a federal offense. But it matters exactly what the company did, how much was raised in the stock offering, and whether the investors met the requirements for qualified investors. No one here will be able to tell you whether the company violated the securities laws or whether you have a good cause of action. These kinds of claims are too complex to resolve on an internet forum.

Does this still count as fraud: A couple month after I invested my money, I realized something was going on, so I asked to take my money out, and they convinced me that the company was doing great and that a buyer was approaching them. This, of course, never happened.

Generally once you buy stock in a company the company itself has no obligation to buy back the shares later. You are able, however, to sell the shares to someone else unless the shares were restricted somehow. The statement a buyer was forthcoming might have been true — the buyer may have just backed out. It was untrue then the company may have again violated securities laws if the company had ongoing requirements to report accurate information to investors.

Why are you so seemingly resistant to the idea of seeing a securities lawyer for the answer to your questions? That is the very best way to figure out where you stand and what actions you can take. So get yourself to a securities lawyer.