Sat09202014

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SEC accuses Los Altos firm of Ponzi scheme

The Securities and Exchange Commission last week froze assets of a Los Altos company, Small Business Capital Corp., after alleging that CEO Mark Feathers operated a Ponzi-like scheme.

The SEC claims that Los Altos resident Feathers, 48, raised $42 million from more than 400 investors by claiming to invest in mortgages that could provide a 7.5 percent annual return. Feathers allegedly disguised his company’s depleted assets from investors over the last three years and didn’t communicate his uncertain ability to repay their investments. His company, known locally as SB Capital, underwrote loans to commercial properties.

Ponzi schemes, named for notorious swindler Charles Ponzi, refer to investment pyramids in which investors are paid “returns” drawn from other investors’ capital rather than from fruitful trading.

“I am shocked, stunned and disappointed at the charges of the (SEC),” Feathers told the Town Crier Friday. “I am firmly committed to protecting the interests of my investors and our borrowers. And I am working closely – and without delay – with the court-appointed receiver to protect these interests. I look forward to the restoration of my good name and reputation.”

Feathers could not comment on the specifics of the charges per the advice of his legal counsel.

Thursday afternoon, SB Capital’s San Antonio Road office buzzed with activity as workers from a court-appointed receiver worked within. Receivers act as custodians, determining assets and their distribution.

Judge Edward Davila had issued a temporary restraining order against SB Capital.

Employees were told to cease and desist from all work and not enter the office, according to Wyatt Allen, a longtime Los Altos banker who has worked as a vice president at SB Capital for the last year. A hearing on the SEC’s request for an injunction against the company is scheduled July 10.

“The SEC hasn’t told me anything yet, they just told me to cease and desist,” he said. “I’m in a little bit of shock. I wouldn’t be part of something if I didn’t feel it was on the up and up… I wouldn’t want to put anyone’s money at risk, including my own.”

Allen said that to his knowledge, SB Capital has been a “very straight-forward organization” which made loans to owner-occupied business properties via the Small Business Administration. Allen added that interest from those loans – and profits from servicing fees – allowed the company to return profits to investors.

While residents of Los Altos and Los Altos Hills have invested in the fund, according to Allen, the majority of participants hail from the South Bay and East Bay.

How much investors might stand to lose remains unknown. The SEC complaint does not address the profitability of the mortgages in which customers thought they were investing.

The complaint does, however, allege that Feathers used money from new investors to pay fictitious returns to existing investors, and that he transferred more than $6 million from investment funds to pay SB Capital’s expenses, including “substantial” payments to himself.

Between 2009 and 2012, Feathers allegedly paid himself and companies he controls $485,850 via a transfer from the investment funds, which the SEC describes as a conflict of interest. The SEC alleges that those transfers were disguised, and that the company also paid itself more than half a million dollars in management fees this year by moving mortgages between its two funds, Investors Prime Fund and SBC Portfolio Fund, and thus generating a false profit. According to the SEC filing, the two funds had a total of $4.7 million cash in hand at the time of the seizure. The filing did not offer a tally of loan assets.

The Town Crier wrote about Feathers in 2009, at which time he described SB Capital as underwriting “sound investments – a community grocery store or restaurant” and said “our business is (an) open book and as transparent as it possibly can be.”

Feathers founded the company in 2004 and hosted regular events at his home for investors.

The SEC’s complaint claims that by misrepresenting and omitting how he was moving money, and by claiming to generate profits that didn’t exist, Feathers committed fraud.

The SEC also claims that he should have registered as a broker-dealer with the commission before attempting to sell securities. In 2011, the California Department of Real Estate reported a “suspension with stay” and monetary penalty against Feathers, who it listed as a broker, and SBA Capital, based on regulations relating to fund handling.

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