ArchiveCases

10B-5 Securities Class Action Involving $22 Million Ponzi Scheme Settled

By August 22, 2011 April 9th, 2015 No Comments

Miami, Florida, January 4, 2010 – A 10b-5 securities class action lawsuit was settlement was recently approved by the federal district court.  The suit alleged Paul A. Hoffman and Edward S. Digges, Jr., defrauded investors of $22 million in a Ponzi scheme consisting of structured investments in ATM cash machines.

The lawsuit alleged that between April 2003 and February 2006, Hoffman and Digges, through various corporate entities, fraudulently sold securities in the form of investments in ATM terminals that were coupled with lease agreements.  The ATM’s were supposed to be placed in high profile retail establishments and locations that would generate profits for the investors.  The investors were promised a fixed rate of return equivalent to 12% annual return for five years along with the option to sell back the terminals for the full $5,000 purchase price after five years.  Through this system, Hoffman and Digges’ corporate entities raised some $22 million from approximately 300 investors, most of whom were elderly.

The lawsuit further alleged that Hoffman and Digges had guaranteed that the ATM lease payments were backed through a reserve fund that would have covered six months’ worth of the monthly lease obligations.  They had also claimed that the investment program maintained a “sinking fund” to fund the eventual repurchase of the terminals.  In the end, this investment program was nothing more than a sophisticated Ponzi scheme. Barely, if any of the ATM’s were actually placed in locations to generate profits, there were no reserve funds, and the $5,000 they collected for each ATM was merely used to pay back some of the investors.

In February of 2006, Hoffman and Digges’ corporate entities ended up in receivership as a result of an action brought by the Securities and Exchange Commission (SEC). With the filing of this SEC Action, the SEC exposed Hoffman and Digges’ fraud.  The SEC complaint sought emergency injunctive relief that the court eventually granted.   It was only with this filing of the SEC Complaint that investors became aware of the fraud in Hoffman’s and Digges’ corporate entities and their role in carrying out the Ponzi scheme.

Because the Receiver’s action did not seek recovery for violations of the Exchange Act, the plaintiffs sued to supplement the recovery their losses resulting from Hoffman and Digges’ violations of the federal securities laws.  Moreover, the Plaintiffs sought recovery for violations of the SEC’s rule 10b-5.  This rule deems it to be illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information or otherwise conduct operations of business that would deceive another person; in relation to conducting transactions involving stock and other securities.

Hoffman and Digges had been long time business associates and very close personal friends. While Hoffman had a relatively distinguished reputation as a businessman as the Chairman and CEO of Ringler Associates, one of the nation’s largest structured settlement firms, Digges, on the other hand, was a disbarred attorney, who had served time in jail for committing fraudulent billing practices.  The lawsuit alleged that Hoffman and Digges understood that investors could be scared away from investing in their corporate entities if they knew of Digges involvement.  To avoid this, they purposely concealed Digges’s role and made Hoffman the public figurehead for the enterprise.  As a result, investors, brokers, and even government regulators were under the impression that Hoffman was at the helm of the corporate entities when, instead, it was Digges who played the most active leadership role.  As a result, Digges was able to amass millions in investments from innocent elderly investors and skim millions for themselves and their family members.

On December 22, 2009, U.S. District Judge Gregory A. Presnell issued the final order granting the class certification and settlement that required Hoffman to pay $700,000 plus attorneys’ fees to the plaintiffs.

“We are very pleased with the settlement,” said Melanie Damian, attorney for the plaintiffs.  “The difficult task was proving that there was fraud in connection with the sale of the ATM’s as a security. Although the plaintiffs received monetary relief from the original SEC complaint, this settlement provided additional relief and sent clear message about the dangers investors face when they are lured into Ponzi schemes.”