Attorney accused by SEC of defrauding retirees in litigation funding Ponzi scheme.
The SEC is suing an attorney and a legal marketer in federal court over an alleged Ponzi scheme in which the two men are accused of defrauding 250 people, mostly seniors, out of $12 million in a lawsuit investment scam.
Michigan tax attorney James A. Catipay and Washington state legal marketer David A. Aldridge, as well as their company Prometheus Law, are accused of four counts of securities
fraud in the SEC’s April 15 suit.
The scheme capitalized on the growing business of “litigation funding,” in which investors underwrite attorneys’ high-dollar commercial lawsuits, in hope of profiting from settlements.
Catipay and Aldridge took money from small investors, allegedly to fund personal injury and mass tort cases, but the SEC says it was a Ponzi scheme.
“Catipay and Aldrich spent millions of dollars on personal items, including a million-dollar loft in downtown Los Angeles and paying Aldrich’s personal income taxes. So when the first approximately $120,000 of investor returns came due, the defendants used money raised from new investors to pay the existing investors — payments that both Catipay and Aldrich admitted were, in fact, Ponzi payments,” the SEC says in the lengthy complaint.
They defrauded investors “by repeatedly downplaying the risks associated with their investments and the fact that their entire business model was unrealistic to afford the exorbitant returns promised,” Michele Layne, the head of the SEC’s Los Angeles office, said in a statement.
Catipay and Aldridge told victims their money “is never at risk,” the SEC says, citing the defendants’ 2014 “information packet.” They promised to spend the money lining up plaintiffs to bring class actions against drug companies and medical device makers, and guaranteed returns of 100 to 300 percent, according to the complaint.
They offered what they called “forward contracts” that would pay off after a specific number of months, and said the mass tort cases “had settlement funds just waiting in escrow to be claimed,” the SEC says. But “In fact, the investments were highly speculative and risky.”
Also, the SEC says, it is illegal for an attorney and a non-lawyer — such as Aldridge and the 250 investors — to share legal fees. Such fee-splitting “is widely prohibited, and therefore potentially unenforceable.”
Aldridge came up with the idea to market investments in medical litigation in mid-2013, but had trouble finding a lawyer to join him. Before meeting Catipay, he interviewed approximately 100 attorneys, who all “declined because of the ethical prohibition against fee-sharing with non-lawyers,” according the complaint.
After beginning in October 2013, Aldridge and Catipay’s venture attracted $11.7 million, generally in small investments ranging from $5,000 to $10,000. The two struck a deal with a personal injury lawyer in Seattle — called “Attorney A” in the complaint — to represent any tort plaintiffs they found and to give their company one-third of any fees he collected.
But they spent only about a third of the investors’ money on looking for tort plaintiffs. And by early this year, those marketing efforts had returned less than $10,000 in attorneys’ fees from the plaintiffs, the SEC said.
The men spent most of the money on themselves. Aldridge withdrew $3.7 million of the investors’ money, including $1 million to buy a condo and another $1 million to pay state and federal taxes, the SEC says.
Catipay took $1.87 million for himself. After a dispute and lawsuit between the partners, Catipay acquired Aldridge’s condo in a settlement.
The SEC seeks freezing of assets, disgorgement of ill-gotten gains and civil penalties.
Originally posted by on Don J. DeBenedictus on Courthouse News Service.
Ponzi Scheme – Ball & Bonholtzer Trial Attorney – Los Angeles