Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, September 28, 2009

SEC Charges Detroit Broker with Participating in Ponzi Scheme

The SEC charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into refinancing the mortgages on their homes in order to fund their investments in a $250 million Ponzi scheme.  The SEC alleges that Bluestein acted as the single largest salesperson in the Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M). The SEC previously filed charges against May and E-M in connection with the fraudulent scheme. The SEC alleges that Bluestein specifically targeted potential investors who were retired or elderly and conducted so-called “investment seminars” in Michigan and California to lure them into investing in E-M securities.

The SEC’s complaint, filed in the U.S. District Court for the Eastern District of Michigan, alleges that Bluestein facilitated May’s fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period. Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.

The SEC’s complaint alleges that Bluestein misrepresented to investors that the investments were low-risk and that he had conducted adequate due diligence with respect to the investments when, in fact, he did little to investigate the legitimacy of the E-M offerings even when confronted with serious red flags about the existence of some transactions. Bluestein also misled investors about the compensation he was receiving from the offerings by failing to disclose that he received at least $2.4 million in commissions from May and E-M in addition to the $1.4 million in disclosed compensation he received from investor funds.

The SEC complaint alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 thereunder by Bluestein. As part of this action, the SEC seeks an order of permanent injunction against Bluestein as well as the payment of disgorgement of ill-gotten gains, prejudgment interest and financial penalties.

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