Securities Law Prof Blog

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

A Member of the Law Professor Blogs Network

Sunday, October 4, 2009

Loan Broker Settles Fraud Charges Involving Stock-Based Loan Scheme

The SEC settled charges against HedgeLender LLC, a stock-based loan broker located in Philadelphia, and its two principals, Daniel W. Stafford and Fred R. Wahler, Jr., for their conduct in connection with a fraudulent stock-based loan scheme orchestrated by Michael and Melissa Spillan through One Equity Corporation and other companies. Upon filing of the complaint, the defendants consented to the entry of orders, without admitting or denying the allegations of the complaint, that will permanently enjoin them from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The orders also provide that the Court shall order disgorgement of ill-gotten gains, prejudgment interest and civil penalties in amounts to be determined upon later motion of the Commission.

The Commission’s complaint alleges that in February 2006, HedgeLender entered into an agreement with One Equity through which HedgeLender referred borrowers to One Equity in exchange for commissions on successful stock-based loan transactions. One Equity was not, however, a legitimate lender. The Spillans, through One Equity, induced borrowers to transfer ownership of publicly traded stock to them as collateral for purported non-recourse loans. They represented that all shares would be returned to borrowers upon repayment of the loans. Instead, the Spillans generally liquidated the shares to fund the loans and failed to maintain adequate cash reserves necessary to repurchase and return the shares to borrowers.

According to the complaint, HedgeLender promoted One Equity’s stock-based loan program as Hedgelender’s Star HedgeLoan®. On its website, HedgeLender represented to potential clients that it had certified its stock-based loan programs, vetted the professional reputations of those that administered the programs, and took steps to ensure the security of borrowers’ shares. In reality, Stafford, a resident of Gaithersburg, Maryland, and Wahler, a resident of Philadelphia, conducted minimal due diligence and failed to investigate “red flags” that cast doubt on One Equity’s ability to administer and fund its stock-based loans. Adequate due diligence would have revealed that One Equity had no funding source and that the Spillans had never run a legitimate stock-based lending enterprise. The complaint further alleges that from February 2006 through at least November 2007, HedgeLender referred approximately 54 borrowers to One Equity and received approximately $1.7 million in commission payments.

http://lawprofessors.typepad.com/securities/2009/10/loan-broker-settles-fraud-charges-involving-stockbased-loan-scheme.html

SEC Action | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef0120a61226db970c

Listed below are links to weblogs that reference Loan Broker Settles Fraud Charges Involving Stock-Based Loan Scheme:

Comments

As a partner and the founder of HedgeLender LLC mentioned in this release, I want to reaffirm that it was the position of the SEC that our due diligence on one of the lender's we briefly referred clients to over two years ago was insufficient. We have chosen to settle this matter by neither admitting nor denying the specifics in order to put it behind us so that we can focus on serving our clients.

I would like to point out, however, the fact that this loan program was one of but several that we referred clients to, and that we referred clients to them for only a relatively brief period of time. Over our ten-year history we have maintained an A+ Accredited Business rating by the Better Business Bureau with many satisfied clients using our services for everything from financing expensive life-saving medical procedures to restructuring debt to creating jobs through business expansion. Our personalized service has made our reputation in this regard.

Though we neither admitted nor denied the specifics of the matter, and of course wish the circumstances leading up to it hadn't occurred, we nevertheless respect the SEC's decision to take this action as part of its mandate, and have drawn our lessons from it. Today, our due diligence and verification systems have improved dramatically, and we offer only stay-in-account/name/title loans offered through SIPC-member institutions where shares are not sold or traded during the loan term in any manner. We have added an international, multi-database background checking service for those who seek to work with us, and have taken other steps as well.

Though we had always assumed our due diligence levels were reasonable and sufficient, as a company we have taken from this SEC settlement the lesson that our due diligence systems could be improved. We believe we made those improvements. If at any time, additional steps are necessary to deliver the level of security our clients expect and deserve, this company will gladly take them.


- Daniel W. Stafford
dws@hedgelender.com

Posted by: Daniel W. Stafford | Oct 4, 2009 10:21:37 PM

Mr. Stafford, I find a few things about your response quite interesting..

1. Referring clients to a nefarious lender for nearly two years, is not a "brief" period of time.. it is quite a long time by finance industry standards,

2. Yes, obviously you should have done better due dilligence.. A 5th grader doing a quick google search would have immediately told you that Michael Spillan was a convicted felon, guilty of crimes from white collar fraud to bomb making and threats.. He could have found out that some of his associates were felons as well, and even pulled up past lawsuits.. At any time you could have made a simple phone call to find out what they were up to with your clients stock..

3. You respect the SEC's decision? It sounds to me like you should be thanking them for not throwing the book at you.. The Spillan cased aside, every time you arranged a stock loan and a single share was sold, you essentially solicited the sale of securities without a license which is a felony..

4. Your industry, whether or not its fundings have grown businesses or jobs, is by and large unethical, unsophisticated, and in many cases criminal.. I have been watching this business and I can tell you that traditional stock loans are illegal transactions 99% of the time.. If you are such an expert in this business, how is it for the last 10 years or so you were involved in transactions that if they were investigated by the FEDS they would be considered illegal?? I find it humorous, that only that now you got caught in with the wrong people you want to do these "no transfer" deals.. You should have been doing them all along, but obviously you no better?? Lol..

5. The last thing I want to mention is that not once in your little speech above did you express any concern for the well being of your clients who trusted you with their precious shares.. It's ALL about you.. Your clients lost millions and millions and millions of dollars because of your actions.. period.. and you do not even have the decency to make a statement as such nor apologise.. Quite disgusting behavior in my opinion..


Posted by: Truth InLending | Dec 1, 2009 4:49:46 PM

Truth,

I'm sorry to see your comments. It's unfortunate you see things as you do, since you clearly know so little about our company and what we've done and been doing over the past three years.

However, you are entitled to your opinions, and I respect that.


Regards,


Daniel W. Stafford

Posted by: Daniel W. Stafford | Feb 2, 2010 9:37:48 AM

First truth and lending is wrong,.it is not illegal to make stock loans, no lidense at all required, you can make loans against soda caps if you feel like it..loans are different than giving investment advice where you need to have a secuities license.
There is a lot of fraud in stock lending with alot of one man shows..and stay away from any company from South Florida or nj THEY ARE SCAMS...THERE IS ONLY ON LEGIMATE LENDER I KNOW OF, AND THAT IS THE GROUP FROM CHICAGO..THE REST ARE CROOKS...ALWAYS HAVE TO DO YOUR DUE DILLEGENCE....HEDGE LENDER MADE THE MISTAKE OF PROMOTING THE SPILLANS PROGRAM ON THEIR WEBSITE AND MAKING FALSE STATEMENTS,,,THERE IS ANOTHER COMPANY THAT IS NOW IN TROUBLE..ALEXANDER CAPITAL MARKETS,,A BILL CHAPMAN WHICH THE LATEST I HAVE HEARD HAS NOT RETURNED SHARES TO A DOZEN CLIENTS...SO YOU HAVE TO BE VERY VERY CAREFUL WHO YOU DEAL WITH...

Posted by: John M | Jul 18, 2010 8:50:07 PM

To John M.:

Actually "Truth in Lending" is right.. almost ALL stock loans are technically illegal or at least invalid transactions..

First off, if in the course of making "stock loans" the "lender" sells any stock at all then in a court of law he would be considered to be acting as an an unlicensed securities dealer, and before you cry wrong I have copies of court decisions to prove that I am right, the most recent being the undoing of Rainmaker in Atlanta, GA, a well known "stock loan" company.

Second, if the "lender" does sell any of the shares then he has now broken UCC law as well.. UCC law states that the collateral for a loan must be cared for and protected. While securities are considered fungible, selling of X amount of XYZ shares would only not violate UCC law if there were still the original number of shares kept in the account, in other words no law would be broken as long as the "lender" had previously had at least the same number of XYZ shares in his account prior to selling the collateralized shares.. Of course all of this is a moot point as UCC law or not the moment the shares were sold the "lender" was still acting as a dealer in violation of federal law, so who really cares about the UCC law anyways..

Third, if there was a "broker" such as Hedgelender who brought the stock loan deal to the "lender" he also has problems, because as soon as the "lender" sells any of the stock (yes, now as we know illegally), then the broker is guilty of soliciting the sale of securities without a license which is also a violation of federal law..

Fourth, if it is determined that the "borrower" was aware of any of these facts prior to signing the stock loan agreements then he can be deemed a party to a fraudulent or illegal transaction and be held just as accountable as any one else for any of the laws broken during the execution of the loan..

Basically EVERYONE involved could be considered culpable in a stock loan, and on top of that any person out there right now who has a stock loan can file a lawsuit, unwind the deal and demand their shares back and trust me they WILL win.

Now the laws that govern the making of loans against soda caps is something I am not familiar with, but you probably will have much less chance of going to prison if that is the business you are in.. :)

Posted by: Experienced | Aug 16, 2010 5:12:36 PM

Funny, if Hedgelender is correct, and transfer of title loans are not valid, then shouldn't they go to jail for the next millennium? As the most successful brokers in the industry for the past decade? I wonder if the SEC is aware of Dan Stafford's continuing activity in the loan business via his new site, nichols or whatever it is called. He couldn't resist walking away from his hedgelender site and all of the traffic it pulls. Notice the link on his hedgelender site to his new venture (which I'm sure he claims is not his)

Non-recourse loans that allow for the trading of securities are totally legal and kosher. But, the contract has to be specific and clear and honest, and the Lender actually has to be capitalized and ALWAYS use a collar or cap.

Posted by: loanblogger | Jan 21, 2011 8:01:54 AM

Actually, these guys were the honest ones in this business. They ran a very tight ship but they trusted their lenders to be honest with them. Had their lenders told the truth to their brokers, the brokers would never have given the SEC an easy target. Their mistake was trusting the lenders to be honest with them. Look at the charges: It's "insufficient due diligence". They only replayed what the lenders told them because they believed the lenders were being truthful. That was HedgeLender's oly "crime".

The true perpetrators were the lenders, who used the very successful and respected HedgeLender organization to keep clients coming in. That's the truth, no matter what anyone anywhere attempts to say otherwise.

Transfer-of-title nonrecourse loans with private individuals are for fools. HedgeLender learned its lesson of trusting but not verifying enough the hard way. Anybody who is still doing these loans now, however, has no excuse. HedgeLender had nobody's example to go by. Anybody still hawking these risky loans today, despite FINRA coming out against them, can only be called a fool.

You should read Stafford's very honest piece at www.hedgelender.com. He is totally open about the facts. He has run from nothing.

By the way, watch out for the comments on these boards by people who are still hawking nonrecourse stock loans. They hate Stafford with a passion for crusading against them. They should hate him -- the SEC has actually applauded Stafford for using his position and his website to fight nonrecourse stock loan companies. See www.hedgelender.com

It's one thing to make a mistake; HedgeLender DID make a mistake. They never denied it. It's another matter, though, if one does not learn from their mistakes. Wahler and Stafford were good people who got caught up with lenders who did not disclose the facts and in one case, outwardly and intentionally deceived their brokers with phony account statements, hedge reports, and other false "proof" that all was well. HedgeLender wasn't the only brokering group or individual they decieved. HedgeLender was not found guilty of anything; it settled neither admitting or denying. HedgeLender was the messenger, but it wasn't the message. The message came direct from the lenders, the ones who are truly culpable for being dishonest with their brokers.

It's a lesson for everyone: Trust, but verify, verify, verify, particularly if you are in any finance-related business. HedgeLender focused on building a top-notch sales organization, and it was the best in the business at its height. It never dreamed that it's lenders would be so callous as to take advantage of it and use it.

That's all anybody ever needs to know if the truth matters to them. Any posts that anyone writes, no matter who they are, after this post, should be completely ignored.

Posted by: John Law | Oct 18, 2011 9:06:27 AM

Why o why SEC US Feds allow such industry to exist? I am talking about non regulated "Stock Loan" marketers non legit stock borrowing and broking industry
Is ther not enough evidance already of fraud?
The alarm bells go off when one hears these so called Stock Loan experts are
- Not regulated and have any securities licnece
- Many of them are introducers

I mean any blind fredy can tell if you contact a reputed Bank/ Broker you can get a Margin loan and you can reduce or eliminate the Margin call risk by simply purchasinga Protection option!

Guys wake up

Posted by: Robert | Feb 8, 2012 5:28:18 PM

Post a comment