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Hijacking the Hamiltons: Lessons Learned from Recent Securities Fraud Case

Post on: March 15, 2017 | Chris Rohde | 0


How do some investors end up defrauded of hundreds of thousands, if not millions, of his hard earned money? He meets a fraudster. Securities fraud, most commonly defined as misrepresenting information to induce investment, has been around as long as people have been investing in common enterprises. Fraud comes in many shapes and sizes, but one of the more well-known strategies is what is called a Ponzi scheme.

In a Ponzi scheme, investors are promised a large profit at little to no risk. Generally, investor funds are later used to pay the promised returns to earlier investors. This can go on for years before anyone is the wiser. As an example, let’s look at a recently identified Ponzi scheme.

On March 7, 2017, the Securities and Exchange Commission (the “SEC”) filed an amended complaint in its case against Joseph Meli, Matthew Harriton, and several of their companies.1 The SEC has accused Mr. Meli and Mr. Harriton of fraudulently raising more than $97 million from 2015 to present.2 They allegedly set up multiple entities, for which they offered securities to investors, to purchase and resell tickets to various high profile events, including Adele, Metallica, and Nine Inch Nails concerts; the concert festival known as Desert Trip, which featured artists including The Rolling Stones, Bob Dylan, Paul McCartney, and others; advanced sale tickets to the upcoming Broadway play Harry Potter and the Cursed Child; and, perhaps worst of all, the musical Hamilton.3 (Let’s just be grateful that they did not defraud people of tickets to Hamilton or this would probably be a missing persons case).

Mr. Meli and Mr. Harriton supposedly accomplished this fraud by setting up multiple entities, each of which claimed to be pooling investments to purchase tickets for these events (35,000 tickets to Hamilton and 250,000 tickets for The Cursed Child, for example) and then resell them.4 Investors were promised different returns for each entity and then a share in the profits.5 It appears that instead of actually following through on this plan, the investments instead were used to fund the accused’s lifestyles and pay the returns to earlier investors. For example, of the $97 million, $59 million of the incoming funds were purportedly used to repay and provide the claimed investment returns to other investors.6 This no doubt aided them in soliciting investments from other investors. Another strategy that may have helped perpetuate this fraud was the use of the so called “Letter Agreements[s].” These letters appeared to be agreements between the companies and the producers of the events for the purchase of tickets.7 These letters unfortunately were not real agreements for the purchase of tickets.8 Additionally, the accused allegedly withdrew more than $6 million of investor funds for their personal use.9 The point here is that, if the SEC is correct, these gentlemen have defrauded more than 100 people of millions of dollars.

There are several lessons to be learned from this incident for all of those involved in private placements. With some help from the artists whose tickets were supposedly to be resold, we will review lessons for investors, financial industry participants, and issuers of private placements from this fraud:

“Exit Light, Enter Night 10”: Lessons for Investors

Investors who are considering an investment in a private placement should approach with eyes wide open to the risks that are involved in such transactions. Private placements made under Rules 506(b) and 506(c) are exempt from the registration requirement of the Securities Act of 1933, i.e. they are not public securities registered on an exchange. As a result, these issuers are not required to provide the same level of disclosure required of “public companies.” In fact, under Rules 506(b) and 506(c), the issuer is not even required to provide a disclosure document at all, though most issuers do provide such a document. Not providing a disclosure document like a Private Placement Memorandum (PPM) or something similar is probably a red flag in many cases. Securities sold through private placements are also not as exposed to the antiseptic light of disclosure as public securities and as such, investors should be cautious in wandering into the sometimes opaque world of private placements.

To be clear, I am not saying that private placements are inherently fraudulent. They are not. Most private placement offerings are legitimate and investing into those offerings may make a lot of sense as part of an accredited investor’s larger investment strategy. However, due to the possible lack of disclosure and less oversight, investors should be cautious. Here are a few things to watch out for when considering an investment in a private placement:

  1. Promises of returns that seem too good to be true: This is a classic strategy of the fraudster, especially those engaged in Ponzi schemes. In the case we are discussing, annual returns of 10% and a 50% share in the profits were promised to investors. That may be reasonable, or it may not be, but either way, investors should be cautious of any promises of great returns, especially if those returns are “guaranteed.”
  1. Do the due diligence on the control persons: People have history. If the control people for the issuer claim to be experts in oil and gas, then do some research to see what the basis is for that statement. If the goal of the issuer is to buy and resell tickets to events in New York City, one should probably investigate whether the control persons have past connections in the New York events space.
  1. Be wary of offerings without disclosure documents: I have already hinted at this one, but personally, I consider an offering lacking a PPM, or a similar disclosure document, a significant red flag. Though the rules do not require such a document in a private placement, I find it hard to believe that issuers can conduct a non-fraudulent offering without disclosing the many potential risks that come with investing in a private placement. Issuers who think they do not need such a document likely do not appreciate the seriousness of raising capital and likely are not receiving great counsel.

There are many things to be aware of in considering investing in a private placement, but if you are cautious and approach that investment with the knowledge that there is real risk of loss, investing in a private placement may be a great choice for some investors.

“Can’t Get No Satisfaction11: Lessons for Industry Participants

Participants in the financial industry, particularly broker-dealers, should see this case as a warning about the importance of independent diligence. As brokers registered with FINRA know, FINRA Regulatory Notice 10-22 lays out the expectations for independent diligence done by a broker-dealer for a private placement offering.12 There are many great practices outlined within that notice, but in the end, it can really be summarized as “don’t trust, verify.” I cannot comment on, or know, whether adequate due diligence was done by any broker-dealers involved in Meli and Harriton’s various offerings, though I will bet we will get to hear FINRA and/or the SEC’s opinion on that question soon. I am not sure prior to reading this complaint that I would have thought to verify the veracity of the fake letters the issuer claimed to have from the producers of the different events, but it sure does seem like a phone call to those producers would have brought this scheme to light pretty quickly.

The lesson here is that broker-dealers, securities counsel, and other industry participants should always question their satisfaction with the evidence provided by the issuer. We have a responsibility to independently verify the truthfulness of any claims by the issuer and to protect our investors from harm. So, we should approach claims with a healthy skepticism and independently verify the claims of the issuer, even if it delays the offering going live or causes some pain to the issuer (within reason).

“Don’t Throw Away Your Shot13: Lessons for Issuers

We have talked about lessons that investors and industry participants should take away from the Meli case, but what about issuers? Issuers of private securities should take a close look at the Meli case and realize that this is what throwing away your shot at success looks like. Let’s say that everything the SEC has claimed about these two gentlemen is true and they are found to have committed securities fraud, what does that mean for them? What it definitely means is that all of that money has to go back to the investors with interest, civil penalties will have to be paid, and these two gentlemen will be “bad actors” for the purposes of securities laws.14 This means they, and any company they are ever control people of, now and in the future, will be barred from ever relying on private placement exemptions again. In plain language, they are done being able to raise capital. This is effectively a death sentence for entrepreneurial ambitions. Additionally, if criminal complaints are brought, both these gentlemen could see even more severe repercussions.

 So, what are some steps that issuers can take to avoid throwing away their shot at building a successful business?

  1. Work hard: You, as someone with a good idea, may feel “young, scrappy, and hungry”15 like Hamilton, but success comes from working hard, perhaps even non-stop. But I don’t have to tell you that. Where Meli and Harriton, and most other fraudsters, went wrong is that they had a good idea and then decided to take advantage of the funds that they received. Obviously, that does not seem to have worked out for them. On the other hand, if they had the connections they claimed, or had developed those connections, and followed through on their business plan, they could have provided investors with returns. So be sure to search for a way to bring value to your potential investors, have a plan, and execute it.
  2. Provide documents with disclosure: One of the best ways to protect yourself as an issuer and to protect your investors is to provide potential investors with a thorough, well written disclosure document, such as a Private Placement Memorandum. A well-written PPM will contain not only the details of the offering terms and the business plan, but will also contain substantial disclosure of risks. These risks include everything from general risks to the economy to specific risks for your business plan. For example, if you are issuing a fund for real estate development in New York City, you should disclose the general risks of investing in private placements and real estate, and you should also disclose the risks of investing in that specific type of real estate in New York City, and maybe even in that particular neighborhood in New York. 

  3. Get help: Raising capital is not easy, and doing so compliantly is even harder. The rules and regulations around private offerings are complex and onerous. You will have federal as well as state regulations to be aware of, and failing to follow these rules could lead to fines, disgorgement, or, if you really screw up, even jail time. So, one of the most important things you can do is find people to help guide you through the process. It is even possible that you, as an agent of the issuer, could be considered an unregistered broker-dealer. To learn more about the broker registration requirement, download our latest e-book.

    It's wise to find a good securities attorney, preferably one who has some experience in private placements. Preferably an attorney who centers his or her practice around securities law, not just an attorney who has done a securities transaction or two. Securities law, like tax law, is a highly technical and complex area whose practitioners need to be experts to be effective. A good securities attorney may cost you some money, but is well worth it when it comes to drafting PPMs, advising on structuring the offering, and avoiding potential legal and regulatory pitfalls.
  1. Consider using a broker-dealer: Like a good securities attorney, a good broker-dealer can bring a wealth of knowledge and experience to bear on your specific offering. For example, an experienced broker-dealer in private placements will have advice on attractive deal structure and risk disclosures. Additionally, as discussed above, broker-dealers are required to do independent diligence on the offering. The knowledge that a licensed broker-dealer reviewed and approved the offering should make your deal more attractive to quality investors. Many broker-dealers will not only help ensure compliance with rules and regulations, but will also aid in the actual selling of the offering. Having a good broker-dealer partner and/or attorney will go a long way in helping you avoid getting into trouble.

There is much that issuers can learn from the Meli case when it comes to what not to do. It is a good reminder of the dangers that lie within the U.S. private securities markets. Every participant from investors, to industry participants, to issuers can learn real lessons from this case and we will all have to watch as it develops. But for now, in the words of Aaron Burrwe will just have to…wait for it.


[1] First Amended Complaint at 1, Securities and Exchange Commission v Joseph Meli, No. 1:17-cv-632-LLS (S.D.N.Y. filed Jan. 27. 2017), available at https://www.sec.gov/litigation/complaints/2017/comp23771.pdf.

[2] Id. at  2.

[3] Id. at  2.

[4] Id. at 10.

[5] Id.

[6] Id. at 3.

[7] Id. at 10

[8] Id. at 10-11.

[9] Id. at 3.

[10] Metallica, Enter Sandman, on Metallica (Elektra Records 1991). Just a note, this author graduated from Virginia Tech and maintains that Enter Sandman is the best football entrance song of all time. Don’t believe me, just watch. Start jumping. Go Hokies!

[11] The Rolling Stones, (I Can’t Get No) Satisfaction, on Out of Our Heads (London Records 1965).

[12] FINRA Regulatory Notice 10-22, available at https://www.finra.org/sites/default/files/NoticeDocument/p121304.pdf.

[13] Lin-Manuel Miranda, My Shot, on Hamilton (Atlantic Records 2015).

[14] 17 CFR 230.506(d).

[15] My Shot, supra note 13.


Keep Track of Your Offering Diligence Documents

The diligence process for private offerings can be time consuming—and knowing what documents you'll need can be difficult to keep track of. This offering document checklist is a useful tool to help you stay organized.



Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.

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Chris Rohde

Chris serves as Associate Corporate Counsel at WealthForge where he advises on an array of areas, including both federal and state securities laws, broker-dealer law, general corporate law matters, and cybersecurity.
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