Sometimes when you look at an investment opportunity, you run through the math and see that things don’t add up. That means it might be a fraud. Take a look at the offering of Bio Profit Series V, LLC detailed in an enforcement action by the Securities and Exchange Commission.
Assuming the SEC’s complaint is true, the fund was selling 10-year notes paying 6% per year with a bonus payment of 45% of the outstanding principal at maturity. That is not an outrageous return by itself. On top of that, the managing member receives a business operations and management fee of 7.5% of the proceeds from the note sale. (See item 15 on the Form D for the offering.)
The fund is supposed to be in the business of buying and making residential loans secured by first or second deeds of trust in California. How can the fund offer that kind of return when interest rates are below 6%?
The SEC lawyers laid out the math in the complaint. Bio Profit Series V would have to generate an average annual return of 12.2% per year to pay the annual return and bonus payment. It was the fourth fund raised by Yin Nan Wang and his Velocity Investment Group, all of which had promised returns that did not add up. (Apparently, Wang skipped over Series IV.)
According to the SEC complaint, Wang was using new investor money to pay old investors. He admitted to the ponzi scheme when talking to a company that originated loans for one of the Bio Profit funds.
Although the underlying investments may be in loans that constitute real estate, the interest in the funds are securities. That gives the Securities and Exchange Commission jurisdiction. It appears that all, or at least a large portion of the investors are from overseas. That may complicate matters.
What’s missing in the story of how the SEC found out about the alleged scam. It does not appear that any investors are complaining of lost money. Perhaps it was the person who was told it was a ponzi scheme. Perhaps that person used the SEC’s relatively new Tip, Complaints and Referrals Portal to alert them to the fraud?