SEC Shuts Down Los Altos-Based SB Capital

Securities regulators say the company and its principal, Mark Feathers were operating a Ponzi-like scheme, and one SB Capital fund even sold mortgages to another of its funds at an inflated price to pay management fees.


The Securities and Exchange Commission used an emergency court order this week to stop Los Altos-based Small Business Capital Corp. and its founder Mark Feathers from operating what the SEC alleges was a Ponzi-like scheme to defraud investors.

More than 400 investors were promised that returns from mortgage investments would yield annual returns of 7.5 percent or more, the SEC said Thursday. But the firm, known as SB Capital was paying investors with both fund profits and money from other investors in a Ponzi-like arrangement, according to the SEC.

“Feathers raised millions from investors by promising high returns,” said John McCoy, Associate Regional Director of the SEC’s Los Angeles Office, quoted in the SEC’s press release. “The returns turned out to be too good to be true and were funded in part with new investors’ money.”

The Hon. Edward J. Davila for the U.S. District Court for the Northern District of California granted the SEC’s request for a temporary restraining order and asset freeze against Feathers, Small Business Capital, and the funds, and appointed Thomas A. Seaman as a temporary receiver over Small Business Capital and the funds.

The SEC describes the allegations this way:

The SEC alleges that from 2009 to early 2012, Feathers improperly transferred more than $6 million from the funds to Small Business Capital to pay its expenses, including substantial payments to Feathers. According to the SEC, the defendants had the funds account for the transfers in a way that disguised the depletion of fund assets, and did not tell investors that Small Business Capital’s ability to repay was uncertain and that it was only able to make the interest payments owed to the funds by borrowing more from them.

In addition, the SEC alleges that investors were not told that in February and March 2012, the defendants caused one fund to sell mortgages to the other fund at an inflated price, thus generating a “profit” for the selling fund so it could pay Small Business Capital management fees of more than $575,000. The SEC also charged Feathers and Small Business Capital for Small Business Capital’s effecting transactions in the funds’ securities without being registered as a broker-dealer with the SEC.

Judge Davila has scheduled a court hearing for July 10, 2012, on the SEC's motion for a preliminary injunction.

weme July 17, 2012 at 12:48 PM
I lost $75,000. I became aware of this investment through my county medical society. I'm a generally conservative investor who often transfers money I've saved in my checking account to CDs. After being a full-time student or in residency until my mid-30s, I was older than average when I started saving for retirement. Thankfully, I served in the military so I'm eligible for USAA and have several small mutual fund investments through them. After buying a condo in Alexandria, VA in 2008 that went underwater, I was eager to save up a down payment over the next 5-8 yrs so that I could sell off the condo (which I'm renting out at a loss) & buy a real home with a garden. I make a modest salary with the federal government, so it may take me until I'm within a few yrs of retirement to save enough for a detached home w/a garden. Lesson learned - check to see if an investment company is registered as a broker with the SEC before you invest. If it sounds to good to be true (although there are other funds earning in the 7% range), walk away, or invest small & don't reinvest like I did (I put in $30k to start last summer - the minimum was $25k - and then another $50k this January instead of putting it into CDs.)
L.A. Chung (Editor) July 17, 2012 at 11:25 PM
@weme, thank you for sharing this your story. I'm trying to follow the court action from July 10 and will report what I learn. You've offered an important lesson, and I appreciate your posting that.


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