The Securities and Exchange Commission (SEC) has filed securities fraud charges against the operator of a massive Ponzi scheme who raised more than $30 million from 200 investors to pay off personal gambling debts and finance his lavish lifestyle.
The complaint was filed in the United States District Court for the Central District of California against Salvatore Favata, the former President of National Consumer Mortgage, LLC (NCM), a residential mortgage business in Orange County, Calif.
The SEC contends that from 2001 through 2006, Favata falsely promised investors rates of return of 30-60% on their investments, but instead used new investor funds to pay off earlier investors in typical Ponzi-like fashion.
The complaint also charges that Favata used the money to pay off more than $10 million of his own gambling debts, as well as other personal debts and living expenses, and to fund lavish house parties and community music festivals.
Peter H. Bresnan, Deputy Director of Enforcement, stated, "This case exemplifies how fraudsters can take advantage of existing market conditions -- here, California's booming real estate market -- to entice investors with the false promise of double digit returns"
According to the complaint, Favata solicited investors in face-to-face settings, including church gatherings and investment seminars, and persuaded mortgage refinance clients to take cash out of their refinancings and use that cash to invest in NCM investment notes.
Favata is said to have falsely told potential investors that NCM would loan investor funds to homeowners who could not qualify for traditional mortgages, and that a low default rate would be maintained by only lending on properties with a 65 % or lower loan-to-value ratio. He allegedly even went so far as to represent that NCM maintained deeds of trust for the real estate securing the investments.
Without admitting or denying the allegations of the Commission's complaint, Favata consented to the entry of a final judgment permanently enjoining him from violating the antifraud and registration provisions of the federal securities laws, Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Favata also consented to being barred permanently from associating with any broker or dealer.
In addition, the U.S. Attorney's office for the Central District of California filed an information and plea agreement in which Favata agrees to plead guilty to one count of mail fraud, to pay restitution in excess of $20 million, and to forfeit his residence in connection with the same scheme. Favata faces a possible 60-month prison sentence.
