On June 5th, 2018, the Securities and Exchange Commission (SEC) filed a complaint against Essex Capital Corporation and Ralph T. Iannelli. From 2014 until 2017, Essex, and Iannelli, the company’s president and founder, allegedly perpetrated an $80 million, ponzi-type securities fraud scheme. According to the complaint, “Iannelli attracted investments through the sale of promissory notes that paid a high rate of return-typically 8.5% per annum. Those investor returns were supposedly based on the strength of Essex’s equipment leasing model, in which Essex’s lease portfolio would generate sufficient income to fully offset its borrowing costs and obligations to noteholders, leaving Essex with a profit of its own. Between 2014 and 2017, Iannelli raised over $80 million from approximately 70 promissory note investors. Unbeknownst to the investors, however, the representations Iannelli made about their investments were materially false and misleading.” Also during this time period, Iannelli siphoned millions of dollars out of the company in the form of bonuses and personal loans to give to himself.
Many of the customers Iannelli solicited were friends of his in the Santa Barbara, California community. Essex, whose headquarters are in Santa Barbara, California, and was purported to operate as a lease financing business, sustained a $32 million operating loss during the aforementioned years. This was according to the company’s own financial statements, and was due, in part, to the fact that Essex used the bulk of its revenue to pay back original investors and banks, instead of using it to purchase income-generating equipment. In 2014 alone, Essex raised over $20 million from its promissory note investors and limited partnership investors, and borrowed $6 million from banks, but only spent $2.3 million of its incoming funds to purchase equipment. Essex paid back more than $25 million of its funds to the banks and investors, and suffered a net operating loss of over $2 million. This trend continued until 2017.
Essex and Iannelli continued to raise new investor funds, and “resorted to a pattern of ponzi-like payments, for a total amount of at least $1.5 million since 2014.” According to the SEC Complaint, two investment advisory firms were responsible for attracting investors to the Essex fraud. These firms are referred to by the SEC anonymously as “Investment Adviser A” out of Santa Barbara, California, and “Investment Adviser B” out of New York, New York. Although the SEC alleges that Essex Capital and Iannelli made material misrepresentations to these investment advisers about Essex’s business, as fiduciaries under the law, these investment advisers had an iron-clad legal duty to perform adequate due diligence into these offerings prior to recommending any of them to their fiduciary clients.