The U.S. Securities and Exchange Commission on Monday filed multiple fraud charges and SEC violations against an entity organized pursuant to a 2015 Nevada law that allows “entity wagering” funds akin to mutual funds, only the monies are wagered at licensed Nevada sportsbooks.
As the SEC described in its complaint against defendants Bettor Investments, LLC and Matthew C. Stuart, Nevada Senate Bill 443 “allowed entities to solicit and collect funds from investors anywhere in the world, aggregate those funds in a Nevada bank, place wagers on sporting events, and apportion profits and losses among investors.”
The now-defunct fund allegedly went belly up pretty quickly after its formation as defendants raised — and then lost or misappropriated — approximately $145,500 from about 70 investors in more than 20 states. Defendants raised those funds between March and November of 2016.
Promissory notes, ludicrous sports betting promises
Stuart is identified as 47-year-old resident of Post Falls, Idaho, where he was (and perhaps still is) employed as a dealer at a casino. He was also the entity’s managing member and sole employee.
The SEC alleges that Stuart lied to investors about a variety of things, including losses, how much of the fund remained after those losses, as well as Stuart’s compensation in connection with running the fund (i.e. losing everyone’s money). Stuart allegedly had advised investors that it would make wagers across a variety of sports and rake in 15 perent of profits.
According to the complaint, things began to go south in November 2016 after defendants lost about $42,000; at that time, Stuart reported to investors that the fund was up about .08 percent. The complaint does not identify which sportsbook(s) took defendants’ wagers. CDC Gaming Reports previously identified CG Technology as the only operator to accept bets from entity funds. (CG Technology has faced other problems in the past.)
Around this time, per the complaint, “the Defendants began to operate outside the parameters of NVSB 443, by offering investors the opportunity to convert their previous investments with Bettor into promissory notes with Stuart.”
Stuart then refunded 15 investors about $70,000 and issued the rest 12-month promissory notes in which Stuart “guaranteed” rates of return on the order of 14%. He also lied about his compensation. It total, he promised 51 investors what amounted to $136,800 in obligations at a time when he was holding a small fraction of that.
Here’s the nut of the complaint:
In other words, the Defendants’ material misrepresentations and omissions left investors unaware that their decisions regarding redemption or entering into promissory notes with Stuart was actually a choice between getting all of their money back plus a small profit (at least until Bettor’s bank account was depleted) or having to rely upon Stuart to generate the massive returns necessary to pay promissory note holders the 14% returns he had guaranteed in 12 months, given the limited funds available to him with which to wager.
Obviously, Stuart was not able to deliver on this Bernie Madoff-like promise when the notes became due in early 2018.
Stuart now faces charges for unregistered offering of securities, for fraud under the Securities Act, and for fraud under the Exchange Act.
Not the first time entity wagering under scrutiny
In September 2018, the SEC settled a similar charge against two wagering entity funds established under NVSB 443, Contrarian Investments LLC and Nevada Sports Investment Group. Like Bettor Investments, Contrarian was charged for unregistered offering of securities. The SEC writes in a litigation release:
The Complaint charges Contrarian with conducting an unregistered offering of securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933. The Commission accepted Contrarian’s offer of settlement in which, without admitting or denying the Commission’s findings, it consented to the entry of a judgment ordering a permanent injunction against future violation of Sections 5(a) and 5(c) and requiring it to send a copy of the final judgment to each investor.
As CDC Gaming noted, neither of the above-referenced companies were fined by the SEC nor were they suspended from doing business.
Elsewhere, more recently, a former felon Ponzi schemer, identified by the Las Vegas Review-Journal as John F. Thomas III, has come under SEC scrutiny for running six funds with similarly outsized promises like Stuart’s.
Here’s what one of Thomas’s investors told the Review-Journal: “[Thomas] is very confident that he will be making millions by May and will be able to pay us all off entirely around that time. I told him that most of us still have faith in him that he would pay us but we can’t control everyone.”
Suckers are born at least often enough to keep the SEC busy with fraudulent entity wagering schemes.
Be careful, folks. There are no guarantees in sports betting, certainly not at the clip Stuart allegedly promised.