SEC: “Undisputed evidence shows Chen operated a pyramid scheme”
Last week we covered the SEC’s Motion For Summary Judgement against USFIA and owner Steve Chen.
Chen had filed an opposition to the motion on November 7th which, in my opinion, raised a number of flawed arguments.
The SEC has addressed these arguments in a reply brief filed on November 14th.
In his objection Steve Chen represented that USFIA sold amber products, mined in the Dominican Republic.
To support his claim, Chen cited witness testimony from George Mo, Chenyu Chen and Jason Ning. All three were USFIA affiliate investors.
The SEC claim Chen ‘plucked a few statements from these witnesses’ depositions and ignored the crux of their testimony‘.
George Mo did not that testify he bought amber.
Mr. Mo’s counsel specifically corrected the interpreter, stating that “[Mr. Mo] didn’t say that he bought the amber. He invested the money. It wasn’t necessarily to purchase the amber.”
Mr. Mo interjected, “That’s right. I just made an investment, not 100 — $10,000 worth of amber. I just made a $10, 000 investment.”
In his opposition, Chen (incorrectly) claimed
Mo testified that when he visited USFIA he “put down some money” and “bought some [amber].”
As to whether Mo was interested in the amber bundled with USFIA GemCoin investment (from the SEC reply brief);
Mr. Mo further explained in his testimony that in exchange for his $10,000 investment he became a member of USFIA, he expected to get rich from his membership, he was told that his investment would increase 64 times, and
the amber he received was just a “gift.”
Chen also claimed the Chenyu Chen ‘obtained a receipt from USFIA showing that he purchased $30,000 worth of amber.‘
According to the SEC;
Chen actually testified that the receipt (Steve) Chen flaunts as evidence he went to USFIA to purchase amber was for the purchase of GemCoins, not amber.
The SEC go on to accuse Chen of cherry-picking Jason Ning’s testimony.
Chen cites just five lines of a two-and-a-half page interview statement and redacts the rest.
The complete interview report shows that Ning’s statements to the police were consistent with what he stated in his deposition: investors could earn money by receiving points or “gemcoins” – and ultimately money – based on recruiting additional investors.
In asserting that USFIA affiliates were the “end users of amber” (a point I don’t see the relevance of), Chen relied on testimony from Michael Liu.
Michael Liu testified that he “consider[ed] purchasing the amber as a gift for my wife,” and that he had told his daughter the amber “can be used as the gift for [her] wedding.”
The SEC respond by claiming
Mr. Liu testified that he was told that in exchange for his investment, he would receive 100,000 units in USFIA, convertible into shares of USFIA upon its IPO, and the amber was nothing more than a “reward” he received for investing worth $7,000.
Mr. Liu also testified that he received cash from USFIA in exchange for recruiting other investors, which as the SEC explained in its motion is the hallmark of a pyramid scheme.
Coco Ke Xu (USFIA’s Manager of Customer Services) featured prominently in Chen’s opposition.
Chen claimed that
had any customers been promised or sold any sort of ownership interest or investment interest in the company, she would have known about it.
In line with my own opinion, the SEC dismiss Xu’s declaration because she
fails to explain USFIA’s new “product package” consisting of Gemcoins, which Chen began to promote to investors after it became clear that USFIA’s IPO was never going to happen.
Another point Chen raised in his opposition was that the amber USFIA was giving to affiliates was ‘extremely valuable in the Chinese market‘.
This was in response to an independent valuation of USFIA’s amber, which found the represented value to be grossly inflated.
The valuation was carried out by Charles Carmona, who Steve Chen claimed had testified he was ‘not an amber expert or specialist‘.
The SEC’s reply brief clearly clarifies the amber issue.
Chen argues that “amber is extremely valuable in the Chinese market.”
He relies on the declarations of Xu, Cong and Yu, who essentially claim amber has a high “cultural and economic” value in China.
None of these three witnesses have any demonstrated expertise in appraising amber or any other gemstones; nor do they contradict the SEC’s evidence because they have not offered a value for USFIA’s amber products.
Although the SEC’s expert gemstone acknowledged he is not an amber “specialist” in that he could not answer defense counsel’s in-depth questions regarding the biological and chemical forces by which amber is created, he testified that over the course of his 36-year professional career he appraised amber 50 to 100 times, and based on his attendance at various international jewelry shows, including shows in Hong Kong, there is no difference in the price of amber between the United States and China.
The rest of the SEC’s reply brief is pretty much a reiteration of facts previously presented in their summary judgement motion.
After invoking the Fifth Amendment at every turn, defendant Steve Chen is now attempting to defeat summary judgment by presenting himself, USFIA and its related entities as honest retailers of valuable amber jewelry.
To do this, Chen has turned a blind eye to the evidence, grossly distorted the witnesses’ testimony, and sought to exclude all of the marketing material obtained from USFIA.
Nevertheless, the undisputed evidence still shows that Chen operated a pyramid scheme and made material misrepresentations to investors.
A decision on the SEC’s Motion for Summary Judgement has yet to be made. Stay tuned…
Update 25th November 2016 – A hearing on the SEC’s motion for Summary Judgement had been scheduled for November 28th.
As per an order issued on November 22nd, the matter had been taken off the motion calendar.
Judge Klausner will take the matter under submission and issue a ruling ‘after full consideration of properly submitted pleadings‘.
There’s no timeline for a decision going forward, but I’ll keep an eye on the case docket for updates.
Update 11th December 2016 – On December 8th USFIA was ruled to be a Ponzi scheme and summary judgement granted against Steve Chen.