SEC file for USFIA summary judgement, Steve Chen opposes
On October 26th the SEC filed for summary judgement against USFIA and owner Steve Chen.
Chen responded in opposition to the SEC’s filing on November 7th.
Both filings are pretty long, coming in at thirty and twenty-six pages respectively.
Below I’ve separated both filings into headers, with my own conclusion at the end.
The SEC’s Motion for Summary Judgement
The introduction to the SEC’s filing reads as follows;
The undisputed evidence establishes that Chen violated the registration and antifraud provisions of the federal securities laws
by offering investors “units” in US Fine Arts, Inc. (“USFIA”) and subsequently “points” in USFIA’s Currency Fund or what Chen referred to as “Gemcoin.”
The uncontroverted evidence shows that USFIA and Gemcoin were nothing more than one continuous pyramid scheme in which investors purportedly received the right to sell and distribute pieces of amber jewelry, but, in reality, the way to earn money was from recruiting additional investors into USFIA and Gemcoin in exchange for cash bonuses and rewards points that were unrelated to the sale of any product.
For more information on USFIA’s business model, refer to BehindMLM’s USFIA review (published June 2015).
Steve Chen’s purported business empire
One of the key promotional techniques used to market USFIA was Steve Chen’s purported business empire.
Marketing materials provided to investors who attended meetings at Live Oak portrayed Chen and his defendant entities as a multinational business empire.
In particular, they claimed that USFIA was a vertically integrated jewelry conglomerate that combined gemstone mining, processing and design with retail jewelry sales.
The marketing materials claimed that USFIA got its amber from the El Valle amber mine in the Dominican Republic through its wholly owned subsidiary Ammine, SRL.
They claimed that this mine produced gemstone grade amber, including blue amber, which was described as the “King of Amber” and several times more valuable than gold.
The marketing materials made USFIA appear even more robust by stating that USFIA was sponsored and owned by UCCA, a company allegedly brought together by a “group of elites” capable of building a bridge between China and the United States in business and political circles.
These “elites” were said to include, among others, Chen in his capacity as Chairman of AFG, John Wuo, who was described as a “US Congressman” and Mayor of Arcadia, California, and nine other undisclosed U.S. members of Congress.
The support of the United States was allegedly so strong that UCCA was allowed 1,600 immigrant investor slots for projects like the Los Angeles Quail Ranch Golf Course, which was described as “the American Dream for 500,000 US dollars.”
Investors were told that the investment program of Quail Ranch had been developed and produced in accordance with the requirements of the U.S. EB-5 investment immigration program, making it a safe and reliable investment.
Note that the above is a “statement of undisputed facts” provided by the SEC and is not intended to be used as an argument.
The pyramid scheme within USFIA
Although some of the marketing materials said that investors in USFIA had the right to receive monthly income and bonuses for promoting and selling USFIA’s amber products, a separate handout distributed to investors made clear that the way to make money was to recruit other people to invest in USFIA.
USFIA even offered to pay investors a monthly income as high as $100,000 and assign them a rank similar to that of a United States military general (one-star, two-star, three-star, four-star), based on the number of investors they recruited.
Steve Chen’s specific role in promoting USFIA
Chen personally told investors they could make money by recruiting additional investors.
In fact, investors were told that the amber they received at the time of their investment in USFIA was simply a gift and what they actually received in exchange for their investments were “units” in USFIA that would be converted to stock when Chen took the company public in the United States sometime in 2014.
Chen claimed that he founded China Unicom in 1993, and said he would take USFIA public the same way he took China Unicom public in the United States in 2000.
Chen told investors that their stock would be worth 64 times their original investment and that USFIA was backed by $50 billion in
assets, including an amber mine in the Dominican Republic, which Chen claimed to have purchased over the course of 14 years for $150 million.
Chen decided the prices to list on the amber displayed in USFIA’s showroom.
Chen told investors they could participate in an EB-5 program if they invested $500,000 in USFIA.
The undisputed evidence demonstrates that none of Chen’s offerings were registered with the SEC, and that Chen’s oral and written representations to investors were materially false and misleading.
Upon investigation by the SEC and USFIA Receiver, here’s how Chen’s claims stacked up;
According to the court-appointed receiver, the total value of the USFIA Entities was approximately $77.5 million, not $50 billion.
The amber mines referenced in USFIA’s marketing materials
were purchased in December 2013 for $373,000, not 14 years’ earlier for $150 million.
According to SEC filings, Chen was not one of China Unicom’s Directors, Executive Officers, or even a Senior Manager when it went public in the United States in 2000; indeed, he is not listed anywhere in China Unicom’s SEC filings.
According to the SEC’s expert gemologist, the jewelry displayed in USFIA’s Live Oak showroom was costume or ornamental jewelry that was essentially worthless but for the silver or gold they were mounted on.
Finally, neither Chen nor any of his entities have been authorized by the U.S. Citizenship and Immigration Services (“USCIS”) to offer EB-5 investments to immigrant investors.
As to the 2014 IPO, the SEC allege it was one of the primary reasons Chen went on to launch GemCoin.
In the fall of 2014, after investors complained that USFIA’s IPO had not taken place, Chen launched a new investment he called the USFIA Currency Fund or “Gemcoin.”
Investors had their “units” in USFIA unilaterally converted into Gemcoins, that Chen represented was a valuable cryptocurrency, the value of which was backed by $5 billion in gemstones.
Claims made by Chen to market GemCoin were as follows;
Although the name may have changed, Gemcoin was simply a continuation of Chen’s underlying pyramid scheme.
Gemcoin continued to make many of the same misrepresentations as USFIA.
For example, the marketing materials for Gemcoin continued to claim that USFIA was backed by $50 billion in assets, except this time it claimed that such backing came from AFG (not UCCA).
The marketing materials also continued to tout Chen as the founder of China Unicom and the person who took that company public in 2000.
Chen personally claimed that $5 billion in gemstones had been secured in a vault to support the value of Gemcoin.
Chen also represented to investors that Gemcoins were liquid and redeemable at ATMs in the United States and Canada, and were backed by “some of the world’s rarest gemstone assets,” which he said he would “prove” by hiring a “third-party auditing [firm] to perform an audit on the gemstone asset holdings.”
Upon investigation, once again here’s how Chen’s claimed stacked up;
The reality of Gemcoin was far different than what Chen and his marketing materials portrayed.
The court-appointed receiver only located two ATMs in the reception area at Live Oak, neither of which was connected to any financial institution, one ATM was empty, and the other had just $100 inside.
Moreover, all that the third party “auditor” Chen hired did was count and weigh –but not value –the purported gemstones during an announced visit.
The SEC’s expert gemologist found that the scores of plastic tubs, each separately containing 1000 rings and labeled with a value of $10 million, or $10,000 per ring, that ostensibly secured Gemcoin, were in fact, worth, at most, 1% of the claimed amount, or $10 per ring.
The SEC’s legal arguments for summary judgement
A party is entitled to summary judgment if “there is no genuine issue as to any material fact and … the movant is entitled to judgment as a matter of law.”
In a nutshell, the SEC argue that their claims are backed by solid evidence, which entitles them summary judgement.
Addressing Chen’s purported securities violations, the SEC bringup the Howey Test.
The undisputed evidence shows that Chen solicited investors to invest typically between $10,000 and $30,000 in cash in USFIA and Gemcoin and, according to the court-appointed receiver, raised approximately $35.6 million doing so.
These cash investments satisfy the first prong of the Howey test.
The second prong of the Howey test is satisfied in this action by the existence of both horizontal and vertical commonality.
The undisputed evidence in this case satisfies horizontal commonality due to the “Bonus Program” and the fact that investor monies were being pooled to pay “bonuses” to investors for soliciting new investors, as well as to pay additional bonuses to investors based on the success of their “downline” in soliciting new investors.
Strict vertical commonality is also satisfied as the fortunes of investors were linked to efforts of Chen to manage, promote and perpetuate USFIA’s operations.
The third prong of the Howey test is also satisfied, as the investors were dependent on Chen and USFIA to realize a return on their investment.
It is irrelevant if an individual investor’s ability to realize a profit was dependent, in part, on that investor’s ability to bring others into the pyramid.
Courts have repeatedly recognized that such ministerial activity does not defeat the “efforts of others” prong of Howey, where the defendant provides the entire framework within which an individual investor’s efforts would succeed or fail.
Specifically, the SEC are alleging that Chen violated Sections 5, 17(a) and 10(b) of the Securities and Exchange Act.
A prima facie violation of Section 5 is established by a showing that: (1) no registration statement was in effect as to the securities at issue; (2) the defendants directly or indirectly, sold or offered to sell the securities; and (3) the sale or offer was made through interstate commerce.
Section 5 is a strict liability offense and requires no showing of scienter, or even negligence.
In this case, the prima facie elements of a Section 5 violation are present.
As to the first element of a Section 5 violation, it is undisputed that none of Chen’s offerings were registered with the Commission.
Likewise, the uncontroverted evidence establishes that Chen directly and indirectly sold and offered to sell securities to investors.
The third and final element of the Section 5 violation – the offer or sale of securities through interstate commerce – is also easily satisfied.
Chen’s investors were located all over the country – indeed, they were located all over the world – and their monies were solicited and received by means of the interstate communications, including credit card transactions and wire transfers to and from domestic financial institutions as well as Internet-based solicitations.
In light of Chen’s apparent Section 5 violations, the SEC then argues that now it up to Chen to show that his offering was exempt from the Securities and Exchange Act, or that he had a previously granted exemption.
Chen has produced no evidence to suggest he can meet the heavy burden of showing that a registration exemption exists in this case and has instead broadly asserted his Fifth Amendment right against self-incrimination.
Moving onto Sections 17(a) and 10(b);
Section 17(a) prohibits fraud in the offer or sale of securities, and Section 10(b) prohibits fraud in connection with the purchase or sale of any security.
Violations of Section 17(a)(1), Section 10(b) and Rule 10b-5 require a showing of scienter, whereas violations of Section 17(a)(2)-(3) only require a showing of negligence.
Scienter is defined as a “mental state embracing intent to deceive, manipulate or defraud.”
In other words, to establish liability under Section 17(a)(1) or Section 10(b) and Rule 10b-5(a), the SEC must show, in connection with or in the offer or sale of a security:
(1) that the defendant engaged in a scheme to defraud;
(2) with scienter;
(3) by means on interstate commerce.
Alternatively, under Section 17(a)(3), the SEC must show that the defendant: (1) engaged in a course of business that would operate as a fraud or deceit upon a purchaser; (2) acted negligently; (3) by means of interstate commerce.
Satisfying the various section requirements begins with the pyramid scheme nature of USFIA.
The operation of a pyramid scheme constitutes fraud for purposes of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act.
Such schemes are inherently fraudulent as they are destined to collapse.
To establish the pyramid nature of USFIA, the SEC relies on Koscot.
The undisputed evidence satisfies both Koscot elements.
USFIA’s marketing materials made clear that it was a “multinational jewelry enterprise that combines gemstone mining, processing and design as well as jewelry sales.”
With respect to Chen specifically;
Chen is liable for securities fraud not only because he orchestrated a wide-scale pyramid scheme, but also because he made several material misrepresentations and omissions to investors in connection with his USFIA and Gemcoin offerings.
The uncontroverted evidence shows that Chen operated a pyramid scheme and that investors were told that they could recoup their investment and earn additional cash bonuses and reward points simply by recruiting more investors.
The whole notion, however, that all of the investors could make back their initial investment is by itself false and materially misleading.
But Chen did not stop there. To make the investment appear even more attractive, Chen made numerous other false and misleading statements about USFIA and Gemcoin, and their business prospects.
There is also no dispute Chen was responsible for making these representations to his investors.
Anyone who “makes” a misleading statement or omission, or who has “ultimate authority over” it, can be liable under Rule 10b-5(b).
Several investors testified that Chen made these seven misstatements to them, either at investor conferences or in-person meetings, or through audio-video presentations posted on the Internet.
The fact that Chen made these statements is corroborated by the marketing materials, which contained essentially the same representations.
Finally, there can also be no dispute that these misrepresentations were all made in connection with the purchase or sale of securities.
The receiver has found that payments to earlier investors were made from funds received from more recent ones.
This is sufficient to show that the sale of the securities and the scheme to defraud occurred at the same time.
And finally, whether or not Chen acted with scienter;
Since Chen operated a pyramid scheme, which is per se inherently fraudulent, his scienter, for purposes of liability for all claims under Section 17 of the Securities Act, and Section 10(b) and Rules 10b-5(a) and (c), may be presumed.
In addition to operating a pyramid scheme, Chen used investors’ funds to support a lavish lifestyle for himself and his dependents.
According to the receiver, this included Chen’s $149,000 Mercedes, a $2.345 million home for the mother of his son, a $4.424 million home for his former spouse, and a $5.3 million home for himself and his current spouse.
The SEC also make an interesting argument in favor finding an adverse inference against Chen, based on his fifth amendment pleading.
The SEC has substantial need for Chen’s testimony, as well as information concerning the identity of any individuals upon whom he may rely in support of his various affirmative defenses set forth in his answer.
Although there is strong circumstantial evidence against him, the SEC has no other, less burdensome means of obtaining information concerning Chen’s mental state and intent to defraud, other than by putting questions to him.
It should be noted that Chen has plead the fifth, despite there being no evidence of criminal proceedings against him.
At every turn Chen has asserted his Fifth Amendment privilege.
Chen’s silence and failure to contest the allegations and evidence against him is itself evidence of his acquiescence to the fact that he knowingly and purposely defrauded investors.
Based on his silence, and in the face of the SEC’s affirmative evidence against him, the Court should draw an adverse inference against Chen in this case.
The SEC sums up their filing by requesting the court grant a permanent injunction against Chen and USFIA.
The totality of the circumstances weighs in favor of a permanent injunction.
Chen acted with a high degree of scienter, his conduct also extended over a period of years, and there is no evidence that he has recognized the wrongful nature of his conduct, nor provided any assurances against future violations.
The Court should therefore enter a permanent injunction against future violations.
Steve Chen’s opposition to Summary Judgement
Steve Chen filed his opposition to summary judgement on November 7th.
In the filing, Chen mostly raises arguments based on USFIA’s GemCoin amber.
The uncontroverted evidence here is that USFIA, Inc. (“USFIA”) directly or indirectly owns and operates amber mines in the Dominican Republic.
From these mines, USFIA—a private company—extracts some of the world’s highest-quality amber, which it sells to customers for their own use and enjoyment.
There is substantial evidence that many USFIA customers are delighted with the amber they have bought from the company.
There is also substantial evidence that USFIA never sold any kind of ownership share, security, investment, or anything similar to any customer or anyone else.
But the SEC ignores all this, and claims that the evidence indisputably shows that USFIA’s amber customers are actually “investors” in securities.
Chen argues that the granting of summary judgement would deprive him of a jury trial.
Far from being supported by admissible, uncontroverted evidence, the SEC’s effort to deprive Steve Chen of his right to a jury trial is crippled by its total reliance on unauthenticated documents, self-contradicting witnesses who lack any credibility, and the inadmissible opinion of its so-called amber “expert,” who has admitted on multiple occasions that he is not an expert in amber.
The SEC also relies heavily on the court-appointed Receiver.
But the Receiver admits that his work is not even complete, and that he in turn relied heavily on the so-called amber “expert” when valuing USFIA’s assets and making crucial determinations about whether USFIA’s revenue was sales proceeds or “investor funds.”
The SEC has utterly failed to carry its burden of demonstrating that no reasonable trier of fact could find in favor of Mr. Chen.
Them’s some fightin’ words, so let’s get into it.
USFIA sold amber from mines it owns in the Dominican Republic
As the Receiver testified, USFIA owns amber mines in the Dominican Republic. But the Receiver has not completed a valuation of USFIA’s amber mines or the amber contained therein.
The Receiver relied on the SEC’s supposed gemologist expert Charles Carmona.
But Carmona admitted under oath, and to an attorney for a private party in this case, that he is not an amber expert or specialist.
Considering USFIA and Steve Chen are being sued by a US regulator as per US law, I’m not sure why this is relevant.
The implication appears to be that USFIA and Chen’s representations about the value of the amber they bundled with affiliate investment is applicable elsewhere in the world.
Even the non-expert Carmona knows that blue amber, which is “unique to the Dominican Republic,” is more valuable than any other coloration.
George Mo (one of the SEC’s principal witnesses) admitted that some Chinese people consider amber to be as precious as “diamonds and rubies.”
Two other Chinese USFIA customers explain that amber can command a price of many thousands of U.S. dollars per gram in China, and that they have personally seen such prices in gem and jewelry stores in China.
But Carmona’s purported “methodology” does not allow for the sale of any USFIA inventory in China, nor does it even attempt to assess the Chinese value of any USFIA amber holdings.
USFIA sold amber, not securities
I don’t really know what to say about this part of Chen’s objection. Clearly USFIA was selling GemCoins and investment packages, yet Chen denies as much.
Contrary to the SEC’s claim that Mr. Chen and USFIA sold “units” or “investment contracts”, there is clear evidence – including sworn testimony of the SEC’s own witnesses – that Mr. Chen and USFIA never offered or sold anything except amber products, and that the only “investment” they offered was in the amber itself.
Forget about the SEC’s legal arguments, based on reality and the USFIA GemCoin MLM opportunity, I can’t stress enough that Chen’s assertion above is patently false.
To support his claim, Chen relies on USFIA insiders.
Coco Ke Xu (USFIA’s Manager of Customer Services) explains that USFIA: sold amber and amber jewelry to its customers; did not sell any bonus points or units to customers independently from amber or amber jewelry; and never promised or issued shares, dividends, or any kind of ownership interest to any of its customers.
Ah, there it is… “independently”.
Well, the same is true in reverse: USFIA never sold bonus points or units without bundling token amounts of amber with them either.
The fact of the matter though is Chen fails to provide any evidence that USFIA affiliates sold bundled amber for anywhere near the represented value.
Ms. Xu was one of the USFIA employees who interacted most commonly and closely with USFIA customers.
Had any customers been promised or sold any sort of ownership interest or investment interest in the company, she would have known about it.
So uh what, Ms. Xu had no knowledge of USFIA’s compensation plan?
Furthermore, the bonus points or units were redeemable only for additional amber and other USFIA products.
One of which was GemCoins, which very much had a dollar amount attached to them.
Chen then goes on to use USFIA investors to support the “we sold amber” claim.
Two USFIA customers purchased $30,000 and $10,000 in amber jewelry from USFIA, for which they also received 240,000 and 80,000 bonus points respectively.
They were interested in USFIA because of its amber, not because of the reward points.
These investors face the prospect of losing $30,000 and $10,000.
No doubt they’ve been told if the SEC lose they’ll get their GemCoin ROI, or at the very least a refund.
I don’t think the inclusion of testimony from Ponzi investors, who *winkwinknudgenudge* claim to have invested in practically worthless amber counts for much legally.
Chen then goes on to reiterate the “we sold amber” claim via the SEC’s filed witness testimony.
The SEC witnesses’ own testimony is substantial evidence that USFIA sold amber products, not securities. Mo testified that when he visited USFIA he “put down some money” and “bought some [amber].”
Mo also testified that he considered the amber he purchased to be the only “investment” he has ever made other than a house.
Another SEC witness, Chenyu Chen, obtained a receipt from USFIA showing that he purchased $30,000 worth of amber.
And Jason Ning told the Arcadia Police Department in September 2015 that
(1) “USFIA owns several Amber gem mines throughout the world”
(2) “Investors, who invested $1,000 to $10,000 would receive Amber stones, said to value the amount of their investment”;
(3) “The idea was that the company would corner the Amber market, causing the price of Amber to go up;” and
(4) “Investors could then sell their Amber, making many times more than their initial investment.”
Many of the documents submitted by the SEC prove the same point.
Thus, there is ample evidence showing that Mr. Chen and USFIA sold amber products, not securities, with reward points issued as a bonus redeemable for additional amber.
I can’t tell if he’s being disingenuous or not, but Chen represents that USFIA sold either securities or amber.
That USFIA sold securities bundled with amber, which is what the SEC allege, is not addressed.
USFIA affiliates were “end users of amber”
I’m going to preface by stating I don’t get why this in Chen’s filing.
USFIA affiliate’s received amber with their GemCoin investments. That’s not under dispute.
Undisputed evidence also shows that the customers who purchased amber or amber jewelry from USFIA were themselves the ultimate end users of amber.
SEC witness Michael Liu testified that he “consider[ed] purchasing the ambers as a gift for my wife,” and that he had told his daughter the amber “can be used as the gift for [her] wedding.”
What USFIA affiliates did with the amber, in light of the GemCoins invested in, appears to irrelevant.
The only exception is if a USFIA affiliate sold the amber, which would either confirm or deny the purported value USFIA and Chen attached to it.
Again, Chen’s filing makes no representation that any USFIA affiliate managed to sell their amber at the represented value.
Infact, Chen even goes so far as to point out that the SEC hasn’t either.
The SEC has offered no evidence suggesting that anyone purchased amber from USFIA with the intent of reselling the amber to someone else.
Talk about shooting yourself in the foot.
Irrespective of what USFIA affiliates believed, based on what USFIA and Chen represented to them regarding the value of the amber, that not even one affiliate managed to sell the amber only supports the SEC and Receiver’s assertion that it was valued far below what was represented.
USFIA affiliates keeping bundled amber justified recruitment commissions
Next Chen gets into a convoluted argument about how because affiliates were the “end-users” of amber, this somehow justified paying affiliate recruitment commissions.
Ms. Xu is thoroughly familiar with USFIA’s referral program, under which customers received referral bonuses only if they referred new customers to USFIA who purchased amber and/or amber jewelry directly from USFIA.
Another “shoot yourself in the foot moment”.
Again, the inverse of Xu’s statement is true: That being referral commissions were only paid out if they recruited new affiliates who invested in GemCoin.
A point lost on Chen seems to be that attaching amber to investment deposits doesn’t negate the fact that funds were deposited for GemCoins.
Based on the arguments raised in his filing, Chen argues that he did not violate the Securities Act.
Contrary to the SEC’s facile claim, there is abundant evidence that Mr. Chen and USFIA only ever sold amber products, and that the only “investment” they offered was in the amber itself.
He does this, as above, by implying that USFIA’s GemCoin investment scheme didn’t exist.
USFIA’s GemCoin offering is not addressed directly in Chen’s opposition filing.
Instead he relies on Ms. Xu’s knowledge of the business, which he indirectly claims USFIA’s own financial records and the SEC and Receiver’s investigation should be disregarded in favor of.
It is clear that no witness in the record knows more than Ms. Xu about the nature of USFIA’s business and the products that it sold.
Indeed, the SEC has no declarations or deposition testimony of anyone who ever worked at USFIA.
Ms. Xu states unequivocally that USFIA never promised or issued shares, dividends, or any kind of ownership interest to any of its customers or any other individual.
I guess if Ms. Xu states so, then that’s it then. USFIA obviously didn’t operate the GemCoin investment opportunity.
Not quite. There’s still the matter of Howey and Koskot to consider.
The SEC next argues that Mr. Chen and USFIA offered an “investment contract” as defined by SEC v. W.J. Howey Co.
As a threshold matter, the purchase and sale of amber does not meet any of the elements of the Howey test, because there is clear evidence showing that USFIA’s customers paid to purchase amber, not to invest in a common enterprise, and because any expectation of profits that the customers had were derived from the amber’s “potential for value appreciation,” not from the efforts of Mr. Chen or USFIA.
Again, none of that makes any sense unless you completely ignore the GemCoin aspect of the business opportunity.
even if the SEC could establish that USFIA sold “units,” the evidence shows that investment in such “units” would not satisfy the “common enterprise” prong of the Howey test.
The SEC’s argument rests on two grounds.
First, the SEC claims that under USFIA’s alleged “Bonus Program,” customer monies were being “pooled” to pay “bonuses” to customers for recruiting new customers, and that this creates “horizontal commonality.”
But horizontal commonality requires that investors “give up any claim to profits or losses attributable to their particular investments in return for a pro rata share of the profits of the enterprise.”
Another “shoot yourself in the foot” moment?
GemCoins are the units referenced above, which were assigned an arbitrary value by USFIA (Chen).
USFIA, while newly invested funds continued to roll in, used said funds to pay existing affiliates a ROI on their GemCoins.
That’s quite clearly a “pro rata share of the profits of the enterprise”…
According to the “Bonus Program” as alleged by the SEC, the opposite happened: if a customer referred a new customer, the referring customer’s bonus would be calculated based on how much the new customer spent on buying amber packages from USFIA.
Wait what? Chen is confusing the pyramid side of the business with the GemCoin investment scheme.
That made each customer’s bonus totally dependent on his own particular efforts in referring new customers, not on any pro rata share of USFIA’s entire profits as an enterprise.
Thus, there is plainly no horizontal commonality.
Are we seriously going to pretend USFIA didn’t offer GemCoin Ponzi points!?
And then there’s this:
Second, the SEC argues – in an utterly circular and conclusory fashion – that USFIA’s program was a pyramid scheme and must therefore be an investment contract.
Seriously, when did that happen?!
Chen goes on to argue that “USFIA was not an illegal pyramid scheme” because the SEC’s filing wasn’t long enough.
Determining whether a program is an illegal pyramid scheme is an utterly fact-heavy analysis, and the SEC’s one-page conclusory argument certainly falls far short of meeting its burden to establish “beyond controversy” that USFIA was a pyramid scheme.
The argument is made that because affiliates are “end users”, that somehow this proves USFIA was not a pyramid scheme.
The lack of retail sales in USFIA (100% of USFIA’s revenue was from affiliates), are not addressed in Chen’s filing.
Chen’s porky pies
Regarding the numerous claims made by Chen cited in the SEC’s motion, Chen’s opposition states
Even assuming that Mr. Chen made this representation (despite the lack of any admissible evidence that he did, as discussed further, below), the SEC has offered no evidence establishing that it was false when allegedly made, and no evidence exists to prove that it is false now.
The Receiver testified at his deposition that his work valuing the assets of USFIA is not complete.
Without any such evidence, a triable issue of material fact remains regarding the truth or falsity of any representation about the value of USFIA’s assets.
Furthermore, the SEC has offered no admissible evidence that Mr. Chen ever made this representation to anyone.
What exactly Chen has based his opposition filing on is unclear, because it’s clearly not on what the SEC filed.
How do you ignore the copious amounts of evidenced provided by the SEC? The motion was supported by three declarations, which together cited a combined fifty-six exhibits as evidence.
As to Chen’s fraudulent claims about purchasing amber mines in the Dominican Republic fourteen years ago for $150 million?
Yeah don’t worry about that. Those claims were so ridiculous that they couldn’t have been taken seriously by anyone.
The SEC relies on the testimony of Jason Ning to support this claim. But Ning admitted that he never fully believed the claims of Mr. Chen or USFIA.
Thus, even assuming Mr. Chen did make this representation, it clearly was not material to anyone’s decision to buy amber from USFIA.
So because Chen’s porky pies were so outrageous, the fact that he made them is inconsequential.
Some solid legal reasoning there folks.
Oh and just incase that doesn’t stick… we’ll go ahead and claim Ning was lying!
Moreover, the declarations of Li Cong and Xin Yu directly contradict Ning’s testimony.
Ms. Cong and Ms. Yu both attended the trip to the Dominican Republic during which Ning allegedly heard this representation, and neither heard Mr. Chen or anyone else at USFIA ever say that USFIA had purchased amber mines for $150 million.
Totally didn’t happen folks. Please disregard the exhibit evidence submitted by the SEC.
China Unicorn and Steve Chen having nothing to do with it buy lying that he did?
No idea how that happened, ‘onest!
The SEC relies on only two documents in support of this purported representation: Exhibits 18 and 221 to the Del Greco Declaration. Exhibit 221 is dated March, 2015 – long after any of the alleged investments at issue in this case.
The SEC has offered no evidence that any customer or prospective customer of USFIA viewed this document prior to purchasing amber from USFIA, nor has the SEC offered any evidence authenticating the document as having been created by USFIA.
Well sure, nevermind the fact that the marketing materials submitted as evidence are from USFIA.
I’m sure it was the work of random individuals who had nothing to do with Steve Chen or USFIA.
The amber on display at USFIA’s offices was represented to be worth tens of thousands of dollars?
No idea how that happened either!
The SEC alleges Mr. Chen falsely represented that the amber displayed in USFIA’s showroom was worth tens of thousands of dollars.
But the SEC has no competent or admissible evidence of the value of that amber, or of any other amber for that matter.
You see it’s more a case of, “we made some claims, you didn’t prove our claims wrong (even though you did), and so we’re arguing, without any evidence of our own, that those claims haven’t been disproven”.
And the nonsense continues;
The SEC alleges that Mr. Chen falsely represented that Gemcoin was backed by $5 billion in gemstones.
But even assuming that Mr. Chen made the representation that the SEC alleges, the SEC has offered no evidence that such statements were material to a single customer’s decision to buy amber from USFIA.
Oh I’m sure nobody invested in GemCoin because they were (falsely) told it was backed by $5 billion in gemstones.
Cmon, why would you even think that? USFIA affiliates totally invested in GemCoins because of Steve Chen’s gun and sheriff swag.
Fraudulent EB-5 visa representations to solicit USFIA investment? Immaterial!
Even assuming that this representation was made, it is clear that it was immaterial to any witness’ decision to buy amber from USFIA because none of them participated, or attempted to participate, in an EB-5 program.
Perhaps the most egregious claim of all however is:
there is no evidence that any USFIA customers’ money was used to make illegal Ponzi-style payments to other customers.
Other than the fact that USFIA had no external revenue, affiliates invested in GemCoin points, which paid a ROI based on an internal value… yeah, sure – no evidence at all.
Steve Chen’s opposition filing left me somewhat speechless.
Having covered the MLM industry for almost a decade, I’m somewhat used to outrageous statements and loose play with facts.
But this was on a whole other level.
If I can summarize the bulk of Chen’s opposition, it’s like me walking into a mall, stabbing someone in the face and buying a stick of gum.
After getting picked up by the cops, I argue that all I did was buy a stick of gum.
How Chen plans on getting away with entirely ignoring USFIA’s GemCoin investment scheme I have no idea.
That amber was bundled with GemCoin investment isn’t up for dispute, but it doesn’t negate the GemCoin securities offering.
And whereas the SEC has provided copious amounts of evidence to date and in their motion, Chen is really light in this area.
How far is a statement from a Ponzi insider going to get you?
A legitimate response by Chen would have been to demonstrate that the amber bundled with GemCoin investment was actually worth what USFIA represented.
This would put to bed the assertion that it was mostly worthless and support the claim that amber is why investors poured $35.6 million into USFIA.
Yet Chen provides nothing concrete to counter the SEC’s own evidence. Not even a counter-appraisal from their own gemologist.
Instead, all Chen does is rubbish the SEC’s expert and his credentials.
And what’s all this crap about the value of amber in China? A whole bunch of unsubstantiated claims which:
- have nothing to do with USFIA’s distribution of amber in the US and
- provides no proof that USFIA’s amber was worth the represented value.
Quoting Campbell v. Medtronic MiniMed, Inc., the SEC claim in their filing:
To defeat a summary judgment motion, the non-moving party may not merely rely on its pleadings or conclusory statements, nor may the non-moving party merely attack or discredit the moving party’s evidence.
Rather, the non-moving party must affirmatively present specific admissible evidence sufficient to create a genuine issue of material fact.
On this I feel Chen has failed miserably. Most of his proof is either USFIA insiders or investors, who all have vested financial interests in the scheme.
Granted the SEC has relied on statements from affiliates too, but they’ve supplemented their filings with copious amounts of hard evidence.
Chen has provided none.
I also think at some point we’re going to see visa fraud charges filed. Chen’s EB-5 scam sounds pretty serious but falls outside the scope of the SEC’s case.
Perhaps that’s why he’s so paranoid about criminal charges and plead the fifth.
In any event the SEC’s motion is now before the court and awaiting a decision.
Update 11th December 2016 – On December 8th USFIA was ruled to be a Ponzi scheme and summary judgement granted against Steve Chen.
EB-5 fraud is going to be Homeland Security (Immigration), not SEC. Though in this case, it is relevant in that EB-5 is a part of the overall fraud in that Steve Chen spread the stuff far and wide, which included his various ventures, including Amkey MLM, that security video company they partnered with, his various real estate ventures and REITs, and of course, the amber (CRAP).
There was a tiny little amber mine from what I heard, already closed. Uncorroborated, of course.
Thanks for all of the details, Oz! Will this have any impact on the timeline for investors getting payments from the receiver?
One thing I dont really understand is, how can Chen argue that USFIA was a legitimate business, yet he hasn’t objected to the receiver taking over and liquidating it.
May I have the source of the SEC document? I would like to take a look of the original documents.
USFIA Receivership has a copy up on their website, look for “ORDER FOR SUMMARY JUDGMENT AGAINST STEVE CHEN”.