The Securities and Exchange Commission charged an unregistered investment adviser for defrauding a city in Puerto Rico, illegal activity experts say the SEC remains vigilant about even as it also scrutinizes the activities of issuers.
Eugenio Garcia Jimenez Jr., 47, was charged in federal court in Puerto Rico Tuesday with defrauding the city of Mayagüez. Garcia allegedly told the city that he could invest $9 million of its funds with no risk to principal and earn the city annual returns of 10%.
“The municipality chose Garcia as an investment adviser and entrusted him with millions of dollars of taxpayer funds,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “As alleged, Garcia took advantage of that trust and misappropriated millions of dollars of taxpayer funds, causing the municipality great harm.”
The SEC’s complaint charges Garcia with violating antifraud provisions of the federal securities laws. The SEC wants a permanent injunction, disgorgement of allegedly ill-gotten gains and a civil penalty.
From 2016 through 2018, Garcia acted as an investment advisor to Mayagüez, though Financial Industry Regulatory Authority records do not show he was properly registered to do such work. He presented a plan to invest $9 million in unused city funds for two years, but instead bought $9 million in U.S. Treasury notes with the city’s funds and took out a margin loan using the notes as collateral, the SEC said.
“In the months that followed, Garcia misappropriated approximately $4.1 million in client funds by transferring various sums to himself, his associates, and entities controlled by him,” the SEC said.
Mayagüez last came to market in 1994, and EMMA filings do not show any outstanding securities.
Garcia lives in Orlando, Florida, and was the principal of Eugenio Garcia Jr. & Associations LLC, Mayaguez Economic Development Financial Strategies Inc., M.A.G. Holdings Inc. and TEGA Holdings LLC. Garcia & Assoc. is still active, but could not be reached for comment.
Garcia called himself an investment and capital municipal advisor specializing in helping municipalities facilitate investment in public development through establishing business relations with potential investors. In 2014, Garcia did consulting work for Trujillo Alto, Puerto Rico, the SEC said.
Through a review of the city’s finances, Garcia found about $9 million in unused funds in city accounts.
“The Puerto Rico government appropriated these funds over many years and earmarked them for various municipal projects,” the SEC said.
Garcia proposed investing that $9 million to achieve sufficient returns to fund some of the city’s projects such as a new trauma center, according to the SEC.
In 2014, Garcia advised the city to incorporate Mayagüez Economic Development Inc. (MEDI) as a for-profit enterprise. In March 2016, Garcia gave the city a fake letter from a California financial institution stating that the city’s investment has a projected return of 8-10%, the SEC said.
To gain full access and control over the city’s funds, Garcia submitted to that California brokerage firm a different set of account opening documents than what the city’s finance director gave him. In those documents, Garcia made several misrepresentations, the SEC said, such as saying he was MEDI’s director of finance when there was no such position.
Garcia later lied about MEDI’s relationship with the city, saying that there was none, according to the SEC.
This case is similar to one in 2012 where the SEC charged former Detroit officials and an investment adviser, said Peter Chan, partner at Baker McKenzie and former SEC enforcement lawyer who worked on that case.
The SEC alleged that a leader of a Detroit-based investment adviser stole $3.1 million from the Detroit pension fund to buy two strip malls in California.
“Often if someone is a fraudster, it is more efficient to defraud one municipality or public pension and get a lot of money as opposed to going through the effort of defrauding hundreds of investors to get the same amount of money,” Chan said.
Usually, municipalities would be sophisticated and wary, but anyone can get defrauded, Chan said.
“The SEC also wants to protect the municipalities as potential victims from fraud,” Chan said. “This is an example of that. They’re not just policing municipalities of issuers of bonds to see whether they violated the law, they also look at them as potential victims to be protected.”
