The U.S. Securities and Exchange Commission Tuesday charged Houston investment adviser James C. Tao of Presidio Venture Capital with misappropriating funds and making material misstatements to those who contributed to the private equity fund he created.
Federal court records show that Tao agreed to settle with the SEC instead of face trial. As part of the deal, Tao agreed to pay $314,000 in fines and disgorgement.
Tao’s former partner, Donna Boyd – formerly known as Donna Chen – also agreed to the SEC settlement and will pay a $10,000 fine.
The SEC claims Boyd violated broker-dealer registration requirements by soliciting sales of interests in the funds, which were securities not offered by the brokerage firm with which they were associated at the time.
“Tao and Boyd betrayed their positions of trust as financial advisers to their clients and the fund,” Shamoil Shipchandler, the director of the SEC’s Fort Worth Regional Office, told The Texas Lawbook. “Advisory clients deserve and are entitled to financial advice that is in their best interests and not instead designed to line the pockets of their advisors.”
Shipchandler said that Tao and Boyd worked as financial advisers with a registered investment adviser and broker-dealer in 2013 when they formed Presidio Venture Capital, a private equity fund that reportedly focused on technology start-ups in Houston.
The SEC lawsuit, which was filed in the Southern District of Texas, states that Tao and Boyd raised about $860,000 for PVC between January 2013 and July 2016 by soliciting investments from their advisory clients, some of whom were also brokerage clients, and from other personal and business contacts.
Tao falsely claimed investor funds would be held in escrow and returned unless $2.5 million was raised., the SEC alleges.
The federal agency claims that some of the money PVC raised was invested in arms-length transactions that fit the fund’s stated business model, but that Tao failed to timely or adequately disclose that the fund was also investing in companies he owned or in which he had a personal stake, which was a clear conflict of interest.
Tao used investor funds to apply for a loan to increase his interest in the fund, cover other expenses not in line with the use of funds disclosed in PVC’s offering materials, and make a Ponzi-style payment by using new investor funds to buy out a disgruntled investor, the SEC states. The complaint also alleges that Tao ignored fund redemption restrictions and bought out Boyd, who severed ties with the fund in 2013, and at least three other investors with cash from the sale of one of PVC’s early investments.
The SEC officially charged Tao with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. It also charges Tao and Boyd with violating Section 15(a) of the Exchange Act.
Tao and Boyd settled the SEC’s charges without admitting or denying the allegations.
Tao agreed to pay disgorgement of $155,970.67, interest of $7,965.65, and a penalty of $150,000.00. Boyd agreed to pay a $10,000.00 penalty.
The SEC’s investigation was conducted by Jennifer R. Turner and Ty S. Martinez and supervised by Jessica B. Magee and Shamoil T. Shipchandler of the Fort Worth Regional Office with assistance from Deborah Shaw, Dale R. Perez, Carole A. Solloway, and Caneka F. Hardon of the Atlanta Regional Office exam staff. The litigation is led by Keefe Bernstein.
Tao is represented by Houston business lawyer Sarah Eng Koong of the Koong Law Group.
Lance C. Arney, a partner in the Houston law firm Moulton, Wilson & Arney, is representing Boyd.