On December 29, 2011, the Securities and Exchange Commission (SEC) filed a civil fraud action against Kevin J. Wilcox, Jennifer E. Thoennes, and Eric R. Nelson for their role in a $16 million Ponzi scheme operated by Joseph Nelson. The SEC filed a separate lawsuit against Joseph Nelson and others involved in the scheme.

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

The SEC’s complaint alleges that from January 2007 to June 2010, Joseph Nelson and his associates, including Wilcox and Thoennes, solicited at least $16 million from more than 100 persons to invest in promissory notes offered by Joseph Nelson’s companies.  Most of the people the three targeted were members of the Church of Jesus Christ of Latter-day Saints. They met them at church functions and through church connections.  The investors were lured by promises of extraordinary rates of return. Most investors were given promissory notes promising returns of 14% to 60% on an annualized basis and additional premium of 20% to 60% at maturity. Some investors were simply told that they would double their money.

The SEC alleges that Nelson and his companies never purchased or sold a single merchant credit card portfolio. The money invested with Nelson and his companies was instead used by Nelson to make incremental payments to investors in a Ponzi-scheme fashion, to pay his associates, including Wilcox and Thoennes, and to pay his own lavish personal expenses, as well as those of other family members.

The SEC’s complaint also alleges that Eric Nelson, Joseph Nelson’s brother, created fictitious documents including bank account statements to lure and deceived investors into believing that Joseph Nelson and his companies were engaged in the business of buying and selling merchant credit card portfolios and that these were viable investments.

In the complaint, Wilcox, Thoennes, and Eric Nelson were each charged with violating the antifraud provisions of the federal securities laws.  The complaint also alleges that Wilcox and Thoennes violated the broker-dealer and securities registration provisions of the securities laws.