SEC Action Targets Digital Investment Fund

The Securities and Exchange Commission (SEC) filed a complaint in the Western District of Pennsylvania against two brothers for an allegedly fraudulent fund and investment scheme using digital currency; the complaint was filed on June 16 and unsealed June 19.

The judge ordered the defendants’ assets frozen in an order issued on June 18. The defendants are doing business as three different entities: Hvizdzak Capital Management (HCM), High Street Capital (HSC), and High Sreet Capital Partners (HSCP). Defendants Shane and Sean Hvizdzak are accused of violating the Securities Act of 1933, the Securities Act of 1934, and other statutes and rules for transferring investment funds to their personal accounts and for providing investors with misleading or false statements and documents.

The SEC claimed that since at least November 2019, the defendants have “fraudulently raised and subsequently misappropriated millions of dollars from the sale of limited partnership interests in High Street Capital Fund USA, LP (‘the Fund’), a fund they claimed would invest in digital assets…In soliciting investments, Defendants misrepresented key information to potential investors about the Fund’s performance and assets, and provided investors and/or their representatives with false financial statements and a forged audit report for the Fund.” \

“Once invested, Defendants, without investor knowledge or consent, moved millions of dollars of investor funds from Fund accounts into the personal bank accounts of Shane and Sean, where Defendants further dissipated investor funds into personal digital asset accounts.”

The fund was created in March 2019 to partake “in a wide variety of cryptocurrency investments.” The different entities managing the funds were entitled to “Management Fees” and “Performance Allocation,” to profit from the investments. Both Sean and Shane Hvizdzak had signatory authority over the Fund’s bank accounts. Further, in May 2019 they began offering and selling limited partnership funds. In 2019, they purportedly raised $540,000 through selling limited partnership interest; only one investor paid in cash, while the others paid in digital currency.

The defendants established a fund structure whereby, “certain Fund investors deposited their investments into Fund accounts at Signature Bank and Gemini, and the Fund pooled their investments and traded digital assets on the Fund’s behalf. Tax records show that trading resulted in a net loss to the Fund for 2019 for those investors.” However, in November 2019, the defendants started to trade outside of this established structure, “directing other investors in the Fund to send their investments to the HCM Account at CNB Bank.” Subsequently, “[d]efendants then simply misappropriated those investors’ money to their personal and other non-Fund accounts and did not invest that money as represented in the PPM and LPA.”

“In addition, the Fund Defendants made numerous material misstatements to potential investors concerning the Fund’s assets and performance, including providing potential investors with fabricated audited financial statements for the Fund.” These actions violated the PPM and LPA, including making misstatements about the funding. Specifically, “since Defendants began receiving money for the Fund in July 2019, the HCM Account has received $31 million from third parties.  Since July 1, 2019, Defendants transferred almost $26 million from the HCM Account to their personal accounts, or over 80 percent of the funds in the HCM account during that period.”

For example, from “July 1, 2019, until May 22, 2020, the HCM Account received approximately $18.75 million from 17 different third parties where the wire instructions that accompany the transfers specifically indicate that the deposit was for an ‘investment,’ related to the Fund” or other investment. It is alleged that most of this money was transferred to defendants’ personal accounts, or not used for investment purposes. Defendants also allegedly “fraudulently offered and sold limited partnerships in the Fund” since at least November 2019 through material misrepresentations and false documents to investors or potential investors. For instance, the Hvizdzak brothers took amounts “far in excess of the 1.5% management fee.” Furthermore, “in the third quarter of 2019, the Fund lost 17.12 percent and loses continued into the fourth quarter, for a total loss of 24.5 percent in 2019.  Because the Fund lost money in 2019, the Fund Defendants were never entitled to a “performance allocation” as represented in the documents. Defendants made false return percentages to investors, claiming investors would make money through a specific percent return on investment, when in fact, investors would lose money. Specifically, defendants claimed that in the third and fourth quarters of 2019 the fund earned 100.77% and 92.90% on its investment; the SEC claims that this is false because the fund lost money during those quarters.  The SEC alleges that defendants continue to “dissipate[e] investor assets,” causing them to lose money.

This alleged conduct violates the Exchange Act because digital currencies were used in an allegedly false scheme. It also violates the Securities Act because defendants created an allegedly fraudulent scheme to defraud investors by providing misleading and/or false statements designed to deceive investors.

The SEC has sought an order temporarily and preliminarily restraining and enjoining defendants from further violations; an order temporarily and preliminarily freezing defendants’ assets; an order preventing defendants from destroying, altering, concealing or interfering with documents or evidence; an order for expedited discovery; an order requiring defendants to repatriate all assets obtained from this conduct; an order requiring defendants to provide a sworn account of all of their received funds; injunctive relief; disgorgement of all assets obtained from this conduct; a judgment requiring the defendants to pay civil penalties; and other relief as determined by the court.