The Securities and Exchange Commission has accused an Illinois man of orchestrating a $4.5 million affinity fraud that preyed on members of his own religious community. The complaint, filed September 28 in the U.S. District Court for the Northern District of Illinois, alleges the man, who had no prior experience in merchant cash advances, raised funds from at least 23 investors between November 2021 and January 2023. The investors were predominantly from Orthodox Jewish communities in Illinois, New York, and New Jersey, and were drawn in through personal connections and word of mouth, according to the SEC.
Merchant cash advances are a form of short-term financing where a company provides an upfront sum to a small business in exchange for a portion of future revenue. The defendant told investors their money would be pooled to fund these advances, with net profits split 50/50 after a 6% management fee, all paid from merchant repayments. The pitch promised returns of "36%-65% on any given deal" and boasted a proven track record, but the SEC alleges these claims were false. The entities had only completed their first advance one month before the December 2021 investor presentation, and none had generated any profit.
Behind the scenes, the defendant allegedly collected undisclosed origination fees, typically 10% per deal, directly from investor funds before passing the rest to merchants. Written agreements did not mention these fees, and at least five investors were orally told the entities would only earn money from merchant collections. The origination fees totaled approximately $1.1 million, according to the complaint.
The portfolio itself was "never profitable," the SEC says, with collections of "less than 60% of the total amount owed." Only about 30 of 184 merchant cash advances were fully repaid. Investors were kept in the dark through an online portal and reports that showed projected returns, sometimes between 25% and 60%, without disclosing that these were projections, not actual results.
The SEC also alleges the defendant entered into at least five renewal transactions with merchants who were already behind on payments, making it appear that original advances had been repaid. In one case, a merchant that had missed roughly 15 of its last 20 scheduled payments received a $300,000 renewal. Investors were charged approximately $190,000 in fees across these renewals, and all five merchants later defaulted.
The complaint describes a pattern of fund diversion. Approximately $400,000 from the entities' bank account went to personal spending, including jewelry and cash payments, and to related accounts. Another approximately $320,000 in merchant repayments was routed to a separate entity owned by the defendant, which the SEC says "has no business operations" but was used to purchase a home, buy automobiles, and pay gambling debts. An additional approximately $282,000 in commission refunds owed to investors was also directed to that entity.
The operation stopped making new advances in January 2023, and the defendant "stopped returning investor calls," the complaint states. Investors later learned the business was insolvent when contacted by an attorney representing the defendants. So far, investors have received less than $1.7 million back, with only one of the 23 investors recovering more than their original contribution. The rest lost between approximately $15,000 and $670,000 each.
The SEC charges violations of federal antifraud statutes, including Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. The agency seeks permanent injunctions, disgorgement with prejudgment interest, civil penalties, and a bar from securities offerings. This case echoes other recent enforcement actions, such as the SEC's allegations against a Georgia trucking operator and the CFTC's $950M forex Ponzi scheme case, highlighting the regulator's focus on affinity fraud. For advisors, this serves as a reminder to scrutinize investment opportunities that rely on community trust, and to consider the recent legislative efforts to help fraud victims.
