The Securities and Exchange Commission (SEC) has taken decisive action, revealing today the issuance of a temporary restraining order, asset freeze, and additional emergency measures to thwart an extensive and ongoing fraudulent scheme targeting the Indian American community. This elaborate scheme, allegedly orchestrated by Nanban Ventures LLC and its founders—Gopala Krishnan (also known as GK), Manivannan Shanmugam, and Sakthivel Palani Gounder—along with three other entities under the control of the founders, has reportedly amassed a staggering sum of nearly $130 million in funds since April 2021.
Unveiling the Intricacies of the Fraudulent Scheme
The recently unsealed complaint, filed in the U.S. District Court for the Eastern District of Texas, lays bare the intricate details of the purported fraud. The defendants are accused of raising over $89 million from more than 350 investors under the guise of investments in venture capital funds managed by Nanban Ventures LLC. According to the complaint, an additional $39 million was raised from 10 investors directly invested in entities controlled by the founders.
The SEC contends that the defendants engaged in a series of misrepresentations, overstating the profitability of these investments and funneling at least $17.8 million in fictitious profits in a classic Ponzi scheme fashion.
Allegations of Troubling Misrepresentation
Particularly troubling are the allegations surrounding the misrepresentation of Gopala Krishnan’s expertise and success in using his “GK Strategies” options trading method. The SEC asserts that Krishnan, in a YouTube video, claimed returns of “more than a hundred percent.” Similarly, in private placement memorandums for its venture capital funds, Nanban Ventures purported that Krishnan would manage the funds to outperform the S&P 500 Index consistently. However, the SEC claims that the actual trading returns using GK Strategies were, with few exceptions, lower than the returns of the S&P 500 index and negative on numerous occasions.
Director’s Cautionary Message in Light of Serious Allegations
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the seriousness of the alleged wrongdoing, describing it as a large-scale affinity fraud targeting the Indian American community in the Dallas-Fort Worth area. Grewal urged all investors to exercise caution, emphasizing the importance of verifying the credentials of investment professionals and approaching investment opportunities that promise extraordinary returns with skepticism. Alex Damsker, Ex SEC attorney, highlights the issue, tweeting on X (Twitter).
Violation of Fiduciary Duties and Financial Manipulation
The complaint further alleges that Nanban Ventures and the founders, acting as investment advisers, violated their fiduciary duties by causing venture capital funds to invest more than $70 million in companies under their control. The funds were allegedly commingled with an additional $39 million from at least 10 other investors. The combined funds were then purportedly used for various purposes, including making Ponzi payments and paying the founders themselves at least $6 million.
Eric Werner, Director of the SEC’s Fort Worth Regional Office, highlighted the ironic use of the ‘Nanban’ branding, meaning ‘friend,’ juxtaposed with actions that betrayed investors’ trust. The SEC’s complaint charges all defendants violating antifraud provisions, seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. Additionally, the complaint seeks an order prohibiting the founders from acting as officers or directors of a public company.
Ongoing Investigation and Necessity for Rigorous Regulatory Scrutiny
As the SEC’s investigation unfolds, led by the Fort Worth Regional Office and involving Akita Adkins, Clemon Ashley, Laura Bennett, and Jason Braun, the gravity of the alleged fraud underscores the need for rigorous regulatory scrutiny to protect investors from such deceptive schemes. The litigation, managed by Keefe Bernstein and Jason Reinsch under the supervision of Samantha Martin, Melvin Warren, B. David Fraser and Mr. Werner signal a determined effort to hold the defendants accountable for their actions.
Disclamer
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