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News Release: 00-01
GRAY DAVIS, Governor
Date: 03/01/00
WILLIAM KENEFICK, Acting Commissioner
Department of Corporations Sues Major Marketer of Promissory Notes in Central Valley
Sacramento, March 1, 2000 — The Department of Corporations announced today that it has filed a lawsuit in Sacramento County Superior Court against Hapjack Marketing, Inc. of Fresno, several affiliated entities and individuals alleging the illegal and fraudulent offer and sale of an estimated $20 million in risky, short-term promissory notes to hundreds of investors, many of them elderly.
This action is the latest in a series of actions brought by the department against the sale of so-called nine-month promissory notes, many of them sold by insurance agents throughout the Central Valley. Since August of 1999, the Department of Corporations has issued 361 orders against 167 individuals and 20 entities alleging the illegal and fraudulent offer and sale of securities and unlicensed broker-dealer activity. Of these actions, some 70 Desist and Refrain Orders have been issued against sales agents selling investments in the short-term notes, which are the subject of this action. Despite promises of quarterly returns, many of the investments were "rolled over" at the end of the first nine-month term, resulting in a substantial dollar amount represented by the notes that remains outstanding and unpaid.
The department warns that while many investors feel that investments in promissory notes offer a safe and secure investment with a guaranteed return, promissory notes are only as good as the assets or property which secure them. Consequently, investors should exercise caution and do their homework before investing in them.
State regulators believe these types of securities offerings are an emerging problem, particularly in the Central Valley and reaching into San Diego. As the walls separating the banking, securities and insurance industries have broken down, more and more insurance agents and financial planners are cross-marketing risky investment products to their customers without proper licensing and disclosure, and often based on fraudulent marketing practices.
In the case filed in Sacramento Superior Court, Fresno-based Hapjack Marketing Inc., three limited liability companies and seven individuals were alleged to have illegally and fraudulently offered investments in commercial automated teller machines (ATM), cash ticket machines (CTM) and discount telephone service systems. According to the complaint filed by the department, the defendants misled investors as to the value of the collateral securing the notes and as to the potential profitability of the notes, which were supposed to provide a 13.5 to 15 percent annual return. Defendants also failed to disclose high commissions, the commingling of funds between different entities controlled by the companies and that the locations for ATMs and CTMs allocated to investors were inferior to those that the defendants retained for themselves.
In its action, the Department of Corporations seeks an injunction against the securities law violations and court approval for an "independent auditor" for the purpose of "(a) confirming collateral pledged to investors; (b) preparing current financial statement; and (c) tracing investor proceeds."
The defendants in the action filed are: Hapjack Marketing Inc., Hotel Connect, LLC, (HC); Innovative Business Solutions, LLC, (IBS); World Cash Network, LLC, (WCN); Billy Ray Smith, Claude D. Smith, Mark L. Ehrlich, Brian T. Griggs, David D. Farrell, and Harold P. Coffin, all of Fresno; and Gary M. Appelblatt of Sacramento. The entities all operated out of the same address at 3649 West Beechwood, in Fresno, and the individuals were shareholders, officers, directors, managers, trustees or controlling persons of some or all of the entities.
IBS, HC and WCN are all described in the complaint as "a start up business with no operating history and no financial statements." The sales agents were allegedly "organized and paid monetary commissions by Hapjack," which acted as "master agent by locating, recruiting, and purportedly training these sales agents to raise funds for IBS, HC, and WCN by offering and selling promissory notes."
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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