Was Wells Fargo Complicit In A Ponzi Scheme?

When a person or entity runs any type of fraud, they generally go to great lengths to disguise their activities from the financial institutions to avoid fraud detection. Many banks have the power to put a stop to any illegal activity that involves their institution to avoid regulatory trouble. Wells Fargo is facing a lawsuit for failing to stop illegal activity to prevent a fraud.

Four investors filed suit on Friday, August 23, 2021, allege that a recently discovered Ponzi scheme used accounts at Wells Fargo Bank. Additionally, the bank did nothing and allowed the scheme to continue defrauding investors. The plaintiffs accuse Wells Fargo of “aiding and abetting” the scheme. The Securites And Exchange Commission (SEC) has also become involved, filing its own lawsuit against the company committing fraud.

MJ Capital Funds, MJ Taxes And More

Headquartered in Pompano Beach, FL, MJ Capital Funding claimed to offer “merchant cash advances” to small businesses to help them with cash flow. Touting a “simplified 4 step process,” the company’s website says it helps small and medium sized businesses who needed funding.

The owner, Johanna M. Garcia, and MC Capital Funds solicited investments from more than 2,150 individuals across the US, mostly ordinary investors. Garcia raised $70.9 million to $128.6 million under the guise of providing these small business advances. In return, the investors would see their principal returned, along with 10% returns. The company also guaranteed the repayment of principal if a merchant defaulted.

Many of these investors were retired, and others were doctors, nurses, police officers, and firefighters. Garcia and MJ Capital sales people told them that their investments would go to help small businesses, and they would see returns on their investments of 120% to 180%.

Unfortunately, the company made very few of these merchant cash advances. The company was mostly seeking new funding and paying previous investors with the incoming cash flow. Garcia also paid sales commissions to her salespersons selling these plans, as well as diverting funds to her own accounts.

In an interview with Law360, attorney Scott Silver said, “Ponzi schemes relating to merchant cash advance schemes continue to proliferate in south Florida. These frauds often occur with the assistance of banks or other third-party professionals. We look forward to representing the victims, many of whom lost life savings meant to secure their retirement.” Mr. Silver is representing some of the defrauded investors.

The SEC’s Lawsuit

On August 9, the SEC also filed a civil complaint against Garcia and her companies. In the complaint, the SEC accused her and the companies of running a “classic Ponzi scheme,” paying previous investors from new funding. Very few merchant cash advances were actually made to struggling businesses. Garcia is also accused of misappropriating millions of dollars herself.

Despite the obvious signs of fraudulent activity, the SEC alleges, Wells Fargo did nothing to stop the ongoing Ponzi scheme.

The U.S. District Court for the Southern District of Florida granted the SEC’s emergency motion two days after filing, freezing all of Garcia’s assets and putting in place a receiver. You can read the petition for Securities and Exchange Commission v. MJ Capital Funding, LLC, MJ Taxes and More Inc. and Johanna Garcia, Case No. 21-61644-CIV-SINGHAL.

As of this writing, the company’s website is still live.

The Investor’s Lawsuit

Four defrauded investors have sued Wells Fargo directly for allowing the Ponzi scheme to continue, failing to carry out proper due diligence that would have uncovered the fraud and end the operation. The four plaintiffs are all residents of South Florida, and invested between $1,000 and $95,000 after participating in Zoom conferences to promote the program.

The investors’ complaint stated, “Despite this knowledge, Wells Fargo substantially assisted the MJ companies by allowing them to continue operating with Wells Fargo accounts, commingle investor funds and make payments via wire, transfer and check. Garcia and the MJ companies’ banking activities at Wells Fargo were integral to her scheme to defraud investors.”

The lawsuit also alleges that Wells Fargo failed in its due diligence, with no detection system that alerted anyone to suspicious or unusual transactions. Without due diligence, the bank failed act upon the fraudulent accounts and transactions, allowing Garcia and her company to continue the fraud against all investors.

The suit alleges aiding and abetting breach of fiduciary duty, aiding and abetting fraud, and “unjust enrichment.”  This lawsuit is in addition to the one filed by the SEC.

What Are Merchant Cash Advances?

Small business owners understand the difficulties of getting funding and trying to get a bank loan to expand. Some may turn to a system called “merchant cash advances,” or MCA It’s similar to the high-interest “payday loans” that many people turn to when they need financial help and don’t have other options. MCAs are an upfront sum of money in exchange for a percentage of a business’s daily debit and credit card sales, often with a high rate of interest. They are not, however, considered “loans” by the usual standards.

Rather than making regular monthly payments to pay back the MCA, a business agrees to automatic clearing house (ACH) withdrawals daily or weekly until the advance is repaid. The “factor rate” is the percentage added to the advance amount that is similar to an interest rate. The rates are typically 1.2% to 1.5% of the advance amount. This means that annual percentage rates are between 120% and 150%, on average, depending on the business’s ability to repay.

MCA differs from invoice factoring, where a business sells its accounts receivable at a discount in exchange for an immediate payment. Invoice factoring allows a business to acquire the cash flow it needs without incurring or increasing business debt. The cash a business receives is already earned, and there are no restrictions on how it can use its own funds.

Both options are considered “alternative financing.” Since banks aren’t generally interested in small- and medium-sized businesses, owners have to find help where they can. Both of these industries have flourished by helping the businesses who need help but are unable to acquire it through traditional means.

Our Securities and Investment Fraud Attorneys Represent Victims of Ponzi Schemes

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.