SEC charges East Tennessee advisor

David MoonBlog

The Securities and Exchange Commission (SEC) recently charged a Chattanooga investment firm and its high-profile owner in a $110 million Ponzi scheme that, according to court records, lasted more than a decade.

First, however, the requisite disclaimer: the SEC has merely charged John Woods and Southport Capital with six counts of securities fraud. Although a judge has named a receiver to oversee frozen assets of Woods and Southport, our court system presumes innocence until a jury determines otherwise.

The 400 victims described in the SEC’s August 20 complaint, most of them elderly retirees, are not similarly required to withhold judgement.

John Woods, a minority owner of the Chattanooga Lookouts minor league baseball team, purchased the investment advisory firm Southport Capital in 2008, while still an employee of Oppenheimer & Co. In its 38-page complaint, the SEC alleges that Woods used both Southport and his position at Oppenheimer to solicit investors for a fraudulent investment fund, Horizon Private Equity III. The SEC charges that Woods and other Southport advisors made a number of false claims, including that Horizon had a guaranteed rate of return, carried little investment risk, invested in mortgages, owned government bonds, charged no fees and was an 6% annuity.

For almost 11 years, the SEC says Woods secretly controlled Southport, never informing Oppenheimer of his outside business.

The SEC alleges no misconduct by Oppenheimer.

Woods certainly presented all the trappings of legitimacy. His bio claims 26 years as Executive Director at Oppenheimer, a stint at Lehman Brothers, host of something called Chattanooga Money Radio, some non-profit board service and a bunch of jock sniffer-looking stuff – including that two of his sons played high school football. Even the investment firm he kept secret from Oppenheimer suggested legitimacy, as Woods purchased Southpoint Capital from a member of one of Chattanooga’s blue blood families. It was actually this purchase that led Oppenheimer to first discover Woods’ undisclosed control of Southpoint, when Oppenheimer executives learned that Woods was being sued for failing to make payments on his loan for the Southpoint purchase.

Many scams go unnoticed for years because the fraudsters simply never register with regulators. For 11 years, however, Woods was claimed affiliation with two legitimate firms. The cues to a potential problem were less obvious, but still present.

I’ve seen a lot of sales pitches for products that purport to be risk free, while guaranteeing returns that are 5-to-6 times those available on actual risk-free investments. Not all were Ponzi schemes, but in some way, every one of them was a fraud. The very act of offering such an absurd proposition is a sign that the promoter is naïve or stupid – or he thinks you are.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.