SEC Accuses Summitcrest Capital and Its Principals of Fraud Targeting Chinese-Speaking Investors

The Securities and Exchange Commission (SEC) has filed charges against Johnny Tseng, Kevin Zhang, and Summitcrest Capital, Inc. for allegedly conducting an offering fraud through their real estate investment fund, SC Development Fund, LLC. The fund, which is now defunct, raised approximately $19.8 million from around 30 investors in the United States and China between 2018 and 2019. The SEC alleges that the fund was used to defraud investors from Chinese-speaking communities in the U.S. and China.

SEC Charges Summitcrest Capital in Major Offering Fraud Case

The Securities and Exchange Commission (SEC) has filed charges against Summitcrest Capital, Inc., and its principals, Johnny Tseng and Kevin Zhang, for conducting an offering fraud through their real estate investment fund, SC Development Fund, LLC. The fund, now defunct, had raised approximately $19.8 million from about 30 investors in the United States and China between February 2018 and November 2019.

Allegations of Misrepresentation and Misuse of Funds

According to the SEC’s complaint, the SC Development Fund, formerly known as SC Development Fund V, LLC, was a real estate investment fund managed by Tseng and Zhang through Summitcrest, which they co-owned. The fund sought investors from Chinese-speaking communities in both the United States and China for its unregistered offering. The SEC alleges that the fund misrepresented its use of investor funds, stating it would make real-estate related loans “to the general public” and use the income from these loans to make promised interest payments and return of capital to investors.

However, the SEC alleges that, contrary to these representations, the SC Development Fund used investor funds exclusively for loans to Zhang’s real estate development and contracting business, and at least twelve other real estate development entities under Zhang’s control. Tseng and Zhang are also accused of misleading investors by using investor funds to pay supposed finder’s fees to two entities that were, in fact, controlled by Tseng or Zhang.

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Legal Consequences for Summitcrest and Its Principals

The SEC’s complaint, filed in the Central District of California, charges Summitcrest, Tseng, and Zhang with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The complaint also alleges violations of the registration provisions of Sections 5(a) and 5(c) of the Securities Act.

The SEC seeks permanent injunctions, conduct-based injunctions, disgorgement with prejudgment interest, and civil penalties against Summitcrest, Tseng, and Zhang, and officer and director bars against Tseng and Zhang.

Settlement and Penalties

Summitcrest and Tseng, without admitting or denying the allegations, have pre-filing consented to the entry of final judgments permanently enjoining each of them from violating the antifraud and registration provisions of the Securities Act and the Exchange Act. They are also prohibited from participating in the issuance, purchase, offer, or sale of any security, with the exception of Tseng’s personal transactions. Penalties include disgorgement payments and civil penalties amounting to millions of dollars.

Why This Matters to Investors

So, why should investors care about this case? It is a stark reminder that due diligence is crucial before making investment decisions. Investors should not rely solely on common ties with someone recommending or selling the investment. The SEC’s Office of Investor Education and Advocacy (OIEA) and the Division of Enforcement’s Retail Strategy Task Force urge investors to protect themselves against affinity fraud, which involves exploiting the trust and friendship within a group to commit fraud.

Investment Ideas Based on This Information

So, what can investors learn from this case? It’s simple: always conduct independent research and verify the credibility of the investment and the people behind it. Consider diversifying your portfolio with investments in well-established, transparent companies or funds with a proven track record. Additionally, consider seeking advice from a trusted financial advisor to help guide your investment decisions.

The case of Summitcrest Capital underscores the importance of vigilance and due diligence in investment decisions. Remember, if an investment seems too good to be true, it probably is.

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