On Monday, May 2, 2022, the U.S. Securities and Exchange Commission (“SEC”) filed fraud charges in the U.S. District Court for the Middle District of Florida against Synergy Settlement Services, Inc. (“Synergy”); its CEO, who is also an attorney and principal of a law firm; and, in addition, Synergy’s President, for defrauding individuals with disabilities into believing that their funds were being placed in one of two pooled trusts managed by a non-profit association. The May 2 Complaint (the “Complaint”) also names the CEO’s law firm as a defendant. The SEC charged that instead of putting the funds into pooled trusts managed by a non-profit, the defendants used a non-profit trustee, the Foundation for those with Special Needs, Inc. (the” Foundation”), as a shell corporation that served as a front for Synergy, a “piggy bank” from which defendants diverted funds for their for-profit businesses. In addition, the SEC on the same day instituted an administrative proceeding against a San Francisco-based registered investment adviser, True Link Financial Advisors, LLC, and its CEO for serving as investment manager of the Foundation’s pooled trusts.

The case involves more than 380 trust members, most of whom, according to the Complaint, are “disabled recipients of Medicaid or Social Security Supplemental Income (“SSI”) benefits.” As the Complaint explains, under Section 1917 of the Social Security Act, Medicaid, and SSI recipients “remain eligible for benefits despite receiving assets (such as awards or settlements in personal injury lawsuits) that would otherwise disqualify them from receiving that government assistance, as long as they place those assets in an irrevocable trust established and maintained by a non-profit association.” The Foundation’s two trusts had a total of some $46 million in corpuses as of 2022. Defendants had been marketing the Foundation’s trusts since at least 2015. The Complaint alleges that the Foundation, although supposedly a non-profit trustee complying with Section 1917 requirements, was “a shell corporation with no operations or employees.” The Complaint asserts that Synergy and its co-defendants used the Foundation “to hide the fact that Synergy, a for-profit corporation, and… [its two principals] perform all the trustee functions” and “profit from the trusts’ operations by collecting all fees and other funds stemming from operating the trusts.”

When a beneficiary was recruited to use the Foundation’s trust for his or her assets, he or she was charged a $1500 fee by the CEO’s law firm, as well as a “joinder fee” of $500 or $550.  In addition, the beneficiaries paid an annual trustee fee of 1% of their subaccount until 2017, when in connection with a change of investment adviser to True Link, the annual trustee fee was reduced to 0.75% of the subaccount holdings. Essentially all the “joinder fees” and a good portion of the trustee fees ended up in Synergy. The Complaint avers that from 2015 to 2019, Synergy earned more than $675,000 from trustee fees, and “more since then,” as well as over $100,000 from joinder fees. The Complaint does not detail how much the law firm earned, but one can infer that it was substantial.

As part of setting up the Foundation, the defendants had to file an application with the Internal Revenue Service (“IRS”) for a determination that the Foundation was a charitable enterprise. Thereafter the Foundation had to file appropriate documentation with the Social Security Administration to be recognized as an eligible sponsor of pooled investment trusts operating under Section 1917 of the Social Security Act. The Complaint asserts that neither these filings nor any subsequent filing, correspondence, or marketing materials revealed the accurate facts of the defendants’ nefarious operations. Moreover, each of the 380 trust members was materially misled by false statements and omissions. The Foundation was offering to new members pooled investment trusts that held securities.  However, as the Foundation [read Synergy] was not in fact a charity, it was not exempt from registration requirements under Section 5 of the Securities Act of 1933, as amended. Further, as Synergy was not a non-profit, but rather a for-profit entity, all the beneficiaries risked not only losing their Medicaid and SSI benefits but also claims for recovery of benefits already received.

Not content with the financial exploitation of special needs beneficiaries already detailed, the Foundation and its outside investment advisers invested the trust fund monies in mutual fund Class C shares that carried the highest so-called 12b-1 fees, often 1 – 2 %, when comparable lower-cost mutual fund shares were available. This constituted an additional breach of duty to operate the trusts in the best interest of the beneficiaries. What then did Synergy and its principals do with their apparently ill-gotten gains? The Complaint recounts in some detail that monies were spent on the following:

• A Synergy business insurance policy.

• At least $300,000 on trial lawyer organizations or to charities of which defendants or friends were members.

• Golf tournaments.

• 2015-17 sponsorship of beach parties for a trial lawyer association.

• A holiday party organized by legal friends and clients.

• $15,000 for a group of trial lawyers who “achieved large settlements.”

• Dues to be named “sponsoring fellows” of a trial lawyer think tank.

• Annual payments (2015-18) to be a sponsor of a holiday event for a lawyer alumni group of a Tampa private high school.

• 2015-17 fees to sponsor judicial luncheons for workers’ compensation lawyers.

• 2015 sponsorship of a trial lawyer in a construction project in a Berber village in Morocco.

The Complaint asserts that none of these expenditures were consistent with the Foundation’s avowed charitable purpose, but in fact were solely aimed to further Synergy’s business interests.

In addition, the SEC brought an administrative enforcement action against True Link and its CEO, essentially for failing to recognize the material mismanagement and fraud of the Synergy defendants. True Link had been a registered investment adviser since 2018, and according to the Commission’s May 2 Order (the “Order”), had $726 million under management as of Feb. 8, 2022. True Link charged a management fee of 0.75% on the trust corpuses and deducted 1.5% each year, one-half for True Link, the rest the trustee fee for the Foundation [Synergy].  True Link interacted only with Synergy employees who, True Link was told, were the actual operators of the trusts. Hence, the Commission asserted that True Link “caused violations by … [the two trusts and the Synergy principals] of Section 17” of the Securities Act of 1933, as amended. The Commission notes that “proof of scienter is not required to establish a violation of Section 17.” The Order further asserts that True Link and its CEO, because of the Section 17 violation, also caused the Synergy defendants to violate Section 206 of the Investment Advisers Act of 1940, as amended, and rules thereunder, which prohibit “an investment adviser to a pooled investment vehicle to make any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading.”  Again, the Commission notes that scienter is not required, citing the seminal Steadman case, SEC v. Steadman, 967 F 2^d 636 (D.C. Cir., 1992).

True Link and its CEO consented to the entry of a Cease-and-Desist Order and to the requirement that True Link pays a civil penalty of $200,000 and the CEO $20,000. The SEC seeks permanent injunctions and disgorgement of all “ill-gotten gains” plus prejudgment interest against all the Synergy defendants, and civil money penalties against all of them except the Foundation. Seldom, in some 50+ years of reading about and studying securities law, has your author come across a more detestable situation than in this story of the exploitation of the weak and injured for the personal wealth of persons purporting to be a charity, and a professional adviser and his co-conspirator.