An Indiana man and former broker fleeced investors by selling unregistered securities he said were securitized loans to Asian food manufacturers, but instead used the money to invest in hemp companies in a Ponzi-like scheme, according to a complaint filed by both the SEC and Department of Justice.
The DOJ also charged George S. Blankenbaker Jr. of Westfield, Ind., with two counts of wire fraud and one count of money laundering in Indiana federal court last week.
According to the DOJ, Blankenbaker managed to solicit more than 100 individuals to invest more than $10 million into his three companies, StarGrower Commercial Bridge Loan Fund 1, StarGrower Asset Management and Blankenbaker Investments Fund.
According to the SEC complaint, Blankenbaker told investors each unit sold would have a 7.5% annual return paid monthly, that much of their funds would be used for short-term loans for Asian food exporters with limited access to traditional financing at banks and that the loans were secured.
To sell his securities, Blankenbaker recruited a number of outside sales agents, supplying them with offering and marketing materials, and he also directly solicited some investors. He tended to focus on senior citizens, most of whom were unaccredited, according to the commission.
But Blankenbaker didn’t tell investors that some of their funds would be used to help prop up a number of hemp companies in the United States, according to the SEC. In April 2018, Blankenbaker did release a marketing document that disclosed that investors’ funds might be used to help finance such companies.
“This disclosure was misleading, at best, because it presented hemp companies as an area StarGrower Asset might get involved in, and failed to disclose that Blankenbaker and his companies would use investor funds to make loans to, and invest in, hemp businesses,” the complaint read. “The disclosure also concealed that Blankenbaker’s companies had secretly been diverting investor funds to hemp companies for nearly two years.”
Blankenbaker held a number of securities licenses and had previously been associated with several broker/dealers, according to the SEC complaint. During the early months of the StarGrower offerings in 2015 and 2016, he was associated with two Indiana-based investment advisors, the complaint stated (though StarGrower’s securities were never registered with the SEC).
“The victims of this scheme placed enormous trust in Mr. Blankenbaker to wisely manage and invest their hard-earned money,” acting U.S. Attorney John E. Childress said. “Instead, he exploited their trust through deception and lies for his own personal gain.”
Of the approximately $11.4 million Blankenbaker raised from investors, he used $4 million to finance hemp companies, the complaint stated. He also used about $2.8 million for other purposes, including $806,000 to customers of unaffiliated companies, $266,900 for real estate and other ventures, and $87,320 for personal expenses, according to the SEC. One of the other business entities was using investor funds to purchase life insurance policies on the secondary market at a lower price than the “face maturity amount” of the policies, according to the DOJ.
Blankenbaker's counsel did not return a call for comment as of press time.
While Blankenbaker returned about $3.1 million of investors’ money, at least $965,000 of this came from new investor funds that Blankenbaker used to pay previous investors in a Ponzi-like fashion, the complaint read. In the end, Blankenbaker only spent about $1.2 million of the approximate $11 million in investors’ funds on the short-term loans he originally touted, and investors lost about $8.1 million, according to the SEC.
Blankenbaker filed a petition to enter a guilty plea for the DOJ charges, and according to the department he faces as much as 10 years in prison for the money laundering count and 20 years for each count of wire fraud, as well as a maximum fine of $250,000 for each count and the possibility of three years of supervised release at the conclusion of any prison term. Blankenbaker also consented to the SEC’s order to pay disgorgement, prejudgment interest and civil penalties with undetermined amounts, and agreed to a proceeding that would bar him from the industry.