‘Venture capitalists’ plead guilty in Ponzi scheme

David Wagner and Marc Lawrence face up to 20 years in prison and must pay millions in restitution. Their case brings up the issue of overhauling unregistered private funds and what Regulation D filings allow.

A pair of New York “venture capitalists” have pleaded guilty to criminal fraud charges, admitting that they bilked their companies’ employees out of some $8 million in a Ponzi scheme.

David Wagner pleaded guilty to two counts of securities fraud and one count of wire fraud on October 16 and his trusted deputy Marc Lawrence pleaded guilty to the same set of charges on October 19, court records show. The pair were indicted last year on charges that they set up a phony investment adviser called Downing Partners that purportedly helped invest in a portfolio of healthcare tech companies.

They charged “employee-investors” between $150,000 and $200,000 to join the company, insisting it was proof that they “had skin in the game,” federal prosecutors alleged. The employees “soon learned” that “Downing did not have access to millions of dollars in funding, often could not make payroll, had virtually no products to sell and that employee investments were the overwhelming source of funding,” authorities said in their 2019 indictment.

States’ rights

Wagner’s and Lawrence’s cases were heard in the US District Court for the Southern District of New York but state regulators are likely to view the pair as Exhibits A and B in states’ ongoing brief that the nation’s unregistered private funds regime needs an overhaul.

“Regulation D ensures that illegitimate issuers no longer need to file registration statements with federal regulators, and for all practical purposes their actions are exempt from federal review,” NASAA concluded in its annual enforcement report, released just a couple of weeks before Wagner’s and Lawrence’s guilty pleas. “Coupled with the federal preemption of state regulation, Regulation D allows white-collar criminals and bad actors to act in a regulatory vacuum – devoid of meaningful oversight and mechanisms to prevent abuse.”

Among the victims of the scheme was the state of Connecticut, which paid $400,000 in public monies to have Downing relocate from New York. Half that money went into Wagner’s account, and another $26,000 paid for Wagner’s daughter’s BMW, authorities alleged.

Awaiting sentencing

Efforts to reach Wagner’s and Lawrence’s attorneys have been unsuccessful.

According to the federal indictment, as former employees brought lawsuits against Downing and its executives and spread word about what was going on at the company, Wagner and Lawrence had trouble recruiting fresh “employee-investors.”

They rebranded their efforts, calling the “new” company Cliniflow. They also hired a new recruiter, federal prosecutors claimed. “Hopefully,” Wagner wrote to Lawrence in an email in July 2016, “we will have fewer bumps in the road.”

As part of their plea agreements, Wagner will pay $549,000 in fines and another $7.85 million in restitution. Lawrence will pay $150,000 in fines and another $4.55 million in restitution. Each man is facing up to 20 years in prison: Wagner is scheduled for sentencing January 11 and Lawrence February 1.

This article first appeared in sister publication Regulatory Compliance Watch