Cold-callers from Spyglass Equity Systems Inc. allegedly sold nearly 200 investors nationwide on purportedly profitable trading systems that were operated by 2 related investment companies – Flatiron Capital Partners LLC and Flatiron Systems LLC.  However, only about half of the $2.15mn invested actually went for trading, and much of the trading that did occur failed to use the purported trading systems.  All told, FCP and FS wound up losing about $1mn in investor funds.  The managing member of the two firms – David Howard II – misused almost $500,000 of investor money on personal expenditures. 

Mr. Howard, the 3 companies and Spyglass owners, Richard Carter, Preston Sjoblom, Tyson Elliott – were charged with fraud in connection with the unregistered securities offerings. 

Spyglass representatives falsely touted a successful performance history and level of automation of the trading systems, and misled investors to believe that FCP had a positive reputation and solid affiliations in the brokerage industry.  To seal the deal, Spyglass offered investors a money-back guarantee if the system did not generate a profit within the first 180 days of trading. However it was only after an investor paid Spyglass a license fee of about $6,000 that Spyglass put the investor in contact with Flatiron, ostensibly to open a brokerage account.

The SEC’s complaint alleges that Howard and FCP provided each investor with instructions on how to fund their “account” with FCP, but included in the instruction packet a copy of the FCP Operating Agreement that indicated the investor was actually purchasing a membership interest in FCP. Many of the investors recruited by Spyglass were elderly and unsophisticated investors who did not understand that they were purchasing a security interest in FCP.

According to the SEC’s complaint, FCP pooled investor funds so Howard and others could trade the funds using various trading techniques. When the trading was not successful and it became clear that Spyglass would have to pay refunds to its clients, Howard provided Spyglass with another trading system and organized FS to purportedly operate the new system. Using false and misleading claims of prior success of this new trading system and Spyglass’s relationship with FS and Howard, FCP investors were persuaded to transfer their investments from FCP to FS. Under the direction of Sjoblom and Carter, Spyglass then began selling the FS trading system to new investors using a sales pitch similar to the one it used to sell the FCP. Investors were again misled to believe they would be opening brokerage accounts, this time with FS. They were later provided with an FS Operating Agreement indicating they were actually purchasing a membership interest in FS. Howard used FS investor funds to trade in equities, futures and off-market securities.

When FS ran out of funds in December 2008, the SEC alleges that Howard took steps to conceal the fraudulent scheme by telling members that he had ceased all trading in order to conduct an audit of the trading accounts. However, Flatiron never hired an auditor and no audit was ever performed.

The SEC seeks permanent injunctions, disgorgement plus prejudgment and post-judgment interest, and financial penalties.  [SEC Litigation Rel. 21892, 3/22/11]