[ by Howard Haykin ] The SEC today announced that it obtained an emergency court order to halt an alleged Los California-based Ponzi-like scheme, headed up by an unregistered individual through 3 entities he operates and controls. Profiles of Defendants. The scheme was operated by Small Business Capital Corp. and its principal Mark Feathers, who raised $42 million by selling securities issued by Investors Prime Fund LLC and SBC Portfolio Fund LLC - two mortgage investment funds they controlled.   All defendants operated out of Los Altos, CA.

Small Business Capital Corp. is a privately held California corporation formed in 2004.  SB Capital is the sole manager of co-defendants IPF and SPF.  SB Capital also manages two other funds: (1) Small Business Capital, LLC, which is a wholly-owned subsidiary of defendant IPF; and (2) SBC Commercial Mortgage Fund, LLC, which through 3/31/12, had raised about $2.8mn from 14 investors.  SB Capital is not registered with the Commission in any capacity.

Mark Feathers, age 48, is founder, CEO and a director of SB Capital.  Through SB Capital, Feathers is the controlling person of IPF and SPF.  Feathers is not registered with the Commission in any capacity and has never had a securities license.

Investors Prime Fund, LLC, a California LLC formed in 2005. SB Capital is the sole manager of IPF, which is engaged in the business of investing in loans secured by first deeds of trust encumbering commercial and income-producing residential real estate located primarily in California.  IPF began raising funds from investors in 2005, but did not begin operations until 6/26/06, when its minimum capitalization of $500,000 was reached. As  of 3/31/12. approximately 314 investors had invested over $31 million in IPF.  IPF and its securities are not registered with the Commission.

SBC Portfolio Fund, LLC ("SPF"), a California LLC formed in July 2007.  SB Capital is the sole manager of SPF, which is engaged in the business of investing in loans secured by deeds of trust secured by commercial and income-producing residential real estate in California and other states. SPF began raising funds from investors in 2007. As of 3/31/12, approximately 103 investors had invested over $10 million in SPF.  SPF and its securities are not registered with the Commission.

SEC Findings and Allegations. More than 400 investors allegedly were attracted to the funds by promises that profits from mortgage investments would yield annual returns of 7.5% or more.  In reality, Feathers operated a Ponzi-like scheme by paying returns to investors that came partly from fund profits and partly from other investors. From 2009 to early 2012, it's alleged that Feathers improperly transferred more than $6mn from the funds to Small Business Capital to pay its expenses, including substantial payments to Feathers.  The defendants had the funds account for the transfers in a way that disguised the depletion of fund assets, and did not tell investors that Small Business Capital’s ability to repay was uncertain and that it was only able to make the interest payments owed to the funds by borrowing more from them. Further, investors allegedly were not told that, in February and March 2012, the defendants caused one fund to sell mortgages to the other fund at an inflated price, thus generating a “profit” for the selling fund so it could pay Small Business Capital management fees of more than $575,000. The SEC also charged Feathers and Small Business Capital for Small Business Capital having effected transactions in the funds’ securities without being registered as a broker-dealer with the SEC. Court Order. Federal Judge Edward Davila for the U.S. District Court for the Northern District of California granted the SEC’s request for a temporary restraining order and asset freeze against Feathers, Small Business Capital, and the funds.  He appointed Thomas Seaman as a temporary receiver over Small Business Capital and the funds.  A court hearing has been scheduled for 7/10/12, on the SEC's motion for a preliminary injunction. SEC's L.A. Reg'l Office Staff Credits. Investigation by Susan Hannan, Roger Boudreau; John Bulgozdy will lead the litigation. For further details, go to:   [SEC PR 12-125, 6/28/12] and [SEC Complaint].