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Last week, Fortune magazine columnist Stanley Bing inexplicably wrote that venture capital is worse than a Ponzi scheme, citing one example of a pal who raised venture capital and later sold the company, and the VCs walked away with all the money.
"Forget the occasional Ponzi scheme," he wrote. "Venture capitalism may be the greatest scam going."
That statement, and its lack of support, is certainly sensationalistic - and careless, most entrepreneurs would agree, no matter how badly bruised they are from a bad experience with a venture capitalist.
Not but a few days later, however, we have news that two groups of investors were separately creating venture capital funds (that's perhaps being generous) as they allegedly stole millions of dollars from people. Considering that venture capital is a long-term investment strategy that usually takes years to reap a return, this would be one terrible Ponzi scheme. But these aren't your typical venture capitalists.
Last week, a firm called BBC Equities was charged by the Securities and Exchange Commission for allegedly operating a Ponzi scheme involving $50 million and at least 440 investors who believed they were putting money into real estate. The suit claims John Bravata, a former police officer, and Richard Trabulsy used investors' money for hunting trips to Russia and Canada, a $500,000 sailboat, jewelry, gambling, luxury cars and houses.
Now, while that firm supposedly dealt in real estate, the SEC also alleges that Bravata and Trabulsy hatched a plan to salvage and perpetuate their Ponzi scheme by forming a new entity called BBC Capital, also known as Phoenix Venture Capital. In a February television interview, Bravata described BBC Capital as a venture capital fund and holding company for BBC Equities and Bravata Financial, according to the complaint. In late June or early July, Trabulsy gave a radio interview promoting Phoenix, the filing said.
The pair stated that they intended to use BBC Capital or Phoenix to start a new offering to investors through a forthcoming private placement, according to the petition. An SEC Form D filing submitted last week for Phoenix Venture Capital lists John Bravata and Trabulsy as directors and shows the firm raised more than $9 million for an offering targeting $200 million.
Last week, U.S. District Judge David Lawson froze the assets of Bravata and Trabulsy and issued a restraining order that in effect put them out of business. A hearing for the defendants before Lawson is scheduled for 10 a.m. Tuesday in federal court in Detroit.
Messages requesting comment from Bravata and Trabulsy were left Monday on BBC Equities' office voicemail. Their home phones were disconnected Monday until press time
Separately, the SEC filed last week a civil action against Omar Ali Rizvi, alleging that he misappropriated funds raised for Bellwether Venture Capital Fund I Inc.
The complaint alleges that Rizvi paid $1.2 million of the $1.8 million raised to a company he controlled, Strategy Partners LLC, after circulating offering materials stating that no sales commissions will be paid to the officers of the fund. Those same materials also failed to disclose that Rizvi had resigned his license to practice law in California following a conviction on several violent felonies, including assault with a deadly weapon, the SEC said.
Shortly after his release from prison, Rizvi formed Bellwether in September 2002, which was first called Landmark Microcap Fund, then Rhino Microcap Fund, then Tiger Fund, before settling on the Bellwether name in 2005, the SEC said.
In offering materials and on its Web site, the SEC charged, the firm lied about individuals who worked at the firm and about its returns. It returned no money to its investors but claimed returns of 550%, according to the SEC's complaint.
The only known investment by Bellwether was a 2005 investment in Espion International Inc., a maker of email gateway appliances. The company, which trades on the Pink Sheets, was formed with the investment from Bellwether. Prior to 2005, the company was called Horizon Networks Inc. and was in the business of renting independent, foreign and "arts" films over the Web, according to the company's most recent quarterly report. Rizvi did not respond to requests for comment. Officials from Espion also didn't respond.
All of this, of course, comes after it was revealed that the alleged con artist R. Allen Stanford invested in several venture capital firms and start-up companies through his various investment firms.
-With reporting by Scott Denne and Ty McMahan
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