United States Securities and Exchange Commission v. Collins et al

On September 23, 2021, the United States Securities and Exchange Commission (“SEC” or “Plaintiff”), represented by Jonathan Stephen Polish, attorney at SEC’s Chicago regional office, filed a civil enforcement action against James R. Collins (“Collins”) and Robert F. Dimeo (“DiMelo”) (collectively “Defendants”), seeking injunctive relief, civil penalties and disgorgement of all ill-gotten gains along with prejudgment interest for the alleged securities fraud committed by Defendants. This case was filed in the U.S. District Court in Northern District of Illinois with Judge Edmond E. Chang presiding.

In the complaint, Plaintiff alleged that, “Defendants’ fraudulent actions set up HATS as a house of cards which was doomed to fail, and it predictably collapsed when their scheme unraveled. HATS collapsed because, prior to the sale of HATS notes, and unbeknownst to investors, Defendants filled HATS with poorly-performing and delinquent loans they disguised to look like better-performing (i.e. more likely to continue to pay rather than default) loans than they really were.”

Plaintiff also alleged that, “Investors purchasing HATS notes did not know about the improper modifications because the materials Honor prepared to market HATS misrepresented Honor’s actual loan servicing practices in several respects..”

Plaintiff further alleged that, “Honor, at the Defendants’ direction, continued these same reckless and impermissible loan modification practices after HATS closed. These modifications caused Honor to inaccurately record and report loan delinquencies which, in turn, delayed Honor from timely repossessing vehicles and charging off defaulted accounts in the HATS pool of auto loans. Defendants engaged in these practices to hide further deterioration in the HATS loan pool and manipulate HATS’s cash flow structure to improperly take money from HATS that should have gone to investors.”

There are eight claims for relief laid down by Plaintiff. The first two claims have been laid down in alternative for alleged fraud in the offer or sale of securities in violation of Securities Act Section 17(a) [15 U.S.C. § 77q(a)]. The third and fourth claims have been laid down by Plaintiff against all Defendants and Defendant Collins specifically for alleged violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5(a) and (c) thereunder [17 C.F.R. § 240.10b-5(a) & (c)]. The fifth, sixth, and seventh claims have been laid down against Defendant DiMeo, or in alternative against Defendant Collins for alleged fraud in aiding and abetting Honor’s violation of Exchange Act Section 10(b) and Rule 10b-5(b) thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5(b)]. The eighth claim has been laid down for Defendants’ alleged liability as control persons under Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)] for Honor violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5].

In its prayer for relief Plaintiff has requested the court to find that each of the defendants committed the alleged violation of fraud. Plaintiff also requested the court to enter an order of injunction enjoining each of the defendants and permanently prohibiting the defendants from acting as an officer or director of any public company pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d)(2) [15 U.S.C. § 78u(d)(2)] of the Exchange Act. Plaintiff further requested the court for an order that each of the defendants pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]; and order of disgorge any and all ill-gotten gains, together with prejudgment interest or any other relief that the court deems just or appropriate.

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