Seven people in the Akron area and other parts of Northeast Ohio are charged with scamming nearly 50 people out of more than $20 million in what federal investigators allege was a significant Ponzi scheme involving a fake oil and fuel-trading business.
Federal court records show the FBI and U.S. attorney general’s office are pursuing a criminal investigation as well, including the convening of a grand jury.
The Securities and Exchange Commission said it filed suit to stop the investments in KGTA, to seek civil penalties and to get the repayment of investor funds.
The SEC filed a 32-page complaint that brings civil charges against Thomas Abdallah, also known as Tom Abraham, 49, Brunswick; Kenneth Grant, 66, Copley; Mark M. George, 56, Independence; Jeffrey L. Gainer, 49, and Nancy Gainer, Akron; Jerry A. Cicolani Jr., 45, Wooster; and Kelly Hood, 35, Richfield and Naples, Fla.
Also listed among the defendants is KGTA Petroleum Ltd, whose address is the same as Kenneth Grant’s daughter, Susan Grant Kalal and Kalal’s husband; consulting business NATG LLC owned by Nancy Gainer; and Turnbury Consulting Group LLC, owned by Hood.
Grant, husband and wife Jeffrey and Nancy Gainer and Cicolani agreed to preliminary injunctions Thursday that bar them from selling and trading securities. They are also barred from destroying documents and taking other actions.
The preliminary injunctions are the latest steps in an SEC action that dates back to May 29 in U.S. District Court for Northern Ohio.
Cleveland attorney Virginia A. Davidson, who is representing Cicolani, Hood and Turnbury Consultants, declined to comment.
The other attorney on record in the case, Paul M. Shipp of Cleveland, who is representing Gainer, could not be reached for comment.
The SEC says Abdallah and Grant set up a fake company, KGTA Petroleum, that they marketed to investors as a business that buys and sells oil and refined fuel products. Investors were told they could earn 2 percent to 4 percent monthly, or 24 percent to 48 percent a year, with no market risk by buying notes in KGTA, according to the court charges. The documents do not name investors or say where they lived.
The two men raised at least $20.73 million between Oct. 8, 2012, and February of this year, the lawsuit says. The men sold the KGTA notes through Jeffrey Gainer and Cicolani, who were Cleveland-based broker dealers. Gainer brought in at least 16 people who invested $9.61 million in KGTA notes, while Cicolani brought in at least 41 people who invested $10.36 million. The SEC lawsuit indicates one unidentified person invested about $1.5 million.
“In reality, Grant and Abdallah operated KGTA as a Ponzi scheme,” the suit says. “As recently as March 19, 2014, KGTA was taking in new investor money.”
“KGTA’s purported fuel sales were fake,” the SEC said. KGTA Petroleum never completed any sales of fuel products and did not have any contracts or purchase orders to do so, the SEC lawsuit says.
“Some investors were shown a fake tax return for KGTA that showed over $200 million in annual sales,” the lawsuit said.
Grant and Abdallah operated KGTA as a Ponzi scheme by using new investor money to pay returns to old investors, the lawsuit said.
Grant and Abdallah used investor money for personal use, including car payments, country club dues, and more than $200,000 in cash withdrawals, the SEC alleges.
The SEC said Jeffrey Gainer was paid about $2 million in fees while Cicolani was paid about $4 million in fees.
“Those massive, illicit fees have been funneled through entities owned by Gainer’s wife [Nancy Gainer] and Cicolani’s girlfriend [Kelly Hood],” the SEC said. Hood’s business, Turnbury Consulting, received more than $3.5 million from KGTA, the SEC said.
The SEC said Jeffrey Gainer and Cicolani sold the “bogus” KGTA notes without a registration statement; hid the transactions from their broker-dealer employer in a process known as “selling away” and committed fraud by marketing the securities “despite glaring red flags that signaled KGTA was a scam.”
The SEC said Gainer and Cicolani never looked into whether KGTA was legitimate. “Had Gainer and Cicolani conducted even a basic Internet search, they would have learned that in 2007 Abdallah was convicted of money laundering and had two state tax evasion felonies,” the SEC lawsuit said. “They also would have discovered that, in 2009, Grant entered into a cease and desist order with the Colorado Securities Commission barring him from selling unregistered securities.”
Cicolani and Hood’s legal team filed paperwork in which they called some of the SEC’s requests “an attempt to bully, intimidate and deprive a man and a woman of the wherewithal to defend themselves.”
That same document says a federal criminal investigation is taking place and that FBI agents are working in coordination with the SEC.
“The United States Attorney and the Federal Bureau of Investigation are conducting an active criminal investigation based on the fraud allegations in the SEC’s complaint,” the document says. “Defendants are targets of an active investigation by a federal grand jury related to the same conduct as that alleged in the SEC’s complaint.”
Jim Mackinnon can be reached at 330-996-3544 or firstname.lastname@example.org.