The nation’s top investment regulator moved Tuesday to shut down a St. Louis Park broker and the national firm he works for, telling a federal court their Brazilian investment scheme constituted an “emergency.”
Over the past five years, Providence Financial Investments Inc., based in Miami, has raised $64 million from 420 investors in the United States to invest in promissory notes used to finance the purchase of accounts receivable — unpaid bills — in Brazil. At least 12 of the investors are from Minnesota.
In a federal court filing in Minneapolis on Tuesday, the Securities and Exchange Commission (SEC) called the investment scheme an “ongoing fraudulent and unregistered securities offering.” The securities have not been registered with the SEC and brokers selling them are unregistered, Providence can’t account for all of the money it has collected and the firm is in a financially precarious position, the filing said.
“This case presents an emergency,” SEC lawyers wrote.
Providence is listed as a defendant in the civil complaint, as is Jeffory Churchfield, a Forest Lake resident who runs Infinity Income, a financial advisory firm in St. Louis Park that has sold the Brazilian securities to Minnesota investors since 2013.
Churchfield could not be reached for comment Tuesday, but Matthew Forsgren, a Minneapolis-based attorney for Providence, wrote in an e-mail that “Providence denies the allegations of fraud” and “has cooperated with the SEC and worked to address the SEC’s concerns.”
Investments in “factoring” — the purchase of accounts receivable from a company at a discounted rate — are a legitimate way to make money. Investors collect the full amount from the company’s debtor and pocket the difference.
Providence bought the bills of small businesses in Brazil, giving them cash immediately, then took over the task of collecting from their customers. It bundled these debts into securities with a 12- or 24-month maturity, which it then sold to investors who expected a fixed-rate return of generally 12 or 13 percent.
Many of the firm’s clients have rolled their investments over as their notes mature rather than cashing out, investing their principal and the return in a new promissory note with the help of brokers like Churchfield.
But according to the SEC, Providence and its brokers have not disclosed to investors that brokers are paid a 6 percent commission when they sell the securities, that executives from Providence received nearly $9 million in compensation from the firm’s U.S. entities in four years, or that, at best, only two-thirds of investors’ money went into Brazilian receivables.
Executives at Providence have been “unable to answer basic questions about their organizational structure, their use of investor proceeds and their financial condition,” the SEC said. In 2015, the firm owed investors $64 million, yet their Brazilian affiliates held only $10.6 million in receivables assets.
The SEC said Providence’s “current financial situation appears extremely tenuous.” The firm holds less than $250,000, spread through 28 accounts, and it has faced difficulties collecting certain of its accounts receivable from Brazil.
Worse still, the devaluation of Brazil’s currency by nearly 50 percent compared to the dollar in 2015 means Providence cannot repatriate its Brazilian assets to repay U.S. investors without suffering massive currency exchange losses.
Yet the firm continues to sell these investments to clients in the U.S., including in Minnesota.
According to the SEC, Churchfield earned $130,000 in commissions selling the promissory notes in Minnesota in 2015. That was his sole source of income, the SEC said, and Providence paid the rent for his office after he started selling the notes.
On his website, Churchfield says he has “extensive knowledge of the pressing issues facing those retiring today.” Churchfield and Jack Jarrell, a Washington state-based financial adviser also listed as a defendant, targeted retirees or people near retirement, according to the SEC. They identified potential investors by holding “social security seminars.”
Churchfield was not registered as an investment adviser in the state, according to the Minnesota Department of Commerce. The department subpoenaed Churchfield with regard to the Providence securities, according to Jarrell’s testimony to the SEC, though a spokesman at the department declined to confirm that.
The subpoena scared Jarrell off from selling more of the securities to new customers, he told investigators, but it didn’t stop him from continuing to help clients roll their investments over and buy new promissory notes.
To protect investors and prevent additional losses, the SEC asked Tuesday for a temporary restraining order against the sale of any of the promissory notes. It also asked the court to appoint a receiver to control Providence, and demanded a jury trial.
Providence CEO Antonio Buzaneli has invoked his Fifth Amendment right against self-incrimination, which, the SEC argued, “demonstrates that Providence’s current management should no longer be trusted to run the companies’ affairs and control the disposition of investor funds.”