An investment in cloud computing doesn't always reap heavenly profits.
Just ask the Securities and Exchange Commission (SEC), which claims fraudsters posing as multi-level marketers raised more than $65 million since March 2013 by falsely promising tens of thousands of investors that they would yield a 100 percent return on their cloud-services investment or greater in just 100 days.
Instead of building cloud services, "Phil" Ming Xu of Temple City, Calif., and entities he controlled – including WCM and WCM777 – used investor funds to make Ponzi payments and purchase golf courses, vacant land, a warehouse and single-family homes, the regulatory agency claimed in a March 28, 2014, press release. The defendants, using investors' funds, played the stock market, made related investments through intermediary companies and disbursed investor money to a rough diamond jewel merchant in Hong Kong as well as another company affiliated with Xu, the SEC said.
Since October 2013, roughly 38 percent of the investor funds raised derived from individuals residing in the United States, according to an SEC lawsuit that alleges violations of federal securities laws.
"Xu and his entities claimed they were using investor funds to build a strong cloud services company that would then ignite other high-tech companies and ultimately make their investors very wealthy," said Michele Wein Layne, director of the SEC's Los Angeles Regional Office, in a statement. "In reality, they were operating a pyramid scheme that preyed on investors in particular ethnic communities, leaving them with nothing left to show for their investment."
U.S. District Judge Christina Snyder, in the Central District of California, has granted the SEC's request to freeze assets and appoint a temporary receiver over them, the agency said. Snyder also has prohibited the defendants from destroying documents and required them to provide accountings.
A court hearing is scheduled for April 10.
SEC laid out a scheme in which defendants offer and sell investors various packages of cloud-based services such as space, music, books and video, in exchange for cash and "points," which can be redeemed for goods and services that WCM777 and its affiliates will offer or "converted into equity in an initial public offering of a company named WCM7.com or other unidentified 'high tech' companies that Defendants claim they will bring public."
"WCM777 is a classic unlawful pyramid scheme," SEC alleges in the lawsuit. "WCM777 sells its products exclusively to investors and has no apparent source of revenues other than money received from new investors." According to the agency, from March 2013 through September 2013, WCM777 recorded a loss of $282,603.48.
Wellman & Warren, which Reuters reported is a California-based law firm representing the defendants, did not immediately respond today to an emailed request for comment.