WASHINGTON -- Regulators have ordered the owner of a Washington-based online trading company to stop raising money after accusing the firm of fraud that threatens the investments of nearly five dozen people -- mostly professional basketball and football players.
A complaint issued late Wednesday by the Financial Industry Regulatory Authority alleges that Success Trade Securities and its founder misrepresented or omitted key facts when it borrowed more than $18 million from 58 investors starting in March 2009.
The complaint did not name the investors but said most were current or former NFL and NBA players. The investors were promised an annual interest rate of at least 12.5 percent, and sometimes up to 26 percent, according to FINRA, a self-regulatory body that oversees broker dealers.
But the company and its founder, Fuad Ahmed, used the money in ways that they did not disclose to investors, the complaint said. Investors did not know that roughly $4 million borrowed from some of them was used to pay the monthly interest owed to other investors or that their proceeds paid the $1,300-a-month lease on Ahmed's Range Rover.
FINRA also alleges that Ahmed used $800,000 to cover his credit card bills, travel and other personal expenditures. Investor proceeds also went toward an $82,000 interest-free loan for Ahmed's brother, FINRA alleges.
The regulatory body filed an order to halt the activities while it investigates. Ahmed and the company agreed to the order without admitting or denying guilt. The group can fine the firm or bar Ahmed from the securities industry, depending on the outcome of the probe.
Ahmed did not immediately respond to a request for comment.
Ahmed founded Success Trade Securities in 1998 after working for several broker dealers, including Smith Barney. He gained national attention in 2007 with the launch of Just2Trade, a discount online trading business that aimed to compete with better-known names such as Etrade by charging much lower fees. That business won accolades from the financial press and landed on Barron's list of best online brokers of 2013.
But Just2Trade and LowTrades, the two divisions of Success Trade Securities, did not generate enough revenue to cover the company's expenses, the complaint said. Together, they had about half of the business necessary to be profitable. The parent company, Success Trade, relied almost exclusively on loans from investors -- through promissory notes -- to keep its subsidiaries solvent.
Without revenue needed to operate the business and pay the exorbitant interest owed to investors, the company kept selling more promissory notes. It raised $18 million after leading investors to believe it was only raising $5 million, the complaint said.
Athletes were the main source of the loans, and Success Trade Securities got to know them through an investment advisory firm in McLean, Va., called Jade Private Wealth Management, or JPW. On its website, JPW says it specializes in "developing and maintaining a well thought out wealth accumulation plan" for professional athletes.
The complaint does not accuse JPW of wrongdoing, but it laid out its relationship with Success Trade Securities, which allegedly funded JPW's operations from March 2009 through March 2010. The complaint did not explain why the funding stopped.
JPW remains an independent contractor of Success Trade Securities and operates out of the trading company's McLean office, the complaint said. Of the 15 people employed by Success Trade Securities, three of them also work for JPW.
"Typically, investors were introduced to [Success Trade] through JPW," and nearly all the investors in the trading firm were clients of JPW, the complaint said.
JPW is cooperating with the investigation, said Jacob Frenkel, who is representing JPW in this investigation. The company "feels confident that the introductions, recommendations and asset management strategies it advanced for its clients were and are in their best interests," Frenkel said. "Nevertheless, they're troubled and disappointed by the allegations against Success Trade."
The complaint did not say how much money investors lost, if any.
But it said that when the promissory notes started to mature in November, about three years after they were issued, Ahmed allegedly knew the company did not have the funds to pay back the principal. He asked some note holders to extend the terms of their notes at a higher interest rate. He asked others to convert their notes into stock, basically giving them an equity in a worthless firm. At least five took him up on the offers.
Ahmed led them to believe that he would acquire an Australian online broker-dealer for $15.6 million in cash by April and publicly list his company's stock on a foreign exchange, the complaint said.
But as of April 4, the parent company had only $25,000 in the bank.