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(VIDEO) Venezuela's Claudio Osorio Charged in $50 Million Fraud
"From his lap of luxury, Osorio concocted a compelling story about InnoVida by recruiting an impressive board of directors and boasting a bogus financial condition to lure investors into funding his scheme of lies," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. He is alleged to have used investor's money to pay for his $13 million Star Island mansion, a Maserati, a Colorado mountain retreat home, and his country club.
MIAMI — The US Securities and Exchange Commission (SEC) today charged a prominent Miami-based, Venezuelan businessman with defrauding investors by grossly exaggerating the financial success of his company that purportedly produced housing materials to withstand fires and hurricanes. Claudio Osorio stole nearly half of the money raised from investors to pay the mortgage on his multi-million dollar mansion and other lavish highlife expenses.
The SEC alleges that Osorio, who was a former Ernst & Young Entrepreneur of the Year award winner, raised at least $16.8 million from investors by portraying InnoVida Holdings LLC as having millions of dollars more in cash and equity than it actually did. Osorio sometimes solicited investors one-on-one at political fundraising events. To add an air of legitimacy to his company, Osorio assembled a high-profile board of directors that included a former governor of Florida, a lobbyist, and a major real estate developer. Osorio falsely told a potential investor he had invested tens of millions of dollars of his own money as InnoVida's largest stakeholder, and he hyped a Middle Eastern sovereign wealth fund investment as a ruse to solicit additional funds from investors.
The SEC also charged InnoVida's chief financial officer (CFO) Craig Toll, a certified public accountant living in Pembroke Pines, Fla., who helped Osorio create the false financial picture of InnoVida.
The SEC alleges that besides his Miami Beach mansion, Osorio illegally used investor money to pay for his Maserati, a Colorado mountain retreat home, and country club dues. He stole at least $8.1 million in investor funds.
"From his lap of luxury, Osorio concocted a compelling story about InnoVida by recruiting an impressive board of directors and boasting a bogus financial condition to lure investors into funding his scheme of lies," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.
In a parallel action, the U.S. Attorney's Office for the Southern District of Florida today announced criminal charges against Osorio and Toll. Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and Michael B. Steinbach, Acting Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, announced that Claudio Eleazar Osorio, a/k/a “Claudio Osorio Rodriguez,” 54, and Craig Stanley Toll, 64, of Pembroke Pines, were arrested based on a federal fraud indictment. More specifically, the indictment charged the two men with two counts of conspiracy to commit wire fraud, in violation of Title 18, United States Code, Section 1349; sixteen counts of substantive wire fraud, in violation of Title 18, United States Code, Section 1343; one count of major fraud against the United States, in violation of Title 18, United States code, Section 1031; one count of conspiracy to commit money laundering, in violation of Title 18, United States Code, Section 1957; and three counts of making false statements to the a United States government agency, in violation of Title 18, United States Code, Section 1001. The defendants are expected to make their initial appearances in federal court today at 2:00 p.m. before U.S. Magistrate Judge Jonathan Goodman.
According to the indictment, between March 2007 and March 2011, Osorio, Toll and others offered and sold shareholder interests and joint-venture partnerships in Innovida to select individuals and groups, raising more than $40,000,000 from approximately ten (10) investors and investment groups located in the United States and other countries. Osorio, Toll and others solicited and recruited investors by making materially false representations and concealing and omitting material facts regarding, among other things, the profitability of the company, the rates of return on investment funds, the use of investors’ funds and the existence of a pending lucrative contract with a third-party entity. Osorio received moneys from investors based on these misrepresentations. In addition, Osorio used investor monies for his and his co-conspirators’ personal benefit and to maintain and further the fraud scheme.
The indictment further alleges that between January 2010 and March 2011, Osorio, Toll and others applied for and obtained a $10,000,000 loan from the Overseas Private Investment Corporation (“OPIC”), a U.S. government agency that promotes U.S. government investments abroad to foster the development and growth of free markets. The purported purpose of the loan was to build a manufacturing facility and 500 homes in Haiti (“the Haiti project”) for displaced families in the aftermath of the January 2010 earthquake. The indictment alleges that Osorio, Toll and others made materially false representations and omissions concerning, among other things, the profitability of Innovida, the purported use of the loan proceeds, an equity contribution to be made by Innovida, and contracts that Innovida purportedly had obtained with third-party vendors. Osorio used the OPIC loan proceeds to repay investors and for his and his co-conspirators’ personal benefit and to further the fraud scheme.
According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, the scheme began in 2007 and lasted until 2010. InnoVida was purportedly in the business of manufacturing building panels used to construct houses and other structures resistant to fires and hurricanes. The company entered bankruptcy in 2011.
To induce funds from investors, Osorio and Toll allegedly produced false pro forma financial statements. A pro forma financial statement for March 31, 2009, stated that InnoVida had more than $35 million in cash and cash equivalents and more than $100 million of equity. A pro forma financial statement for Dec. 31, 2009, listed more than $39 million in cash and cash equivalents and $122 million of equity. In reality, the company's bank accounts held less than $185,000 on March 31, 2009, and less than $2 million on Dec. 31, 2009. Toll failed to review all of InnoVida's bank account statements when he drafted financial statements. Instead, he accepted Osorio's misrepresentations that InnoVida had these assets in an account to which Toll did not have access.
The SEC alleges that Osorio offered bogus share prices to prospective investors based on false valuations. He told one investor that InnoVida was valued at $250 million, and then a week later told a different investor that the company was worth $50 million. The latter investor purchased $100,000 of Osorio's stake in the company for five cents per share.
The SEC further alleges that Osorio lied to an investor when he said that he had personally invested tens of millions of dollars into InnoVida. He had in fact made no such investment. Osorio also enticed an investor to increase an investment in InnoVida by touting a supposed $500 million deal he was negotiating with a Middle Eastern sovereign wealth fund that would significantly benefit InnoVida investors. Osorio went so far as to create a document showing the investor how much he would make once the sovereign wealth deal closed and was funded. Based on Osorio's misrepresentations, the investor was able to raise approximately $700,000 and later borrowed $3 million from a close friend. However, no sovereign wealth buyout deal ever materialized, and InnoVida investors never benefited as promised.
The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against InnoVida, Osorio, and Toll to enjoin them from future violations of the federal securities laws. The complaint also seeks an order barring Osorio and Toll from serving as an officer or director of a public company.
The SEC's investigation was conducted in the Miami Regional Office by Senior Investigations Counsel Gary M. Miller and Accountant Karaz S. Zaki under the supervision of Assistant Regional Director Elisha L. Frank. Amie Riggle Berlin is leading the SEC's litigation.
History Repeats Itself?
Born in 1958, Osorio first rose to prominence due to the reportedly explosive growth of his computer distribution company CHS Electronics.
Founded in 1984, CHS Electronics had been a public company since August 1994, when it was trading on the Over-The-Counter (OTC) Bulletin Board market. At that time, it was reporting $243,000 in profit on $134.5 million in sales. By 1998, CHS Electronics' audited accounts claimed $4.75 billion worth of sales, and net earnings of $48.3 million, and it was trading on the New York Stock Exchange. Much of its rapid growth was attributed to a voracious acquisition strategy that pumped up its apparent revenue, financed by several hundred million in debt and 2 stock offerings totalling $480 million via investment bank Raymond James. Innovida Chief Financial Officer (CFO) Craig Toll was also the CFO for Osorio at CHS.
In 1998, some of the "accounting irregularities" began coming to light. In February of 1998, the stock tumbled 20% on concern that its earnings were fueled by using unusually low tax rates in its accounting. "The company would have missed earnings expectations" if the tax rate had been closer to normal levels, analyst Rob Damron at Cleary Gull told Bloomberg at the time. And the next year, in February 1999 -- shortly after CHS began trading on the NYSE -- the shares collapsed again after the company reported that it discovered "discrepancies" in its accounting. The company was quickly hit with a slew of class action lawsuits charging that Osorio and Toll submitted false financials and false earnings, based on forged documents and false customer orders and kept accounts receivable off its reported balance sheets.
By the next year, in April 2000, the stock was worthless and Osorio's CHS Electronics filed for bankruptcy. Ever the snake oil salesman, Osorio promised that "The reorganized CHS will emerge as an incubator and holding company for internet companies engaged in business-to-business electronic exchanges, primarily within the IT industry." Needless to say, that promise went unfulfilled.
Osorio has since been accused of civil fraud in several lawsuits and was targeted by a $220 million Swiss criminal probe in relation to CHS in 2010. Authorities there were investigating whether Osorio and others fraudulently obtained $220 million in loans from Swiss banks in the late 1990s by lying about the soundness of CHS Electronics.
A decade later, Innovida seemed to follow the same accounting irregularities. It had received $10 million in loans from the US Overseas Private Investment Corporation (OPIC) to build homes in Haiti after the earthquake, but evidence of many being completed is hard to come by. In September 2011, OPIC began questioning Innovida's "negative operating cash flow." A court appointed receiver in charge of investigating Innovida's finances indicated that "$37.5 million in funds had been moved offshore, but he had so far been unable to find out what happened to the money."
As the frauds became increasingly apparent, Innovida and Osorio both filed for bankruptcy protection in March 2011. US Bankruptcy Judge Robert Mark grew increasingly exasperated with Osorio, finally concluding that "Mr. Osorio has engaged in a pattern of, if not fraud, certainly evasive answers and … nonsensical explanations.” After several multimillion dollar lawsuits by disgruntled investors, Osorio's Star Island mansion -- which had been the seat of his fraudulently financed high life and celebrity and political wining and dining -- was auctioned off for $12.7 million dollars. Most of that went to pay the banks and mortgages, with the Osorios reportedly being allowed to keep $500,000 -- they would need it for lawyers' fees.