An attorney for a Georgia man accused of running a massive Ponzi scheme disputed the charge Monday and said government regulators created "a catastrophe" through a "tragic shoot-first/ask-questions-later strategy."
Attorney David M. Chaiken, of Atlanta, said the U.S. Securities and Exchange Commission's claims a year ago regarding his client, former Chattanooga Lookouts minority owner John J. Woods, don't meet the FBI's definition of a Ponzi scheme.
The attorney said in an email that the SEC's "use of this pejorative term in its press release and in its complaint mischaracterized the actual facts and unfairly portrayed" Woods and others.
Chaiken said Woods was managing a private equity fund with real assets that would have been worth more than what the fund owed investors.
He said, for example, Woods sold his 20.1% share of the minor league baseball team back to the Lookouts for $1.87 million last October. With the approval by Chattanooga and Hamilton County this summer for a new $79.5 million ballpark for the Lookouts, the attorney said the value of the team "likely tripled this month due in no small part to Mr. Woods' hard work over the years to obtain approval for a new stadium."
The SEC said in an email that it doesn't comment beyond court filings.
In August 2021, Woods, who lives in Marietta, Georgia, was accused by the SEC in a civil complaint of "running a massive Ponzi scheme for over a decade," defrauding more than 400 investors. The SEC said Woods had operated a private equity fund with promises of 6% to 7% returns to investors.
But the SEC in court filings alleged that investments Woods made in a number of companies and in real estate deals, several in the Chattanooga area, were worth far too little for there to be any realistic prospect of paying back investors their principal, much less the promised returns.
U.S. District Court Judge Steven D. Grimberg of the Northern District of Georgia, in a hearing shortly after the SEC filed its complaint, agreed to put assets in the fund, Horizon Private Equity III, into receivership. A court-appointed receiver is now selling off the assets.
An audio and video hearing has been scheduled before the judge on Sept. 9, when the receiver is expected to discuss a method for distributing the money to claimants.
Chaiken said that, in the FBI's definition of a Ponzi scheme, instead of investing victims' funds, the operator pays dividends to initial investors using the principle amounts invested by subsequent investors.
The attorney said that, as defined, the scheme generally falls apart when the operator flees with all of the proceeds, or when a sufficient number of new investors cannot be found to allow the continued payment of dividends.
But Chaiken said that in Woods' case, the "undisputed facts" establish that at the time of the SEC's complaint, Horizon's most valuable asset was Southport Capital Advisors, a Chattanooga investment advisory firm with 45 employees in 16 states with $1.4 billion in assets under management. He said that amount is more than the $824 million the SEC had said in a filing was in client investments.
The attorney said Horizon's interest in Southport alone was valued in excess of $40 million prior to the SEC's complaint. He said Southport had an offer in hand from a buyer that would have generated that value for Horizon's investors.
Chaiken said the SEC chose to proceed with charges and "a misguided effort to place Southport Capital Advisors into receivership that destroyed that value and harmed Horizon's investors."
He said Woods also had nearly $1 million of his own family's money invested in the fund, 100% of which he expects to lose as a result.
In addition, Chaiken said he is unaware of evidence that Woods stole investor funds for himself or lived a lavish lifestyle. He said Woods did not receive compensation or fees for running the fund.
The attorney said tens of millions of dollars in investor assets remain held on behalf of Horizon's investors -- including more than $14 million in cash in a single TD Ameritrade account held by the fund.
According to a filing by the receiver -- Charlotte, North Carolina, attorney A. Cotten Wright -- investors in Horizon put in $134.5 million. Investors so far received back $66.3 million in principal or interest from Woods' fund, court papers show. But, the filing said, there's $68.2 million in "net losses" to date.
The receiver said in the filing that of the 525 investors in Horizon, 87 were determined to be "net winners," or received more money back than they invested. Three investors received back exactly what they invested.
That leaves 435 investors who have so far received back less money than they invested, according to filings.
Chaiken said it's incorrect to say that losses to investors to date amount to about $68.2 million. He said the number "merely represents the current amount of principal outstanding to be paid to investors using the assets held by the fund, not 'losses.'"
The attorney said tens of millions of dollars in investments are in the process of being liquidated in order to return funds to the investors, and it remains to be seen what shortfall there will be at the end of the day.
He said that "promising" real estate development projects throughout Chattanooga with prominent developers such as Wolford Development, BI Developments and CBL Properties were in the private equity fund.
Also, Chaiken said, there were numerous start-up companies, the Atlanta movie studio filming the hit Netflix show "Stranger Things" and other investments, including income-producing office properties in Georgia and Kentucky.
"These are real, legitimate investments, unlike true Ponzi schemes like United States v. Madoff that involved fabricated documents to show fictitious investments," he said.
Woods, 57, who grew up in East Ridge, has asked for a jury trial in the civil case. He has not been charged criminally.
The SEC, in its original complaint, asked for civil penalties, the giving up of "ill-gotten gains," and a freezing of Woods' assets.
Contact Mike Pare at mpare@timesfreepress.com or 423-757-6318. Follow him on Twitter @MikePareTFP.