The fallout from Nevada‘s botched entity sports betting continued last week with a new federal complaint.
The Securities and Exchange Commission (SEC) filed a complaint against Bettor Investments and its principal, Matthew C. Stuart, in Nevada District Court.
The SEC previously targeted some Nevada-based entity betting operations back in September 2018, reaching settlements with Contrarian Investments LLC and the Nevada Sports Investment Group. While legalized in 2015 and launched in 2016, entity betting has been slow to take off with only nine funds launching.
The Nevada law has always raised questions as to how it interacts with federal regulations under a variety of agencies’ purviews, with the SEC has taken the closest look to this point.
What is Bettor Investments?
The original promise of the business was to place legal wagers in Nevada on sporting events using investors’ money. It allows investors to share in both the wins and losses proportionally to their investments, which would be compliant with Nevada law.
Where it went wrong
The complaint alleges that beginning in November 2016, Bettor Investments, through Stuart, began allowing investors to convert their original investments into promissory notes (agreements to pay an individual at a later time) with Stuart. This type of activity was not within the scope of allowable conduct under the Nevada law.
Accompanying the promissory notes were alleged “material misrepresentations and omissions” regarding the losses that Stuart and Bettor Investments suffered, in addition to Stuart’s compensation for managing the fund.
By early 2017, much of the money was gone, according to the feds. Some investors had been paid back, but others received promissory notes with guaranteed rates of 14% of return, payable 12 months later.
The charges against Bettor Investments
The conduct of Bettor Investments via Stuart resulted in the defendants being charged with a variety of provisions under the 1933 Securities Act and 1934’s Securities Exchange Act.
Securities Act charges
The defendants were charged with violating section 5 (a) and 5(c) which prohibit the sale of unregistered securities and the failure to file a registration statement (for the offering of securities) with the SEC.
The defendants were also charged with violating section 17 (a)(2), which is part of the statute’s anti-fraud provisions. The provision criminalizes the interstate sale of securities in interstate commerce:
“to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”
The Securities Act charges were accompanied by allegations of violating the Securities Exchange Act.
Securities Exchange Act charges
Violations of 10(b)-5 are most often associated with insider trading allegations. In the case of Bettor Investments and Stuart, the SEC charged them with violation 10(b)-5(b), which criminalizes making:
“any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”
What does the SEC want?
The SEC, in their complaint, is asking for several things, chief among them a permanent injunction stopping the defendants from continuing to violate the sections under which they have been charged.
The feds also want to see Stuart return any ill-gotten gains combined with pre-judgment interest. The complaint alleges that at least some of the investment money was used for Stuart’s personal expenses, contrary to what he told investors.
The government also asked the court for civil penalties under both the Securities Act and the Securities Exchange Act, which could be as much as $500,000 (per allegation) because the allegations involve fraud.
What’s next in entity case?
According to the summons issued the day after the complaint, Stuart has 21 days after he receives the summons to answer the complaint.
If Stuart and Bettor Investments do not respond or seek an extension for responding and make another procedural motion, a default judgment will likely be entered against them.
There also remains the possibility that a settlement could be reached in the case, like the previous entity betting cases that the SEC targeted. The key difference is that this case involves the 10(b)-5 allegations which are the most serious of the charges, and were not part of the 2018 complaints that resulted in settlements.
What to make of this?
The interstate aspects of entity betting have always been problematic. While Nevada has sovereignty within its borders, when entities step outside the state’s protective shell and dabble in interstate communication networks to operate their businesses, they expose themselves to federal law.
It’s unclear if this action is one more nail in the entity-betting coffin, but the Nevada iteration has certainly drawn a disproportionate amount of negative attention. While the enforcement action might be viewed as an intrusion by some, it is important that regulatory bodies act to protect consumers against alleged fraudulent misrepresentations.
Federal regulation of the gambling sphere remains widely unpopular. As more states legalize sports betting, one can expect to see additional instances where federal law is triggered despite state authorization.
While federal oversight is widely shunned, there are some aspects of securities and commodities regulation, in particular, that might be beneficial for the sports betting world to examine. This includes how investment advisors are regulated. Adopting analogous regulations could bring much-needed transparency to the tout industry, for instance.