The U. S. Securities and Exchange Commission (SEC) has obtained final judgments against Susann Ashley Cargnino, her son, Zachari Alan Cargnino of California, Susann’s married friends, Julie Ann Youssef and Gary Youssef of Michigan, and six Michigan-based companies, which the Cargninos controlled, for allegedly conducting a fraudulent medical device scam that defrauded at least 55 investors of more than $6 million.
The SEC’s complaint, filed in the U.S. District Court for the Eastern District of Michigan, charged the defendants with the registration and antifraud provisions of Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The SEC complaint alleges the defendants used six Michigan-based companies to offer investment contracts to buy supposed “World-Class” and “Life Saving” medical testing devices. No registration statement was ever filed with the Commission or in effect for any of these investment contract offerings, and no exemption from registration applied. The defendants allegedly claimed that the devices would be placed in doctors’ offices by the defendants and their businesses and would purportedly generate $250 of passive income to investors for each test performed.
The defendants allegedly made numerous false claims about the investment opportunity, including that the defendant entities manufactured the devices, that 1,400 devices were earning money for existing investors, with the devices being used on average more than five times each weekday and generating more than $10,000 per month in passive income for existing investors. Contrary to Defendants’ claims, the devices behind the investment contract offerings were not manufactured by any of the Michigan-based companies, but instead were purchased from a third party at a small fraction of the roughly $150,000 paid by allegedly defrauded investors. Also, contrary to Defendants’ claims, per the SEC’s allegations, fewer than 70 devices were ever purchased by Defendants, and doctors seldom used the devices before putting them in storage or asking Defendants to take them back. Moreover, the SEC contended that Julie Ann Youssef and Zachari Cargnino sent investors fake usage reports, Mrs. Youssef lulled investors with false excuses, and Zachari or Susann Cargnino made Ponzi payments to investors.
Not only did the defendants present fraudulent information about their companies and the investment contracts, but they also defrauded the investors regarding their own identities, according to the SEC. At various points in time, Susann used the names Susan Ashley Walker or Ashley Walker on documents related to the fraud to disguise her connection to her husband, Philip Cargnino, who was previously sentenced to 18 months in prison for an unrelated fraud. Zach Cargnino admitted that he routinely used the pseudonym “Zach Alan” and intentionally omitted Cargnino, to avoid disclosure of Cargnino family involvement given prior public allegations against Zach Cargnino, as well as his father’s unrelated fraud conviction. It is also alleged by the SEC that Mr. & Mrs. Youssef also used alternative names.
The complaint further alleges that the Cargninos used millions of dollars of defrauded investors’ money to buy jewelry, jet skis and a trailer, pay for multiple vacation rentals and expensive home improvements, buy three residential properties in Manitou Beach, Michigan, and extinguish nearly $100,000 of pre-existing bankruptcy debt.
Ultimately, all defendants, without admitting or denying the allegations in the complaint, consented to the entry of judgment on liability and permanent injunctive relief against them for violations of the charges. The court’s final judgment granted monetary relief and ordered defendants to disgorge nearly $8.7 million in illicit profits and prejudgment interest and to pay nearly $8.3 million in civil penalties.
SEC Fraud Investigation Attorney David Chase
SEC defense attorney David Chase, of the Law Firm of David R. Chase, has successfully represented individuals in SEC fraud investigations around the country for more than 25 years after having served as Senior Counsel in the SEC’s Enforcement Division. If you are under SEC investigation, or just received an SEC subpoena and need strategic advice, contact David at: 800-760-0912 or e-mail him at: david@davidchaselaw.com. Visit the Firm’s website for valuable content and to review the firm’s prior successful defense results here.
