The SEC alleges that Detroit-based Onyx Capital Advisors LLC and its founder Roy Dixon, Jr., raised $23.8 million from the three pension funds for a start-up private equity fund created to invest in small and medium-sized private companies. Often to cover overdrafts in his bank accounts, Dixon illegally withdrew money invested by the pension funds from the bank accounts of the private equity fund, according to an SEC news release.
The SEC accuses Dixon’s friend Michael A. Farr, who controls three companies in which the Onyx fund invested millions of dollars, of diverting money invested in these entities to another company he owned, withdrew the money from that bank account, and gave the cash to Dixon. Farr also kept some money for himself, and used investor funds to make payments to contractors building a multi-million dollar house for Dixon.
The SEC’s complaint, filed in federal district court in Detroit, also alleges that Dixon and Onyx Capital made a number of false and misleading statements to defraud the three pension funds about the private equity fund and the investments they were making.
The regulator is seeking a court order for emergency relief, including temporary restraining orders, asset freezes, and accountings. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties.
Specifically, the SEC’s complaint says shortly after the three pension funds made their first contributions to the Onyx fund in early 2007, Dixon and Onyx Capital began illegally siphoning money. Dixon and Onyx Capital took more than $2.06 million under the guise of management fees, and Farr assisted in diverting approximately $1.05 million through the Onyx fund’s purported investments in companies Farr controlled.
Dixon used the money to pay personal and business expenses, including construction of his house in Atlanta and mortgage payments on more than 40 rental properties he owns in Detroit and Pontiac, Michigan.
Under the partnership agreement for the Onyx fund, Onyx Capital was entitled to receive an annual management fee of 2% of the committed capital within the fund, or $500,000 per year, payable on a quarterly basis, but the SEC alleges that Dixon withdrew money whenever he desired from the Onyx fund’s bank accounts under his control.
According to the news release, Onyx Capital invested more than $15 million from the Onyx fund in three related entities controlled by Farr – Second Chance Motors, SCM Credit LLC, and SCM Finance LLC. Farr diverted a portion of the pension fund investments in Farr’s companies to 1097 Sea Jay LLC, another entity that Farr controlled. He then withdrew large sums of cash and provided most of it to Dixon while retaining at least $229,000 for his own benefit.
Farr also used Sea Jay’s bank accounts to make at least $522,000 in payments to construction companies performing work on Dixon’s house in Atlanta, the complaint alleges.
In addition, the regulator says Dixon and Onyx Capital made numerous false and misleading statements to Onyx Capital’s public pension fund clients. For example, one pension fund had concerns about Dixon’s inexperience in private equity. To allay the concerns and ultimately convince the pension fund to fund the investment, Dixon sent a letter falsely stating that a purported joint owner of Onyx Capital with substantial experience evaluating private equity investments would devote all of his efforts to the Onyx fund. The letter contained a forged signature of that individual, who had reviewed certain investment opportunities for the Onyx fund during his spare time, but has never owned or been employed by Onyx Capital. He instead had been working full-time for another company since 1996.