By Caitlyn Cullen
In January 2019, competing documentaries on Fyre Festival were released. The “Greatest Party That Never Happened” cast a new, darker light on the power of viral marketing as social media influencers lured to a tropical island by promises of luxury villas and a Coachella-style music festival, scrambled in the rain to claim one of the few hurricane tents on the otherwise-barren site. The documentaries portrayed a millennial catastrophe ripe for mocking, but also highlighted the consumers, stakeholders, and investors that were left as victims in the wake of high price tags and material misrepresentations.
In a legal setting, these misrepresentations go by another name: Fraud. After the festival, William “Billy” McFarland, the founder and CEO of Fyre Festival, found himself under the microscope of the SEC and U.S. Attorney’s Office facing allegations of civil and criminal fraud, respectively. Civil fraud claims can be filed by individuals or by government entities like the SEC, which regulates financial markets to protect investors from securities violations. Only the government can file criminal charges.
The SEC filed a civil complaint against McFarland for making false statements and material misrepresentations to fraudulently induce investments. The complaint alleged violations of the Exchange Act under § 10b (15 U.S.C. § 78j) and Rule 10b-5 (17 C.F.R. §240.10b-5) and of the Securities Act under § 17(a) (15 U.S.C. § 77q). While both provisions prohibit making false or misleading statements to defraud investors, 10b-5 claims require a showing of intent to defraud, but 17(a) claims require only a showing of negligence. In this way, the complaint captured McFarland’s conduct under the umbrella of fraud regardless of whether he purposely mislead investors at the time he solicited their investment or negligently allowed them to believe the concert would be successful, despite his catastrophic lack of planning. In civil cases brought by the SEC, courts may grant injunctions and may impose civil penalties. McFarland and the SEC settled their claims with both an injunction and a fine. McFarland will be permanently banned from serving as an officer or director of a company and has agreed to a disgorgement of the $27.4 million his scheme raised from investors.
In contrast, the consequences of criminal proceedings can include imprisonment, restitution, and criminal fines. In the criminal case filed by the U.S. Attorney’s Office in the Southern District of New York, McFarland pled guilty to three counts of wire fraud, one count of bank fraud, and one count of making false statements to a federal agent. For these offenses, McFarland was sentenced to six years in prison and ordered to forfeit $26 million dollars.
Though the remedies for each case are distinct, the relief each may provide for victims is related, as the imprisonment will prevent McFarland from engaging in further deceptive practices, at least while in prison, the SEC settlement will bar him from similar activities after prison, and criminal forfeiture will be used to pay the disgorgement in the SEC settlement, which, in turn, may flow through as a payment for the victim-investors.