The Securities and Exchange Commission has obtained an emergency court order to stop an alleged Ponzi-type scheme being operated by a California-based firm called Small Business Capital Corporation and its principal, Mark Feathers.

Feathers raised $42 million by selling securities issued by Investors Prime Fund and SBC Portfolio Fund, two mortgage funds the firm controlled, the SEC alleges. The funds promised annual returns of 7.5 per cent or more. However, they paid returns partly from other investor’s funds, as well as from fund profits.

The Commission alleges that between 2009 and early 2012 Feathers improperly transferred over $6 million from the fund to Small Business Capital to cover expenses, including payments to himself. At one point, one fund bought mortgages from the other fund at an inflated price, allowing the selling fund to earn a “profit” and pay the firm fees of over $750,000, the SEC says.

Both SBA and Feathers were also charged with completing transactions in fund securities without being registered as a broker-dealer with the SEC.

The US District Court for the Northern District of California granted the SEC’s request for a temporary restraining order and asset freeze against the firm and its principal, and has appointed a temporary receiver over the firm and its funds. Judge Edward Davila has scheduled a court hearing for July 10, 2012.