Opinion
Case No. 00-8015-CIV-(Ryskamp/Vitunac)
December 19, 2000.
FINAL JUDGMENT IMPOSING EQUITABLE RELIEF AGAINST RELIEF DEFENDANT ACC CAPITAL CONSULTANTS, INC .
This matter came upon the motion by the Securities and Exchange Commission ("Commission") for summary judgment against Relief Defendant ACC Capital Consultants, Inc. ("ACC").
Procedural History
On January 7, 2000, the Commission filed its Complaint. The Court entered an ex parte temporary restraining order to stop Chemical Trust's alleged fraudulent securities offering and ordered an asset freeze against the defendants and relief defendants, among other relief, on that date. The Court held a preliminary injunction hearing on January 13, 2000. Following the hearing, the Court entered preliminary injunctions against all defendants and relief defendants and ordered a continuation of the asset freeze. On various dates, the Court permanently enjoined all the defendants, either by their consent or following dispositive motions by the Commission, and ordered them to make disgorgement and to pay civil money penalties, among other relief.
Pertaining to the relief defendants, the Court entered a default judgment against relief defendant Prestige Accounting Services, Inc., and ordered it to make disgorgement. The Court ordered relief defendants Merrit Pierce Trust and Three Rivers Trust to make disgorgernent following dispositive motions by the Commission.
On January 27, 2000, the Court entered a consent order against relief defendant ACC requiring it to make disgorgement in the amount of $914,626.49. However, the Commission now seeks summary judgment against ACC based upon additional evidence that it received more funds than it voluntarily consented to disgorge.
The Court being fully advised in the premises, the Court makes the following findings of facts, conclusions, and orders:
FINDINGS OF FACTS
The Court finds that the Commission has made a proper and sufficient showing in support of its motion for summary judgment that the following material facts are not disputed:
THE UNDERLYING SECURITIES FRAUD
The Defendants Chemical Trust was a "business trust" with principal offices purportedly located in West Palm Beach, Florida; Birmingham, Alabama; and Seneca, South Carolina. These locations were in fact mail drop-boxes. In July 1999, Chemical merged with Alliance Trust ("Alliance"), the trust organization under whose name the investment was previously being offered and sold. Throughout 1999, a number of states securities agencies issued cease-and-desist orders against Chemical Trust and Alliance Trust for the sale of unregistered securities. Chemical has never been registered with the Commission in any capacity.
U.S. Guarantee Corp . is a Nevada corporation with principal offices located in Scottsdale, Arizona. U.S. Guarantee purported to provide a surety payment bond to investors for 100% of their principal amount invested.
United Marketing Trust was a trust organization with principal offices purportedly located in Atlanta, Georgia. United was Chemical's marketing arm and handled all public relations and marketing aspects for Chemical.
Virgil W. Womack resided in Marietta, Georgia. Womack was the Chief Trustee of Alliance and was a Trustee of Chemical.
Clifton Wilkinson resided in Toccoa, Georgia. Wilkinson was the Trustee of Alliance and was a Trustee of Chemical.
Relief Defendants
Three Rivers Trust ("Three Rivers") was a Trust organization with principal offices purportedly located in Seneca, South Carolina. Three Rivers received at least $800,000 in investor funds from Chemical and Alliance. Womack was signatory on Three Rivers' bank account.
Prestige Accounting Services, Inc . ("Prestige") is a Georgia corporation with principal offices in Toccoa, Georgia. Prestige received at least $2.3 million in investor funds from Chemical. Wilkinson was the chief executive officer of Prestige and Womack was the company's chief financial officer.
Merrit Pierce Trust ("Merrit") was a Trust organization with principal offices purportedly in Seneca, South Carolina. Merrit received at least $10,000 in investor funds from Alliance Trust and $50,000 from Chemical. Womack is the Chief Trustee of Merrit.
ACC Capital Consultants, Inc . was organized as a Florida corporation on June 23, 1999 and maintained its principal office in Stuart, Florida. ACC's president at all times material hereto was James A. Laiacona. The State of Florida dissolved ACC on September 22, 2000 for failure to file its annual report.
The Fraudulent Scheme
Chemical's Offering
Between approximately April 1999 and January 2000, Chemical offered and sold "guaranteed contracts" to the general public. The offering began under the name "Alliance". In July 1999, Alliance purportedly merged with, and became known as, Chemical. Chemical raised at least $17 million from at least 350 investors and promised them returns ranging between 9.25% and 15% per annum depending upon the amount invested. The Chemical investment had a term of 12 months, or longer, if the investor chose, and interest was paid monthly during the term of the investment. However, investors were told that they could earn an extra bonus at year end if their interest was left to accrue. Investors were also given the option of investing their funds in Individual Retirement Accounts ("IRA") through an IRA custodian selected by Chemical.
Chemical's "guaranteed contracts" were offered and sold to the general public through a network of independent sales agents. The agents were recruited primarily by United through advertisements on the Internet. In order to sell the investment, an agent was required to pay a fee of $99.00. Once the fee was paid, United provided the agent with marketing materials and a training manual. United also responded to investor and agent questions. Based on the amount invested, Chemical allocated a lump-sum amount comprised of the sales agent's commission and the interest due to the investor. The agent determined the amount he kept for himself as commission. The reminder was set aside for the investor as his return on the investment. The agent's commission and the rate of return paid to the investor varied because the agent could arbitrarily decide the investor's rate of return.
Chemical's sales agents solicited investors nationwide through newspaper advertisements and sales seminars. Chemical did not require its sales agents to hold securities licenses. No registration statement was filed or had been in effect with the Commission in connection with the securities offered by Chemical.
Chemical's Offering Materials
Prospective investors received a package of Chemical's offering materials describing the investment. The offering materials previously distributed to prospective investors by Alliance and the materials later distributed by Chemical were virtually identical. The offering materials included an introductory letter to the prospective investor, a one-page "explanation of the trust", a document entitled "questions and answers for the client," as well as background and financial information on U.S. Guarantee. Some prospective investors were also provided with a tri-fold brochure, which boasted the financial strength of Chemical and U.S. Guarantee and discussed the terms and safety of the investment.
Chemical's offering materials represented to investors that their funds would be used to buy treasury notes and distressed properties. In the materials, investors were told that "100% of [their] money goes to work for [them]." The materials further represented to investors that their funds were secured by a "surety payment bond" issued by U.S. Guarantee. Investors were told that the principal is always guaranteed to the amount of the investment, in an introductory letter signed on different occasions by either Defendants Wilkinson or Lewey L. Cato, III (a Trustee of Chemical), investors were told that Chemical had been in business for 14 years and that it had assets ranging from $450 million to $750 million. In the letter, potential customers were told that Chemical's investment program "provides security that the market does not because of the guarantee principle" and provided "substantially higher interest rates than obtained through CD's and Fixed Annuities." Chemical concluded the letter by telling investors that it is "proud to offer one of the finest investment programs available today."
The offering materials also included information regarding U.S. Guarantee. Specifically, investors were provided with background information on U.S. Guarantee, biographies of its principals, letters of reference from companies that purportedly did business with U.S. Guarantee, and a copy of U.S. Guarantee's balance sheet. Investors were provided with one of two versions of U.S. Guarantee's balance sheet. The earlier version dated February 15, 1999 showed the company as having total assets of $6 billion and the later version dated July 13, 1999, showed total assets at $2.4 billion.
The purported safety and security of the investment was verbally reinforced to investors by Chemical's sales agents. As in the offering materials, Chemical's sales agents verbally told investors that their investment was 100% secured because of the surety bond issued by U.S. Guarantee.
Role of Womack
Womack laid the groundwork for the success of the fraudulent offering. Womack set up Alliance and Chemical, and each trust agreement was signed solely by him. Womack was one of the Trustees of Chemical and the Chief Trustee of Merrit Pierce Trust. Womack was also chief financial officer of Prestige Accounting Services, Inc. ("Prestige"). In addition, Womack was signatory on Three Rivers Trust's and Merrit Pierce Trust's bank accounts. Womack was also responsible for opening the various mail drop-boxes for Chemical, which purported to be its offices in Florida. Alabama and South Carolina. Womack was the only person with signature authority over Chemical's bank accounts and controlled the movement of funds in those accounts.
Role of Wilkinson
Defendant Wilkinson, as one of the Trustees of Chemical, managed the affairs of the trust and acted as a contact person for sales agents and investors. The materials distributed to investors included the introductory letter from Wilkinson, as Trustee of Chemical, which touted the company's 14 years of experience and described the investment as "an opportunity that is too good to be missed." In addition, Wilkinson responded directly to the state securities regulators investigating Chemical. In letters to state regulators, Wilkinson claimed that the contracts offered by Chemical "are exempt from regulation . . . as a pure contract trust" and that "any statutes or regulations that purport to regulate a pure contractual trust [is] in violation of the Article One, Section Ten of the Constitution of the United States."
Wilkinson communicated verbally with sales agents and answered any questions they might have concerning the investment. He also communicated with them in writing. For example, the training manual provided to agents included written instructions from Wilkinson. In addition, Wilkinson sent a letter to Chemical's sales agents claiming that the communications received by some of the agents from various state securities agencies were "negative and misplaced." In this letter, Wilkinson emphasized that the contracts issued by Chemical were exempt from state securities laws under article one, section ten of the Constitution. Wilkinson was the signatory on the Prestige bank account.
Misrepresentations and Omissions Misappropriation of Investor Funds
Chemical's representations that funds would be used purchase U.S. treasury notes and distressed properties were blatantly false. Investor funds were not used to purchase treasury notes and properties as represented. Instead, bank records revealed that investor funds were misappropriated and diverted offshore. More than $9.0 million of investor funds were wire transferred to offshore bank accounts located in the United Kingdom and the Bahamas. Records also show that approximately $3.29 million in investor funds were diverted to U.S. Guarantee. In addition, bank records revealed that Chemical was engaged in a Ponzi scheme and used new investor monies to pay interest to its existing investors.
The Assets of U.S. Guarantee
The offering materials distributed to investors included an unaudited copy of U.S. Guarantee's balance sheet. Investors were provided with one of two versions of the balance sheet. The earlier version dated February 15, 1999 showed the company as having total assets of $6 billion and the later version dated July 13, 1999 showed total assets at $2.4 billion. The difference in the two versions was attributable to certain gold backed bonds. The February 15, 1999 balance sheet included as assets 24 historical railroad gold bearer bonds with a purported total value of more than $4 billion. However, those bonds were not actually payable in gold, were not backed or guaranteed by the U.S. government, and had no value except as collectibles. The worth of any one of these bonds as collectibles was not more than $250.00.
Both versions of U.S. Guarantee's balance sheet also falsely included as assets real estate purportedly worth more than $100 million. Specifically, the properties consisted of three 5,000 acre parcels located in Bledsoe County, Tennessee purportedly worth $37.5 million and a 31,310 acre parcel located in Warren, Grundy and Sequatchie Counties, Tennessee purportedly valued at $62.6 million. In fact, the three 5,000 acre properties did not exist. As to the 31,310 acre parcel, no property records evidence U.S. Guarantee as ever having owned this property.
U.S. Guarantee's balance sheet also falsely included as assets certificates of deposit ("CDs") purportedly worth a total of $167 million. Two of the CDs on the balance sheet, reportedly worth $25 million each, were issued by a bank in Indonesia. Two of the CDs on the balance sheet, reportedly worth $25 million each, were issued by a bank in Indonesia. Id. However, the CD's had expired and had not been rolled over or extended; U.S. Guarantee paid at most $200,000 for them, and U.S. Guarantee's chief financial officer, Stephen M. Hammer ("Hammer"), considered the CD's worthless.
The other CDs listed on U.S. Guarantee's balance sheet consisted of five CDs purportedly worth a total of $117 million issued out of the Bank of China. With regard to these CDs, Hammer testified that although U.S. Guarantee had a contract for transfer of the CDs, it was never effectuated. He testified that, based on this, it was erroneous for U.S. Guarantee to claim that it possessed these CDs. Therefore, even assuming these CDs were real and worth $117 million, it was false and misleading to include them on U.S. Guarantee's balance sheet.
U.S. Guarantee's Authority to Issue Surety Bonds
The Chemical offering materials informed investors that U.S. Guarantee would issue a "surety payment bond" for 100% of their principal amount invested. In fact, U.S. Guarantee has not been licensed in Arizona where it is headquartered to issue surety bonds. Arizona law requires companies that underwrite surety bonds in the state to be licensed. Likewise, U.S. Guarantee has not been licensed to issue surety bonds in at least two states where it issued surety bonds to Chemical investors.
Background of Principals
The Chemical offering materials contained false and misleading biographies of U.S. Guarantee's principals. For example, investors were told that defendant Alvin A. Tang ("Tang"). U.S. Guarantee's chief operating officer, received his M.B.A. from Century University in California. In fact, Tang never received an M.B.A. or any other degree from Century University. In addition, the materials failed to disclose that Tang filed personal bankruptcy in July 1998 and was discharged in November 1998.
Chemical's offering materials informed investors that Hammer, chief financial officer of U.S. Guarantee, received his degree from the University of Oregon. In fact, Hammer never received a degree or even attended the University of Oregon. The materials also profile Kenneth Turner ("Turner"), the company's comptroller, and represented that he received his degree from the University of Michigan. Although Turner attended the university, he never graduated. Further, the materials profiled Russell G. Miller ("Miller"), senior vice-president, and claimed that he graduated from University of Texas. Miller attended the university, but he never received a degree.
Finally, the offering materials profiled former U.S. Congressman Barry M. Goldwater, Jr. ("Goldwater") as a vice-president and director of U.S. Guarantee and claimed that he was "responsible for the management of assets and investments for [U.S. Guarantee] as well reviewing [sic] investment decisions before they are implemented." Goldwater denied such claims.
Chemical's Operating History
Chemical misrepresented its operating history to investors. In its offering materials, Chemical claimed that it has "been providing clients steady streams of interest and the return of their principal [sic] since its inception." Chemical represented that it has been in business for fourteen years and has assets worth $750 million. This representation was blatantly false. Chemical's and Alliance's own trust formation documents reflected that they were both only formed in March 1999. Chemical also represented to investors that it had satellite offices throughout the country. In fact, it did not. Chemical's purported offices in Florida, Alabama and South Carolina were merely mail drop-boxes.
State Cease-and-Desist Orders
Letters included in Chemical's offering materials stated that the "guaranteed contracts" are not securities and therefore do not have to be registered. This statement was false because numerous state securities agencies issued cease-and-desist orders in connection with the Alliance and Chemical offerings against, among others, Chemical, Alliance and Wilkinson for violations of the registration provisions of their respective state securities laws. From July 1999 through December 1999, nine states issued cease-and-desist orders against Chemical, Alliance and their principals for selling unregistered securities. U.S. Guarantee was also the subject of two of the cease-and-desist orders. Despite entry of the cease-and-desist orders, Chemical continued to make offers and sales of its "guaranteed contracts" to investors while claiming that they are not securities. At a minimum, Chemical should have disclosed that cease-and-desist orders had been entered against it and against Alliance that contradicted the representations that the investment was not subject to the registration requirements.
DIVERSION OF FUNDS TO VARIOUS BUSINESS ENTITIES
Role of ACC
Between at least June 17, 1999, and November 30, 1999, ACC received at least $1.75 million in investor funds from bank accounts controlled by Womack and Wilkinson. Accounts were in the names of Defendant Chemical Trust, its predecessor Alliance Trust, Continental Trust, and Relief Defendants Three Rivers Trust, Prestige Accounting Services, Inc., and Merrit Pierce Trust transferred at least $1.55 million in investor funds to a bank account in ACC's name at Bank of America. Likewise, funds from bank accounts in the names of AT, Inc. (an alias of Alliance Trust) and Alliance Trust transferred at least $200,000 in investor funds to a bank account in ACC's name at A.G. Edwards Sons, Inc. ACC has not demonstrated any bona fide reason for its possession of any of the investment funds.
By January 7, 2000, the date of the temporary asset freeze ordered in this matter, ACC had transferred $608,333.23 back to Chemical Trust and Three Rivers Trust. On January 26, 2000, the Federal Bureau of Investigation in a parallel criminal matter, seized $26,940.28 from ACC. With ACC's consent, the Court entered an order on January 27, 2000 requiring ACC to surrender $914,626.49 to the Court's Registry. On March 10, 2000, ACC deposited $414,626.49 into the Court Registry in this matter.
CONCLUSIONS OF LAW
ACC offers no evidence or argument why summary judgment against it is inappropriate. Since there are no genuine issues of material fact to be tried, summary judgment against ACC is appropriate.
I. Summary Judgment Standard
Under Federal Rule of Civil Procedure 56, summary judgment:
(c) . . . shall be rendered forthwith if the pleadings depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
To prevent summary judgment the non-moving party must come forward with evidence sufficient to support a finding by the trier of fact in its favor. Wohl v. City of Hollywood, 915 F. Supp. 339, 341 (S.D. Fla. 1995) (Highsmith, J.). Under the Supreme Court's rulings in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986), "the trial judge must [enter summary judgment] if, under the governing law, there can be but one reasonable conclusion . . ." See also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) ("[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial.'") (citation omitted).
Accordingly, summary judgment is appropriate because there is no genuine issue of material fact to be tried.
II. The Ill-Gotten Nature of ACC's Funds: A. The Defendants Sold Securities
The defendants sold securities because the "guaranteed contracts" offered and sold in the Chemical offering had characteristics of both investment contracts and promissory notes and therefore were securities, as defined by Section 2(1) of the Securities Act of 1933 ("Securities Act") and Section 3(a)(10) of the Securities Exchange Act of 1934 ("Exchange Act"). In SEC v. W. J. Howey Co., 328 U.S. 293 (1946), the Supreme Court defined an investment contract as "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of others." 328 U.S. at 298-99. The Chemical "guaranteed contracts" met the Howey investment contract analysis. The investors who purchased the investment contracts offered by Chemical made an "investment of money" when they committed their funds to Chemical, and risked losing their funds if the venture was not successful. The returns of each investor were interwoven with and dependent upon the success of Chemical's promoters or of third parties. The investors' funds were also combined in a pool with funds risked by other investors purportedly to purchase treasury notes and distressed properties. Chemical's investors had a strict or narrow "vertical" common interest with the promoters or third parties because of the sharing of profits and a "horizontal" common interest with other investors because of the purported pooling of funds to purchase treasury notes and distressed properties. Finally, Chemical's investors had no role whatsoever in the management of the trust, because Chemical, United, Womack, Wilkinson, and Cato were solely responsible for setting up and operating the purported investment trusts and marketing the program to investors. In this case, the investment was passive and investors needed only wait for their promised returns. See, e.g. SEC v. Glenn W. Turner Enterprises Inc., 474 F.2d 476, 482 n. 7 (9th Cir. 1973), cert. denied 414 U.S. 821 (1973);SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974).
Additionally, the "guaranteed contracts" had the characteristics of promissory notes and therefore were securities as defined by Section 2(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. Promissory notes and contracts similar to the "guaranteed contracts" have been found to constitute securities under the relevant case law. In Reves v. Ernst Young, 494 U.S. 56, reh'g denied, 494 U.S. 1092 (1990), the Supreme Court adopted the "family resemblance" test articulated by the Second Circuit, in determining whether or not a particular note constitutes a security. The "family resemblance" approach presumes initially that every note is a security. An issuer can rebut this presumption by showing that a particular note "bear[s] a strong family resemblance" to a list of notes that the Second Circuit has determined are not securities. See, e.g., Exchange Nat'l Bank v. Touche Ross Co., 544 F.2d 1126, 1137 (2d Cir. 1976); Chemical Bank v. Arthur Andersen Co., 726 F.2d 930, 939 (2d Cir. 1984), cert. denied, 469 U.S. 884 (1984).
In concluding that the note at issue constituted a security, the Reves Court set forth the following four considerations: 1) the motivation of the buyer and seller; 2) the plan of distribution in order to determine whether the note is intended for speculation or investment; 3) the reasonable expectations of the investing public; and 4) whether there is any risk-reducing factor, such as the presence of another regulatory scheme. Reves, 494 U.S. at 66-70.
None of the four criteria is crucial, and the failure of one will not automatically result in the determination that the note in question is not a security. In re: NBW Commercial Paper Litigation, 813 F. Supp. 7, 12 n. 7 (D.D.C. 1992).
"If the seller's purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a `security.'" Reves, 494 U.S. at 66.
Applying the four considerations under the Reves analysis, the "guaranteed contracts" were securities. First, the investor's motivation for investing in the Chemical offering was to obtain the promised return. The essential appeal of the investment was a rate of return substantially higher than what most market investments would have yielded. Likewise, the seller, Chemical, ostensibly sought to profit from the sale of the "guaranteed contracts" by earning profits from buying and selling treasury notes and distressed properties. Second, Chemical offered the "guaranteed contracts" through a nationwide network of sales agents who advertised and conducted sales seminars throughout the country soliciting a broad segment of the investing public. Third, the "guaranteed contracts" clearly involved an investment of money with a corresponding expectation of profit, and there were "no countervailing factors that would have led a reasonable person to question this characterization." Reves 494 U.S. at 68-69. Fourth, there was no other applicable regulatory scheme available to regulate the "guaranteed contracts" and thereby reduce significantly the risk of the instrument such that the application of the Securities Act would be unnecessary. Therefore, under the Reves analysis, the "guaranteed contracts" were securities.
B. The Defendants Sold Unregistered Securities
The defendants violated Sections 5(a) and 5(c) of the Securities Act. In general, those provisions make it unlawful, absent an exemption from registration, for any person to make use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell, to sell, or to offer to buy any security or to carry such security for purposes of sale or delivery after sale, when no registration statement has been filed or is in effect as to the security.
In this case, Chemical offered and sold securities guaranteed by U.S. Guarantee to the public through various sales agents organized by United. At least 350 investors residing in numerous states purchased Chemical's securities. No registration statement was filed or in effect with respect to any of the securities sold by Chemical. Accordingly, the defendants violated Sections 5(a) and 5(c) by offering and selling securities when no registration statement had been filed with the Commission with respect to such securities. See SEC v. Continental Tobacco Co., 463 F.2d 137 (5th Cir. 1972).
C. The Defendants Defrauded Investors
The defendants also violated the antifraud provisions of the federal securities laws — Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 thereunder of the Exchange Act. Section 17(a) of the Securities Act, which proscribes fraudulent conduct in the offer or sale of securities, and Section 10(b) of the Exchange Act and Rule 10b-5, which proscribe fraudulent conduct in connection with the purchase or sale of securities, prohibit essentially the same type of sales practices. See United States v. Naftalin, 441 U.S. 768, 773 n. 4 (1979). In general, the elements of proof of a violation of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 are that: (1) the defendant, directly or indirectly, used a device or scheme or trick to defraud someone, or made an untrue statement of a material fact, or failed to disclose a material fact which resulted in making the defendant's statements misleading, or engaged in an act, practice or course of business that operated, or would operate, as a fraud or deceit upon a purchaser or seller; (2) the defendant's acts were or his failure to disclose was in connection with the purchase or sale of a security (Section 10(b)) or involved the offer or sale of any securities (Section 17(a)); (3) the defendant intended to defraud someone or acted in reckless disregard whether someone would be defrauded; and (4) the defendant used or caused to be used sonic aspect of interstate commerce, the mails, a telephone or a facility of a national securities exchange, in furtherance of the acts or his failure to disclose whether or not the defendant's false statement itself passed through interstate commerce, the mails, by telephone or a facility of a national securities exchange.SEC v. Rana Research, Inc., 8 F.3d 1358 (9th Cir. 1993); SEC v. Tome, 638 F. Supp. 596, 620 n. 46 (S.D.N.Y. 1986) (distinguishing cause of action elements for private litigants), aff'd, 833 F.2d 1086 (2d Cir.),cert. denied sub nom. Lombardfin S.p.A. v. SEC, 486 U.S. 1014 (1988).
"Material information" is defined as information that is substantially likely to be important to a reasonable investor in deciding whether to purchase, sell, or hold securities. Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988); 17 C.F.R. § 240.12b-2 (definition of "material") (as last amended in 62 F.R. 26386, June 14, 1997); SEC v. MacDonald, 699 F.2d 47, 49-50 (1st Cir. 1983); SEC v. Geon Industries, Inc., 531 F.2d 39, 47-8 (2d Cir. 1976); Elkind v. Liggett Myers, Inc., 635 F.2d 156, 166 (2d Cir. 1980), citing Lily v. State Teachers Retirement System, 608 F.2d 55, 58 (2d Cir.), cert. denied, 446 U.S. 939 (1980); SEC v. Shapiro, 494 F.2d 1301, 1307 (2d Cir. 1974).
Through Womack, Wilkinson, Cato and Tang, Chemical and United distributed offering materials to the public, which contained materially false statements and omissions regarding, among other things, the use of investor proceeds, the assets of U.S. Guarantee, the backgrounds of its principals and Chemical's operating history. This information undoubtedly would have been material to investors because it relates directly to the safety and risk involved in the Chemical investment.
Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5, require a finding of scienter to establish a violation. See Aaron v. SEC, 446 U.S. 680, 697 (1980). Scienter, in the securities fraud context, has been defined by the Supreme Court as "intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). To act intentionally means to act deliberately, rather than mistakenly or inadvertently. The Supreme Court has not decided whether recklessness alone satisfies the scienter requirement. See Aaron, 446 U.S. at 686 n. 5; Ernst Ernst, 425 U.S. at 193 n. 12; Herman McClean v. Huddleston, 459 U.S. 375 (1983). However, lower courts have concluded that scienter may be established by a showing of reckless disregard or acting in a manner that involves an extreme departure from ordinary care-conduct that is worse than being simply or inexcusably negligent or careless. SEC v. Carriba Air, Inc., 681 F.2d 1318 at 1324 (11th Cir. 1982); Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 649-51 (3d Cir. 1980); Lanza v. Drexel Co., 479 F.2d 1277, 1306 (2d Cir. 1973). A person acts recklessly if he knows the risk of potential harm involved, or it is obvious that an ordinary person under the circumstances would have realized the danger of harming someone and taken care to avoid the harm likely to follow. Messer v. E.F. Hutton Co., 847 F.2d 673, 678 (11th Cir. 1988).
A finding of scienter is not required to establish a violation of Sections 17(a)(2) or (3) of the Securities Act. See Aaron, 416 U.S. at 696-97. The elements of a violation of Sections 17(a)(2) and (3) require proof that a defendant, directly or indirectly, (1) in the offer or sale of securities; (2) obtained money or property by making an untrue statement of a material fact, or obtained money or property by failing to disclose a material fact which resulted in making the defendant's statements misleading, or engaged in a transaction, practice, or course of business that operated, or would operate, as a fraud or deceit upon an offeree or seller; and (3) the defendant used or caused to be used some aspect of interstate commerce, the mails, a telephone or a facility of a national securities exchange, in furtherance of the acts or his failure to disclose whether or not the defendant's false statement itself passed through interstate commerce, the mails, by telephone or a facility of a national securities exchange.
The defendants knowingly distributed offering materials to investors and potential investors that contained the false and misleading information described above. The defendants, therefore, acted with scienter sufficient to establish violations of the antifraud provisions. Accordingly, they violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
D. ACC Possesses Illegally Obtained Proceeds
Relief defendant ACC received proceeds from the defendants' illegal scheme. As between the investors and ACC, ACC has no bona fide claim of title to any of the securities offering's proceeds. Accordingly, the Commission can obtain equitable relief from ACC without charging it with any wrongdoing where it "possess[es] illegally obtained profits but ha[s] no legitimate claim to them." SEC v. Cherif, 933 F.2d 403, 414 n. 11. (7th Cir. 1991), cert. denied, 502 U.S. 1071 (1992). It is not necessary for the person holding the property to have done anything wrong in order for that person to be required to return the property to its rightful owner. As recognized by the court in U.S. v. Cannistraro, 694 F. Supp. 62, 72 n. 11 (D.N.J. 1988), "[t]he courts impose the remedy of constructive trust where, rightfully or wrongfully, a party has obtained property which unjustly enriches him." (emphasis supplied), modified, 871 F.2d 1210 (3rd Cir. 1989). Therefore, ACC is deemed to be a constructive trustee of the proceeds it obtained from the defendants' fraudulent and unregistered scheme. ACC is deemed to hold those proceeds for the benefit of the investors from whom the proceeds were illegally obtained.
III. Equitable Relief Is Appropriate
The Court concludes that ACC continues to hold funds that belong to defrauded Chemical Trust investors. Accordingly, equitable relief is appropriate.
A. Disgorgement
This Court has the equitable power to order ACC to disgorge all its ill-gotten gains to prevent it from being unjustly enriched through its wrongdoing or the wrongdoing of others. See SEC v. First City Financial Corp., 890 F.2d 1215, 1230-31 (D.C. Cir. 1989) (disgorgeinent primarily serves to prevent unjust enrichment); SEC v. Bilzerian, 814 F. Supp. 116, 120 (D.D.C. 1993) ("The primary purpose of disgorgement is not to punish the wrongdoer but rather to prevent the unjust enrichment of the wrongdoer by depriving him of ill-gotten gains."). The disgorgement amount need only be a reasonable approximation of profits connected to the wrongful conduct. SEC v. First City Financial Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989). Once the Commission has shown that the disgorgement amount is a reasonable approximation of ill-gotten gains, the burden of proof shifts to the defendant. Id. at 1232. Further, if there is any uncertainty as to the amount to be disgorged, the "risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty." Id.
Here, there can be no dispute that from their fraudulent, unregistered activities the defendants received at least $17 million and relief defendant ACC received at least $1.75 million in investors' funds. In determining the disgorgement amount, "it is proper to assume that all profits gained while defendants were in violation of the law constituted ill-gotten gains." SEC v. Bilzerian, 814 F. Supp. 116, 120 (D.D.C. 1993).
However, on these facts, it would be inequitable to require ACC to disgorge funds it had transferred back to the defendants and not otherwise converted to its own use, or not otherwise placed in the hands of third parties beyond the reach of the investors. By transferring some portion of the funds back to the defendants, the investors were made no worse off by ACC than they were already, being the victims of a Ponzi scheme. Likewise, funds that the FBI seized from ACC. $26,940.28, pursuant to a seizure warrant issued in a parallel criminal investigation may inure at a later time to the benefit of the defrauded investors herein. To the extent those funds do inure to the benefit of investors, they should be credited against ACC's accounting. To the extent those funds may fall into ACC's hands or the possession of any other defendant or relief defendant herein against whom a disgorgement order has been issued, those funds shall be surrendered to this Court's Registry. Further, ACC has already surrendered $414,626.49 to this Court's Registry, and ACC's accounting shall be reduced by that amount.
B. Asset Freeze and Repatriation Orders
The defendants' and relief defendants' assets have been ordered frozen since the outset of this litigation, upon the Commission's preliminary showing that they committed securities fraud and/or possessed stolen investor funds. Also, ACC has been ordered, by its consent, to disgorge its ill-gotten gains, and it has not fully complied with this order. Therefore, the pre-trial orders freezing assets and requiring the repatriation of assets are hereby extended. It would be highly inequitable and illogical if, after a finding against the defendants that they committed securities fraud, and after a finding against ACC that it possesses some of the fruits of the fraud, ACC were then allowed to dissipate stolen investor funds that had once been frozen. Instead, the present asset freeze and repatriation orders should be continued so that, after the defendants and relief defendants eventually reveal the whereabouts of the stolen investor funds, the Commission can meaningfully pursue proceedings in execution of this Court's order. Other courts have ordered similar relief. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972); United States v. Cannistraro, 694 F. Supp. 62 (D.N.J. 1988). To do otherwise, after a finding on the merits against ACC, could have the perverse effect of giving it the unfettered right to dissipate stolen investor funds.
C. Records Preservation
The Commission has requested continuation of the records preservation order. A continued order prohibiting record destruction is appropriate to prevent dissipation of assets and documents to assure that whatever equitable relief might ultimately be appropriate is available. See SEC v. R.J. Allen Associates, Inc., 386 F. Supp. 866, 881 (S.D. Fla. 1974).
There being no genuine issue of material fact to be tried, the Commission's motion is hereby GRANTED, final judgment against ACC is entered, and the Court hereby ORDERS as follows:
ORDERS I. Disgorgement Order
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that ACC is liable to disgorge the gross amount of proceeds it received from the scheme alleged in the Commission's Complaint, $1,750,000.00, less $608,333.23 it transferred back, indirectly, to defendant Virgil W. Womack prior to the filing of the Commission's Complaint, less $26,940.28 seized by the Federal Bureau of Investigation, subject to the condition that those funds shall be deposited in this Court's Registry for the benefit of defrauded investors herein and not ACC or any other defendant or relief defendant herein against whom a disgorgement order has been entered (should the U.S. District Court for the District of South Carolina lose jurisdiction over those funds for any reason), and less $414,626.49 paid to the Court Registry, for a net amount owed of $700,100.00, plus prejudgment interest. Such disgorgement and prejudgment interest shall be deposited into the Registry of this Court within ten (10) days from the entry of this final judgment. Nothing in this disgorgement order shall be construed as a waiver or limitation of any kind of this Court's ability to enforce its contempt power with respect to any violation of its prior orders entered in this action.
II. Order Freezing Assets
IT IS HEREBY FURTHER ORDERED, ADJUDGED AND DECREED that, until further order of this Court, ACC, its directors, officers, agents, servants, employees, attorneys, depositories, banks, and those persons in active concert or participation with any one or more of them, and each of them, who receive notice of this order by personal service, mail, facsimile transmission or otherwise be and they hereby are, restrained from, directly or indirectly, transferring, setting off, receiving, changing, selling, pledging, assigning. liquidating or otherwise disposing of, or withdrawing any assets or property owned by, controlled by, or in the possession of Chemical Trust, Alliance Trust, U.S. Guarantee Corp., United Marketing Trust, Virgil W. Womack, Clifton Wilkinson, Lewey L. Cato, III, Alvin A. Tang, Three Rivers Trust, Prestige Accounting Services, Inc., The Falcon Trust Co., Ltd., America's Fidelity Assurance Co., Merrit Pierce Trust, and U.C.B.M. (Bahamas) Ltd., including, but not limited to, cash, free credit balances, fully paid for securities, and/or property pledged or hypothecated as collateral for loans. Nothing in this order freezing assets shall be construed as a waiver or limitation of any kind of this Court's ability to enforce its contempt power with respect to any violation of its prior orders entered in this action.
III. Repatriation Order IT IS HEREBY FURTHER ORDERED, ADJUDGED AND DECREED that, until further order of this Court, ACC, its directors, officers, agents, servants, employees, attorneys, depositories, banks, and those persons in active concert or participation with any one or more of them, and each of them, who receive notice of this order by personal service, mail, facsimile transmission or otherwise be and they hereby shall:
(a) take such steps as are necessary to repatriate to the territory of the United States all funds and assets of investors described in the Commission's Complaint in this action which are held by them or are under their direct or indirect control, jointly or singly, and deposit such funds into the registry of the United States District Court, Southern District of Florida; and
(b) provide the Commission and the Court a written description of the funds and assets so repatriated.
Nothing in this repatriation order shall be construed as a waiver or limitation of any kind of this Court's ability to enforce its contempt power with respect to any violation of its prior orders entered in this action.
IV. Order Requiring Records Preservation IT IS FURTHER ORDERED, ADJUDGED AND DECREED that ACC shall preserve any records related to the subject matter of this lawsuit that are in its custody, possession or subject to its control.
V. Order Retaining Jurisdiction IT IS HEREBY FURTHER ORDERED that this Court shall retain jurisdiction over this matter and ACC in order to implement and carry out the terms of all Orders and Decrees that may be entered and/or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court, and will order other relief that this Court deems appropriate under the circumstances.