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Merrill Scott > SEC
v Merrill Scott
Thomas M. Melton (4999)
William B. McKean (4883)
Attorneys for Plaintiff
Securities & Exchange Commission
50 South Main Street, Suite 500
Salt Lake City, Utah 84144-0402
801-524-5796
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
SECURITIES
AND EXCHANGE COMMISSION,
Plaintiff,
v.
MERRILL SCOTT & ASSOCIATES, LTD.
MERRILL SCOTT & ASSOCIATES, INC.
PHOENIX OVERSEAS ADVISERS, LTD.
GIBRALTAR PERMANENTE ASSURANCE, LTD.
PATRICK M. BRODY
DAVID E. ROSS II, and
MICHAEL G. LICOPANTIS
Defendants, |
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Civil No. 2:02CV 0039C
COMPLAINT FOR TEMPORARY RESTRAINING ORDER, PRELIMINARY
AND PERMANENT INJUNCTIONS AND LEGAL AND OTHER EQUITABLE
RELIEF
|
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Plaintiff Securities and Exchange Commission
("Commission"), for its Complaint against defendants Merrill Scott
& Associates, Ltd. ("MSA"), Merrill Scott & Associates, Inc.
("MSAI"), Phoenix Overseas Advisors, Ltd. ("Phoenix"), Gibraltar
Permanente Assurance, Ltd. ("Gibraltar"), Patrick M. Brody ("Brody"),
David E. Ross II ("Ross") (collectively these defendants will be referred
to as "Merrill Scott") and Michael Licopantis ("Licopantis")
alleges as follows:
1. Merrill Scott is engaged in an ongoing scheme
in which it has obtained investments of an unknown amount, but which exceeds
$25 million, from clients to whom it provides offshore tax planning and asset
protection advice and services. Merrill Scott provides its services in the form
of a "Master Financial Plan" it sells to clients and implements on
their behalf. The implementation of the plan involves the establishment of offshore
entities and the execution of transactions through which its clients invest
funds, securities and other assets. Merrill Scott promises its clients that,
through the implementation of the Master Financial Plan, the clients will reduce
their taxes by significant percentages, have their investments grow offshore
in a tax free environment, and will be able to protect their assets from unwanted
liabilities and encumbrances. Merrill Scott sells securities to its clients
as part of its Master Financial Plan.
2. In fact, since in or about 1998, Merrill Scott
has misappropriated investor funds and securities for uses contrary to representations
made to investors. Investor funds have been used to pay for Brody's personal
expenses and extravagant lifestyle. Investor funds have been used for the obligations
and expenses of Merrill Scott and to invest in start-up companies unaffiliated
with Merrill Scott. This misappropriation of investor funds is ongoing. Recently,
new funds coming to Merrill Scott from new clients and from the sale of securities
have been used to pay Merrill Scott's obligations to old clients and for obligations
of other clients' plans, rather than in accordance with the plans of the clients
who invested the funds. In other words, Merrill Scott is currently operating
a Ponzi scheme. In addition, Brody intends to misappropriate approximately $1.4
million of client money deposited in accounts controlled by Merrill Scott to
purchase the stock of a start-up company unrelated to Merrill Scott or the plans
of the clients.
3. The defendants, directly or indirectly, singly
or in concert, have engaged, are continuing to engage, and are about to engage
in, transactions, acts, practices, and courses of business that constitute,
and would constitute, violations of Section 17(a) of the Securities Act of 1933
("Securities Act"), 15 U.S.C. § 77q(a); Sections 10(b) and 15(a)
of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.
§§ 78j(b) and 78o(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5,
and Sections 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers
Act"), 15 U.S.C. §§ 80b-6 (1) and (2), and they are likely to
repeat such violations in the future unless the Court enjoins them from doing
so. Accordingly, the Commission seeks relief in the form of a temporary restraining
order, injunctions, disgorgement, civil penalties and other appropriate remedies.
JURISDICTION AND VENUE
4. The Commission brings this action pursuant
to the authority conferred upon it by Section 22(a) of the Securities Act, 15
U.S.C. § 77u(a), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d),
and Sections 209(d) and (e) of the Advisers Act, 15 U.S.C. §§ 80b-9(d)
and (e), to restrain and enjoin, temporarily, preliminarily and permanently,
MSA, MSAI, Phoenix, Gibraltar, Brody, Ross and Licopantis from future violations
of the federal securities laws. The Commission also seeks disgorgement by MSA,
MSAI, Phoenix, Gibraltar and Brody of their ill-gotten gains plus prejudgment
interest, and such other equitable relief as may be deemed appropriate. In addition,
the Commission seeks civil penalties from each of the Defendants pursuant to
Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), Section 21(d)
of the Exchange Act, 15 U.S.C. § 78u(d), and Section 209 (e) of the Advisers
Act, 15 U.S.C. §80b-9(e). The Commission also seeks specific ancillary
relief as detailed in its Prayer for Relief.
5. This Court has jurisdiction over this action,
and venue is proper, pursuant to Section 22(a), 15 U.S.C. § 77u(a),of the
Securities Act and Sections 21(d) and 27 of the Exchange Act, [15 U.S.C. §§
78u(d) and 78aa, and Section 214 of the Advisers Act, 15 U.S.C. § 80b-14.
6. The Commission, pursuant to authority conferred
upon it by Sections 10(b) and 23(a) of the Exchange Act, 15 U.S.C. §§
78j(b), and 78w(a), has promulgated Rule 10b-5, 17 C.F.R. § 240.10b-5.
Rule 10b-5 was in effect at the time of the transactions and events alleged
in this Complaint and remains in effect.
7. The Defendants, directly or indirectly, singly
or in concert, made use of the means or instruments of transportation and communication
in, and the means or instrumentalities of, interstate commerce, or of the mails,
in connection with the transactions, acts, practices and courses of business
alleged herein. Certain of the transactions, acts, practices and courses of
business alleged herein took place in the District of Utah, including, the offer,
purchase and sale of securities, and acts and transactions involved in the misappropriation
of investor funds and securities. Therefore, venue properly lies in this district
pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a); Section
27 of the Exchange Act, 15 U.S.C. § 78aa, and Section 214 of the Advisers
Act, 15 U.S.C. § 80b-14.
DEFENDANTS
8. Merrill Scott & Associates, Ltd. is a
Bahamian company. It used to maintain an office in Nassau, Bahamas, but it is
has allegedly established an office in Hong Kong. Merrill Scott claims to be
a leading firm in the business of providing tax reduction and asset protection
through the establishment of offshore entities and accounts.
9. Merrill Scott & Associates, Inc., is a
Utah corporation, incorporated in 1993. MSAI's function is to provide the office
space and the staff who provide services to Merrill Scott's organization and
its investors, and serves as the office through which investors are solicited.
MSAI and MSA also regularly induce clients to purchase securities, including
those issued by Gibraltar and Phoenix. MSAI is located in Salt Lake City, Utah.
10. Phoenix Overseas Advisors, Ltd., is a Bahamian
entity that acts as an investment adviser and a "mutual fund company"
for Merrill Scott investors. Phoenix manages "mutual funds" that have
been sold to Merrill Scott investors. It also maintains accounts with brokerage
firms into which investor securities are placed.
11. Gibraltar Permanente Assurance, Ltd., is
an entity organized under the laws of Dominca, a Caribbean island. Gibraltar
ostensibly acts as an issuer of many of the investment products sold to Merrill
Scott investors. Gibraltar also controls the funds of Merrill Scott investors
that are to be repatriated to those individuals from accounts located in the
Bahamas.
12. Patrick M. Brody, age 37, is founder and
control person of Merrill Scott. He is the sole signatory on all the accounts
maintained by clients of Merrill Scott and its affiliated entities, including
Phoenix and Gibraltar. Brody purportedly has exclusive control of Merrill Scott
and its affiliated entities. Brody uses a Bahamian entity, Alex Jones &
Associates, Ltd. and Alex Jones & Associates, Inc. as an alter ego.
13. David E. Ross II, has been associated with
Merrill Scott since approximately 1998. Ross is an attorney licensed to practice
in Utah, Kansas and Illinois, with experience in tax and insurance matters.
Ross has functioned as General Counsel of MSA, and has been the Managing Director
of Estate Planning Institute, a Bahamian law firm, and Gibraltar.
14. Michael Licopantis was associated with Merrill
Scott functioning as the General Manager of Phoenix and Gibraltar from in or
about 1998 until approximately June 2001. Licopantis had authority over the
assets maintained or managed by Phoenix and Gibraltar. Licopantis purportedly
has extensive experience managing investments for firms in the U.S.
FACTS
BACKGROUND
15. Merrill Scott claims to have been in the
business of advising and servicing clients in tax reduction and asset protection
through offshore planning since at least 1993. The Merrill Scott organization
offers services to clients in the United States that are designed to reduce
taxes and protect assets through the creation and use of "offshore"
legal entities.
16. In a brochure Merrill Scott provides to potential
clients, MSA describes itself and the organization:
Headquartered in the Bahamas, Merrill Scott & Associates is organized as
a parent company, charged with coordinating the actions of its subsidiaries,
as well as our affiliated law firm. Merrill Scott & Associates consists
of a mergers and acquisitions company, a domestic insurance agency, an offshore
insurance carrier, an accounting firm, a mutual fund company, a mortgage company
and a headquarters services company.
17. Wealthy individuals solicited by Merrill
Scott are told that they can utilize loopholes in the Internal Revenue Code
and other laws and regulations to minimize tax obligations and protect assets
against litigation or other unwanted encumbrances. Merrill Scott offers a product
known as a "Master Financial Plan" ("MFP"). One of the functions
of the MFP is to provide a means by which the investor can invest cash and securities
offshore, usually in the Bahamas or another Caribbean nation, and receive tax-free
gains from the investment activity.
18. Merrill Scott also provides investors a means
to repatriate assets through transactions that hide the actual ownership of
the assets, thereby enabling the investors to utilize the untaxed funds without
paying tax obligations. In its sales manual, MSA states:
Once money is invested offshore, there are several ways
to repatriate part or all of it. These include such non-taxable methods as
with secured credit cards, personal or corporate loans, mortgages, personal
withdrawals or through insurance policies. Capital can also be repatriated
through taxable means such as through salaries or annuities.
19. Merrill Scott advertises its services in
publications such as The Robb Report, Celebrity Living, Tycoon, Departures,
Boatshowing and The Wall Street Journal. Merrill Scott also retains
financial advisers who solicit investors either through personal contacts or
by referral from Merrill Scott and are there to sell the MFP. Merrill Scott
solicits investors through its publications and through a website it maintains
on the Internet. Most of Merrill Scott's investors appear to have invested since
1998.
20. MSAI advertises the Merrill Scott organization's
services and employs the staff who solicit clients and design the investment
plans. Merrill Scott's other affiliated entities, including Phoenix and Gibraltar,
are involved in structuring the individual details of a investor's plan, issuing
and selling the products recommended in the plan, and management of the investor's
assets offshore.
21. Merrill Scott retains professionals to provide
"expert" advice on the clients' financial plans. Those professionals
include attorneys, accountants, financial planners, asset managers and persons
with banking expertise.
22. The MFP essentially establishes the framework
through which the Merrill Scott investor invests and protects cash and assets,
avoids payment of taxes and repatriates his or her funds. The basic structure
of the plan involves the transfer of an investor's income and/or assets into
offshore entities established on behalf of the investor. These funds and assets
are then used to purchase investment and other products offered by MSA and its
affiliates.
23. The primary source of revenue to Merrill
Scott are the fees associated with the initial development of the MFP and the
sale of various investment products, fees for the creation of offshore entities,
and transactional and maintenance fees associated with the implementation of
the plan.
24. In order to implement its MFP, Merrill Scott
investors establish offshore entities in which they place assets and effect
transactions. The main types of entities employed by Merrill Scott for its clients
include International Business Corporations (IBCs) and Support Organizations
(SOs).
25. Merrill Scott sales literature describes
IBCs as corporations formed in a tax haven but not authorized to do business
within that country. They are intended to be used as an investment or asset
protection vehicle. The Merrill Scott investor transfers personal assets or
an investment portfolio to the IBC.
26. Merrill Scott describes SOs as charitable
organizations established for the benefit of an individual client. Among the
stated benefits of an investor establishing an SO over using a domestic charitable
organization is that investment funds transferred to the investor's personal
SO can grow tax free. These investment gains are available to the donor/investor
through access to the offshore corporations that manage the investments of the
SO.
27. Merrill Scott tells clients the offshore
entities are not owned or controlled by the clients for tax purposes. Rather,
nominee officers or directors act on behalf of the clients to control the entities
and effect transactions. In fact, Merrill Scott personnel have authority to
effect the transactions, with Brody retaining sole signatory authority over
all accounts. Typically, in order to effect a transfer of funds, senior personnel
at Gibraltar or Phoenix, such as Ross or Lipocantis, must authorize the transfer,
which is then executed by Brody, using his signatory powers.
Sales of Investment Products to Clients
28. The types of investment products sold by
Merrill Scott include Loss of Income Policies ("LOI"), Equity Management
Mortgages ("EMM"), Foreign Variable Annuities ("FVA") and
mutual funds managed by Phoenix.
Loss of Income Policies and Equity Management Mortgages
29. MSA's web site describes an LOI as an agreement
between the client and Gibraltar whereby the client purchases a policy to insure
against a future loss of income:
An LOI policy is usually purchased for coverage until the
earlier of a specified term, such as 1 year, or the date of death of the insured
. . . . The insurance company typically holds the net premium . . . in a separate
account, along with the net premiums of other LOI insurance policies. Creditors
cannot access policy reserves. The insurance company guarantees a fixed return
on such premiums. . . . Most LOI policies provide that your premiums, plus
a guaranteed return, will be paid back to the policy holder at the end of
a specified period (usually 10 years).
30. The sales manual also states that investment
decisions are made by the insurance company. The funds received by Gibraltar
for the sale of LOIs are pooled in an account at Barclays Bank maintained by
Gibraltar in the Bahamas.
31. In reality, LOIs are not purchased as insurance,
but as a vehicle to make offshore and tax-free investments of funds which can
be repatriated as desired by the investor. No Merrill Scott investor has ever
filed a claim against an LOI for a loss of income. What, in fact, occurs is
that the investor purchases the LOI from Gibraltar and then borrows back a percentage
of the premium through a note or investment contract, usually in the form of
a "mortgage," called an Equity Management Mortgage or EMM.
32. The EMM is obtained through two affiliated
entities of Merrill Scott, Fidelity Funding and Legacy Capital, which act as
the mortgagee. The investor's proceeds from the EMM are then placed in an IBC
and invested offshore through Phoenix, or repatriated by the investor. The net
effect of the LOI/EMM transaction is that the investor is able to deduct the
premium paid for the LOI, encumber his property through a mortgage to himself
and deduct the interest payments to himself on the mortgage. The investor can
then invest the proceeds from the mortgage offshore through an IBC, with Phoenix
managing the investment. The remainder of the premium left with Gibraltar is
then invested to provide the investor with a fixed rate of return over the ten-year
life of the policy.
33. Contributions by investors to SOs are treated
in a similar way. Under Merrill Scott's interpretation of the tax code, a certain
percentage of the income derived from the funds contributed to the SO must be
donated to charity, and the remainder may be loaned back to the investor through
an EMM. The proceeds from the EMM are then invested in the same way as described
in paragraph 32.
Foreign Variable Annuities
34. The FVA is a variable annuity issued by Gibraltar.
The investor purchases the FVA by transferring cash or securities to Gibraltar;
Gibraltar then pays the investor or his designees the principal and an agreed
upon rate of return over the succeeding years. Merrill Scott markets the FVA
as a means to repatriate a client's assets without tax consequences. With respect
to FVAs the MSA sales manual states:
You could purchase a Foreign Variable Annuity Contract between
you and a Foreign Insurer. During the accumulation period of the Annuity Contract
you could set aside money and have it grow on a tax-deferred basis [pending]
withdrawal. At retirement, or another time selected by you, the payout period
begins whereby the insurance company promises to pay a steady stream of income
for a fixed period of time or for life.
"Mutual Funds"
35. Another investment opportunity offered to
Merrill Scott investors are mutual funds managed by Phoenix. Formerly, Phoenix
offered three separate funds to Merrill Scott investors. Of those three, however,
the most popular was a fixed-income fund. The fixed income fund still exists
but no purchases or sales into or out of the fund are currently taking place.
The current value of that fund is purported to be $1.5 million.
36. Merrill Scott offered investors a mechanism
to repatriate invested funds through what is referred to by Merrill Scott as
a "Margin Fund." A MSA sales manual describes the Margin Fund as follows:
An IBC may open a mutual fund account with Phoenix Overseas
Advisors. Phoenix provides a margin line of credit at 9.5% interest rate.
The IBC may simply borrow against its position in the funds up to 50% of the
value of the fund. Access to the funds can be through the secured credit card.
Finds can also be wired against the line of credit or proceeds forwarded to
a Nevada Corporation. This transaction is not reportable and not taxable.
37. Phoenix acts as an investment adviser, and
is retained by the offshore entities established by the Merrill Scott investors
to operate as such for their offshore assets. Phoenix receives the securities
contributed by the investors to their offshore entities and places them in brokerage
accounts controlled by Phoenix, usually with TD Evergreen, a Canadian broker
dealer. 38 Phoenix is charged with managing the investor accounts and executing
transactions on instructions provided by the Merrill Scott investors. Phoenix's
fee for these services is approximately 1.5% of the funds it manages.
THE FRAUD
39. The Defendants are engaged in an ongoing
fraud, the heart of which is the solicitation of investor funds through misrepresentations
of material fact or omissions of material facts.
40. The misrepresentations made by the Defendants
include:
a. The funds of MSA investors will be held in
segregated accounts and will be held in trust on behalf of the investor.
b. That payments made to MSA investors are the
proceeds of their own investment funds.
c. That the fees disclosed to MSA investors are
the only funds used by the Defendants for their own purposes.
d. That even though the investor has, on paper,
surrendered control of his assets to MSA, MSA investors will be able to direct
the funds being held on their behalf offshore.
The Ponzi Scheme
41. The Merrill Scott organization has used newly
invested client funds to pay principal and returns promised to earlier investors.
Merrill Scott has not been able to honor its investors' demands for funds for
repatriation or other from the assets contributed by investors because those
funds no longer exist. As a result, Brody and others have used funds provided
by new clients or from the sale of additional investments to existing clients
to pay obligations to clients demanding promised returns.
42. The Merrill Scott organization has obtained
funds to pay earlier investors by margining brokerage accounts in which clients'
securities had been deposited and by simply liquidating funds maintained in
accounts established by Gibraltar in connection with client purchases of LOIs
and FVAs.
43. Internal communications among Merrill Scott
employees discuss the payment of immediate obligations with new monies obtained
from new clients. One internal Merrill Scott email, copied to Brody and Ross,
states:
[Y]ou are proposing somewhat of a Peter/Paul scheme that
funds one client from another's funds. I am not comfortable with that system
until we all have a conversation about the ramifications of that type of payment.
It is my understanding that up to $1 Million is coming in before the end of
the month. It would seem to me that the funding should come from that source,
not client payments against notes ultimately due SO Organizations.
44. Internal Merrill Scott emails also make reference
to threatened lawsuits against Merrill Scott by its clients because of Merrill
Scott's inability to meet its financial obligations due its clients.
Investor Funds are Used for Brody's Personal
Use
45. Since at least 1999, Brody has misappropriated
approximately $9.5 million of client funds for his personal use, utilizing his
alter ego, Alex Jones. Ross and Licopantis, who control the funds maintained
by Gibraltar and Phoenix, have assisted Brody in the conversion of investor
funds for Brody's personal expenses.
46. Brody uses investor funds to pay for his
extravagant lifestyle. Brody has boasted to a Merrill Scott associate that "I
own nothing but live like a king." As evidence of that maxim, Brody writes
checks on corporate accounts to "cash" and uses the funds for personal
expenses.
47. To pay his personal expenses, Brody has simply
taken the funds, after having been authorized by Ross or Licopantis in many
cases, from accounts maintained on behalf of clients over which he had signature
authority.
48. Brody has used these funds to furnish a home,
purchase art and on extravagant travel. Brody has also used client funds to
lease expensive cars for Brody and his wife.
49. In response to objections to this conduct
from associates at Merrill Scott concerning his appropriation of client funds,
Brody stated Merrill Scott was his company, the funds coming to Merrill Scott
were his, and that Brody could do whatever he wanted with the funds.
Investor Funds Have Been Used for Speculative
Purposes
50. Brody has also used investor funds to purchase
speculative securities, often to purchase stock in small, start-up companies.
51. Investors have not authorized the purchase
of these speculative securities, and, in fact, have sometimes not been denominated
as the owner of the securities once they are purchased.
52. Brody recently stated that he planned to
use new funds recently obtained by Merrill Scott to purchase stock in a pre-IPO
company because he believed the investment would result in significant returns
when the company conducts its IPO.
Investor Funds Have Been Used to Pay MSAI
Operating Expenses
53. Client funds have also been used to cover
MSAI's operating expenses. MSAI has operated at a loss for several years, and
Brody and others have used funds in client accounts to cover operating expenses.
54. According to MSAI's financial statements
for the year ended December 31, 1999, MSAI's income for the year was $2.24 million
while its expenses totaled $4.77 million.
55. In order to help fund MSAI's operational
losses, POA loaned MSAI $1.5 million and GPA loaned $125,000.
56. For the years 2000 and 2001, MSAI's books
reflect as paid-in-capital from Alex Jones, funds taken from Gibraltar and Phoenix
to cover MSAI's losses. Brody has caused various persons with authority over
client funds, including Ross and Licopantis, to authorize the withdrawal of
funds from accounts maintained on behalf of clients and loan the funds to the
Merrill Scott organization to cover operating expenses.
57. In recent months, in order for MSA to meet
its payroll and other obligations, Brody, Ross and others margined securities
maintained on behalf of Merrill Scott clients in accounts with a brokerage firm.
The funds obtained from the margin transactions were then used to pay the obligations.
58. In addition, funds deposited in accounts
maintained by Gibraltar on behalf of Merrill Scott clients were simply withdrawn
from those accounts to meet similar obligations. Under those clients' MFPs,
the funds were to be used for the benefit of the clients pursuant to the plans'
instructions, not to pay Merrill Scott's obligations.
59. Brody and Ross have told employees that the
client funds were merely being borrowed by Merrill Scott to pay expenses and
would be repaid to its clients.
CLAIMS FOR RELIEF
FIRST CLAIM FOR RELIEF
Violations of Section 10(b) of
the Exchange Act and Rule 10b-5
60. The Commission realleges and incorporates
by reference the allegations contained in Paragraphs 1 through 59 above.
61. From in or about 1998 through the present,
the defendants, directly or indirectly, singly or in concert, by use of the
means or instruments of transportation or communication in, or the means or
instrumentalities of, interstate commerce, or of the mails, in connection with
the purchase or sale of securities, knowingly or recklessly, have: (1) employed,
and are about to employ, devices, schemes and artifices to defraud; (2) made,
and are about to make, untrue statements of material fact, or have omitted,
and are about to omit, to state material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading; and (3) engaged, and are about to engage, in acts, transactions,
practices and courses of business which have operated as a fraud or deceit upon
purchasers of the securities and other persons.
62. By reason of the foregoing, the Defendants,
have, directly or indirectly, singly or in concert, violated, and unless temporarily,
preliminarily and permanently restrained and enjoined, will again violate Section
10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R.
§ 240.10b-5.
SECOND CLAIM FOR RELIEF
(Violations of Securities Act Section 17(a)(1))
63. The Commission realleges and incorporates
by reference the allegations contained in Paragraphs 1 through 59 above.
64. Defendants, with scienter, in the offer or
sale of securities, by the use of means or instruments of transportation or
communication in interstate commerce, or by the use of the mails, directly or
indirectly employed, and are employing, devices, schemes or artifices to defraud
in violation of Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)].
65. By reason of the foregoing, Defendants have,
directly or indirectly, singly or in concert, violated, and unless temporarily,
preliminarily and permanently restrained and enjoined, will again violate Section
17(a)(1) of the Securities Act and unless restrained and enjoined will continue
to do so.
THIRD CLAIM FOR RELIEF
[Violations of Securities Act, Section 17(a)(2)
and (3)]
66. The Commission realleges and incorporates
by reference the allegations contained in Paragraphs 1 through 59 above.
67. Defendants, in the offer or sale of securities,
by the use of means or instruments of transportation or communication in interstate
commerce, or by the use of the mails, directly or indirectly (a) obtained and
are obtaining money or property by means of untrue statements of material facts
or omissions to state material facts necessary in order to make the statements
made, in the light of the circumstances under which they were made, not misleading;
or (b) engaged and are engaging in transactions, practices or courses of business
which operated or would operate as a fraud or deceit upon purchasers of securities
in violation of Section 17(a)(2) and (3) of the Securities Act [15 U.S.C. §
77q(a)(2) and (3)].
68. By reason of the foregoing, Defendants have,
directly or indirectly, singly or in concert, violated, and unless temporarily,
preliminarily and permanently restrained and enjoined, will again violate Section
17(a)(2) and (3) of the Securities Act and unless restrained and enjoined will
continue to do so.
FOURTH CLAIM FOR RELIEF
[Violations of Advisers Act, Sections 206(1)
and (2)]
69. The Commission realleges and incorporates
by reference the allegations contained in Paragraphs 1 through 59 above.
70. MSAI, Phoenix and Brody from at least 1998
engaged, for compensation, in the business of advising others as to the value
of certain securities, or as to the adviseability of investing in, purchasing
or selling certain securities. Consequently, MSA, MSAI and Brody were investment
advisers.
71. As described in paragraphs 1 through 59,
MSAI, Phoenix and Brody, directly or indirectly: (1) employed devices, schemes,
or artifices to defraud clients or prospective clients; and (2) engaged in transactions,
practices or courses of business which operated as a fraud or deceit upon clients
or prospective clients.
72. Consequently, MSAI, Phoenix and Brody violated,
and unless temporarily, preliminarily and permanently restrained and enjoined,
will again violate Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§
80b-6(1) and (2), and unless restrained and enjoined will continue to do so.
FIFTH CLAIM FOR RELIEF
(Aiding and Abetting Violations of Advisers
Act)
73. The Commission realleges and incorporates
by reference the allegations contained in Paragraphs 1 through 59 above.
74. As described above in paragraphs 1 through
59, Ross and Licopantis were aware that investors were told that securities
would be purchased for them. Licopantis managed the assets of Phoenix and authorized
Brody to transfer client funds, knowing that he would misappropriate the funds
or use them in a manner other than represented to investors. Similarly, Ross
authorized Brody to transfer investor assets from Phoenix to Brody knowing that
Brody would misappropriate those funds or use them in a manner other than represented
to investors.
75. Ross and Licopantis aided and abetted conduct
by MSAI, Phoenix and Brody which, directly or indirectly: (1) employed devices,
schemes, or artifices to defraud clients or prospective clients; and (2) engaged
in transactions, practices or courses of business which operated as a fraud
or deceit upon clients or prospective clients.
76. Consequently, Licopantis and Ross aided and
abetted, and unless temporarily, preliminarily and permanently restrained and
enjoined, will again violate Sections 206(1) and (2) of the Advisers Act, 15
U.S.C. §§ 80b-6(1) and (2), and unless restrained and enjoined will
continue to do so
SIXTH CLAIM FOR RELIEF
(Violations of Exchange Act, Section 15(a))
77. The Commission realleges and incorporates
by reference the allegations contained in Paragraphs 1 through 59 above.
78. As part of their regular course of business,
MSA, MSAI and Brody solicited investors to purchase securities, were involved
in negotiations between issuers and investors, and received compensation related
to the purchase of securities. Therefore, MSA, MSAI and Brody were acting as
brokers.
79. Neither MSA nor MSAI has been registered
with the Commission as a broker. Brody has not been associated with a broker
or dealer registered with the Commission.
80. The activities of MSA, MSAI and Brody violated
the registration provisions of Section 15(a)(1) of the Exchange Act, which requires
that all brokers register with the Commission.
RELIEF REQUESTED
WHEREFORE, Plaintiff respectfully requests that
this court:
I.
Enter an Order temporarily restraining and preliminarily
enjoining: (A) MSA, MSAI, Phoenix, Gibraltar, Brody, and Ross, their
agents, servants, employees, attorneys, and all persons in active concert or
participation with them who receive actual notice of the injunction by personal
service or otherwise, and each of them, from future violations of Section 17(a)
of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange
Act, 15 U.S.C. §§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5,
(B) MSA, MSAI and Brody, their agents, servants, employees, attorneys,
and all persons in active concert or participation with them who receive actual
notice of the injunction by personal service or otherwise, and each of them,
from future violations of Section 15(a) of the Exchange Act, 15 U.S.C. §
78o(a), and (C) MSAI, Phoenix and Brody, their agents, servants, employees,
attorneys, and all persons in active concert or participation with them who
receive actual notice of the injunction by personal service or otherwise, and
each of them, from future violations of Sections 206(1) and (2) of the Advisers
Act, 15 U.S.C. §§ 80b-6(1) and (2), and (D) Ross, his agents,
servants, employees, attorneys, and all persons in active concert or participation
with him who receive actual notice of the injunction by personal service or
otherwise, and each of them, from aiding and abetting future violations of Sections
206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2).
II.
Grant a Final Judgment permanently enjoining:
(A) MSA, MSAI, Phoenix, Gibraltar, Brody, Ross and Licopantis, their
agents, servants, employees, attorneys, and all persons in active concert or
participation with them who receive actual notice of the injunction by personal
service or otherwise, and each of them, from future violations of Section 17(a)
of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange
Act, 15 U.S.C. §§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5,
(B) MSA, MSAI and Brody, their agents, servants, employees, attorneys,
and all persons in active concert or participation with them who receive actual
notice of the injunction by personal service or otherwise, and each of them,
from future violations of Section 15(a) of the Exchange Act, 15 U.S.C. §
78o(a), and (C) MSAI, Phoenix and Brody, their agents, servants, employees,
attorneys, and all persons in active concert or participation with them who
receive actual notice of the injunction by personal service or otherwise, and
each of them, from future violations of Sections 206(1) and (2) of the Advisers
Act, 15 U.S.C. §§ 80b-6(1) and (2), and (D) Ross and Licopantis,
their agents, servants, employees, attorneys, and all persons in active concert
or participation with them who receive actual notice of the injunction by personal
service or otherwise, and each of them, from aiding and abetting future violations
of Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1)
and (2).
III.
Grant a Final Judgment requiring Defendants MSA,
MSAI, Phoenix, Gibraltar, and Brody to disgorge an amount equal to the funds
and securities they obtained illegally as a result of the violations alleged
herein, plus prejudgment interest on that amount.
IV.
Grant a Final Judgment assessing penalties against
the Defendants pursuant to Section 20(d) of the Securities Act, 15 U.S.C. §
77t(d), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), and Section
209 (e) of the Advisers Act, 15 U.S.C. §80b-9(e).
V.
Issue an order directing MSA, MSAI, Phoenix,
Gibraltar and Brody, jointly and severally, to prepare and present to the Court
and the Commission, within thirty (30) days from the entry of said order, a
sworn accounting of all of the proceeds collected by the defendants from the
activities described in the Commission's Complaint.
VI.
Issue in a form consistent with Rule 65(e) of
the Federal Rules of Civil Procedure, orders preliminarily and permanently enjoining
defendants MSA, MSAI, Phoenix, Gibraltar, Brody, and Ross, and their officers,
agents, servants, employees and attorneys, and those persons in active concert
or participation with any of them, who receive actual notice of the orders by
personal service or otherwise, and each of them, from:
A. transferring, changing, wasting, dissipating,
converting, concealing or otherwise disposing of, in any manner, any funds,
assets, claims, or other property or assets owned or controlled by, or in the
possession or custody of such defendants or ;
B. transferring, assigning, selling, hypothecating,
or otherwise disposing of any assets of as of the date of the Order.
C. directing them to:
1. take such steps as are necessary to repatriate
to the territory of the United States of America, in a manner directed by the
Court, all funds and assets of investors in MSA, MSAI, Phoenix or Gibraltar,
or any affiliated entity, which are held under their direct or indirect control,
jointly or singly; and
2. provide the Commission and the Court a written
specification of the funds and assets so repatriated;
3. submit in writing to the Court and to the
Commission, within two business days following service of the Order:
(a) an accounting of all securities, funds, and
other assets held in their names or for their direct or indirect benefit, stating
the location of the funds and assets;
(b) an identification of each account with any
financial institution (including banks and securities and commodities brokerage
firms) maintained in their names or held for their direct or indirect benefit;
and
(c) information identifying all business and
residence addresses, postal box numbers, telephone numbers and facsimile numbers.
VII.
Issue in a form consistent with Rule 65(e) of
the Federal Rules of Civil Procedure, orders preliminarily and permanently enjoining
the defendants, and their officers, agents, servants, employees and attorneys,
and those persons in active concert or participation with any of them, who receive
actual notice of the orders by personal service or otherwise, and each of them,
from destroying, mutilating, concealing, transferring, altering, or otherwise
disposing of, in any manner, any books, records, computer programs, computer
files, computer printouts, correspondence, memoranda, brochures, or any other
documents of any kind, pertaining in any manner to the business of the defendants,
including, without limitation, the sale of securities.
VIII.
Grant such other and further relief as this Court
may determine to be just, equitable and necessary, including, but not limited
to, (i) a freeze of assets, (ii) the acceleration of discovery including the
forthwith production of books and records, (iii) the appointment of a receiver,
(iv) an order requiring repatriation of assets, and (v) an order requiring the
execution of consent directives.
IX.
Retain jurisdiction over this action in order
to implement and carry out the terms of all orders and decrees that may hereby
be entered, or to entertain any suitable application or motion by the Commission
for additional relief within the jurisdiction of this Court.
X.
Grant such other and further relief as the Court
may deem just and equitable.
Dated: January 15, 2002
Respectfully Submitted,
__s/Thomas M. Melton____
Thomas M. Melton
William B. McKean
ATTORNEYS FOR PLAINTIFF
SECURITIES AND EXCHANGE
COMMISSION