S.E.C. v. Autocorp Equities, Inc.

• Decision Date: 08 December 2003
• Docket Number: No. 2:98-CV-00562 PGC.,2:98-CV-00562 PGC.
• Citation: 292 F.Supp.2d 1310
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. AUTOCORP EQUITIES, INC., Michael Carnicle, Robert Cord Beatty, Hillel Sher, Amotz Frenkel, and Nili Frenkel, Defendants. and Nili Frenkel, Relief Defendant.
• Court: U.S. District Court — District of Utah

Page 1310

292 F.Supp.2d 1310

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. AUTOCORP EQUITIES, INC., Michael Carnicle, Robert Cord Beatty, Hillel Sher, Amotz Frenkel, and Nili Frenkel, Defendants. and Nili Frenkel, Relief Defendant.

No. 2:98-CV-00562 PGC.

United States District Court, D. Utah, Central Division.

December 8, 2003.

COPYRIGHT MATERIAL OMITTED

Brent R. Baker, Robert K. Hunt, Utah Federal Defender Office, Karen L. Martinez,

Thomas M. Melton, Salt Lake City, UT, for Plaintiffs.

Michael Carnicle, Las Vegas, NV, Amotz Frenkel, Nili Frenkel, Oak Park, CA, Mark J. Griffin, Woodbury & Kesler, Salt Lake City, UT, for Defendants.

Ronald F. Price, David W Scofield Parsons, Kinghorn, Peters, Salt Lake City, UT, for Hiller Sher.

OPINION AND ORDER GRANTING AND DENYING SUMMARY JUDGMENT IN PART

CASSELL, District Judge.

This securities fraud case is before the court on motions by plaintiff Securities and Exchange Commission (SEC) for summary judgment. The SEC filed one motion for summary judgment (56-1) against defendants Robert Cord Beatty, Hillel Sher, Amotz "Bobby" Frenkel, and Nili Frenkel and a separate motion for summary judgment (96-1) against defendant Michael Carnicle. The court now grants these motions in part as set forth below.

FACTS

One of the 1980s' most memorable contributions to pop culture was American Gladiators, a TV game show that pitted contestants against bodybuilders clad in red-white-and-blue uniforms in tests of strength and skill. Although the American Gladiators concept began as a TV program, like many fads, it promised to be a big money maker, and show creator Johnny Ferraro decided to take the show on the road. Because Ferraro shared production rights with the Samuel Goldwyn Company (Goldwyn), it was necessary for Goldwyn to sign off on any performances that Ferraro wanted to stage, and in July 1993 Goldwyn agreed to let Ferraro stage a live production "at and only at a fixed facility (the "Facility") in Las Vegas, Nevada."¹

Based on this agreement, Ferraro arranged to do the show at the Imperial Palace Casino in Las Vegas. Because the agreement between Goldwyn and Ferraro referred to the venue for the show only as "the Facility," it is unclear whether the Imperial Palace was the only acceptable venue or one of many possible options. In any case, although the Imperial Palace was willing to host the event, it was unwilling to fund the production. Thus, Ferraro had to seek outside sources of funding.

It was at this juncture that Ferraro met Cord Beatty, a defendant in this case. When Ferraro and Beatty met, Beatty was a managing member of Diamond Entertainment LLC. Ferraro and Beatty agreed to form a new corporation called AmGlad, Inc., which was jointly owned by Diamond and Ferraro's company, Flor-John Films, Inc. AmGlad owned the production rights to the live American Gladiators show, and Beatty and Ferraro both worked to secure funding for the Las Vegas production.

In December 1993, they met Michael Carnicle, another defendant in this case. Carnicle was associated with a company called M & M Investments. M & M and Carnicle came on board to help secure funding for the production. Ultimately, Carnicle suggested they take Diamond public and raise capital by selling shares on a publicly traded market. Rather than try to take Diamond public on its own, Carnicle suggested they merge Diamond with an existing public company. Carnicle found a company called Eagle Automotive that was willing to merge with Diamond. There is some dispute as to what representations convinced Eagle to merge with Diamond, but the details of that negotiation are unimportant here.

Unfortunately Eagle was in the process of divesting itself of its assets, so Diamond would have to be worth five million dollars coming into the merger in order for Eagle to keep its NASDAQ listing. Since Diamond did not have substantial assets at that time, Diamond would have to acquire several million dollars' worth of assets in order to facilitate the merger. Although Carnicle's plan was very complicated and involved a number of different entities (Diamond Entities), the ultimate effect was that Eagle and the Diamond Entities would merge to form a new company called Chariot Entertainment, which would own the rights to the American Gladiators show. Chariot's sole purpose would be to promote and produce live performances of American Gladiators at the Imperial Palace.

At some point in the process, Carnicle introduced the idea of acquiring Russian certificates of deposit (CDs) instead of merging. Carnicle had located a broker named Bobby Frenkel. Frenkel is named as a defendant in this case. Frenkel knew a man named Hillel Sher, another defendant in this case, who claimed to be the exclusive representative of the Russian bank Skinektica. Frenkel and Sher had collaborated in the past to secure assets for other companies and were willing to help Chariot acquire Russian CDs with a maturity value of five million dollars.

Although the record is not fully developed as to the extent Frenkel and Sher knew about Chariot's position, one thing is clear: they knew why Chariot wanted the CDs. Both Frenkel and Sher knew that Chariot wanted the CDs for "asset enhancement" —that is, they understood that Chariot wanted the CDs so its balance sheet would allow it to be listed on NASDAQ and sell stock publicly.² Frenkel also stated in deposition that his understanding from the beginning was that Chariot wanted the CDs so they could raise capital in the form of loans.³

Carnicle arranged for the CDs to be acquired in exchange for Chariot stock. The CDs would be provided by Frenkel's company, F & P Investments (F & P), which was ostensibly "the holder in due course of certain proceeds and/or assignments of various Certificates of Deposits ... issued by the Commercial Bank Skinektica."⁴ F & P would "transfer to [Chariot] its rights, title, and interest in the proceeds of the CD's."⁵ In exchange, F & P would receive 2.8 million shares of Chariot stock. Roughly 1.4 million of the Chariot shares would be held in escrow by M & M, and the other 1.4 million would go to F & P Investments. Of shares issued to F & P, half would be issued to Yocheved Datner, an Israeli national, pursuant to SEC Regulation S.

Although Beatty was initially skeptical about acquiring Russian CDs, Carnicle prevailed on him to consent to the acquisition. Carnicle assured him that everything was above board and encouraged him to have professionals verify all the details of the transaction. When Beatty asked why certain shares had to be issued as unregistered Regulation S shares, Carnicle responded that it had to be done that way to get the deal.

Carnicle represented that an attorney named Karl Mangum had structured the deal. Beatty had Duane Midgley, a certified public accountant, authenticate the CDs, and the details of the transaction were reviewed and approved by Nathan Drage, counsel to the Diamond Entities. With the accountant's and the lawyer's approval, Beatty agreed to exchange Chariot shares for the CDs from F & P.

In spite of these professional reviews, certain facts undermined the success of the transaction. Most significantly, the CDs turned out to be fake. Sher admits that he created the CDs on blue check paper at a Kinko's in Florida, although he claims to have been authorized by the bank. Not surprisingly, the CDs were worthless. Subsequent analysis of the CDs by Andrey Koslov, Deputy Chairman and Chief of the Securities Division of the Central Bank of the Russian Federation, revealed that the CDs could not have been legally issued by a Russian bank because they were deficient in a number of ways. Furthermore, while the CDs were expressly sought to raise money, the terms of the agreement expressly limited their ability to "encumber, lien, pledge, or hypothecate" the principal,⁶ a limitation that Sher explained was imposed by the issuing bank. Finally, although F & P was ostensibly the owner of the CDs, the CDs were apparently issued in exchange for a $2 million promissory note rather than any kind of deposit. Sher and Frenkel intended to use the Chariot shares to pay for the CDs. Accordingly, some of the unregulated shares were sold to Frenkel's wife Nili Frenkel (Nili), who is also a defendant in this case. She in turn sold the unregulated shares for a profit.

Apparently unaware of these details, on March 23, 1994, Diamond Entities and F & P agreed to the exchange of Chariot shares for the CDs. Having gone public, Chariot appeared to be on track to make the American Gladiators show a reality. The CDs were about 30% of Chariot's assets and were included on its balance sheets and financial statements. In late March 1994, Beatty hired Judith Jarvis of the law firm of Broad and Cassel to represent Chariot in securities matters. On March 31, 1994, Chariot filed a Form 10-Q with the SEC, listing the CDs as an asset, and on April 5, 1994, Chariot filed registration form S8 with the SEC. Chariot tried to raise money for the Las Vegas show by selling its stock on the public market, and issued a number of press releases that described the Las Vegas show and its role in making the show a reality.

However, things did not work out as was hoped. Beatty unsuccessfully tried to secure a loan based on the CDs and was removed as president in May. Though no longer president, Beatty continued to seek funding, but by June 1994 Chariot had no liquid assets. In July Beatty spoke with Frenkel about his inability to secure a loan. Frenkel informed him that under the terms of the March 23 agreement Chariot did not have the right to get a loan based on the CDs. Surprised by this information, Beatty approached Nathan Drage, who reviewed the agreement and confirmed that it did not give Chariot the right to get loans on the CDs.

To further complicate matters, Chariot lost the Imperial Palace lease. Under the terms of the agreement, Chariot was to post a $150,000 performance bond....