SEC v. Sands

• Decision Date: 26 July 1995
• Docket Number: No. CV 93-7510 JGD.,CV 93-7510 JGD.
• Citation: 902 F. Supp. 1149
• Court: U.S. District Court — Central District of California
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Leonard S. SANDS, et al., Defendants.

902 F. Supp. 1149

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Leonard S. SANDS, et al., Defendants.

No. CV 93-7510 JGD.

United States District Court, C.D. California.

July 26, 1995.

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Karen Lynn Matteson, SEC — Securities & Exchange Commission, Los Angeles, CA, Thomas V. Sjoblom, SEC — Securities & Exchange Commission, Washington, DC, M. Catherine Cottam, SEC — Securities & Exchange Commission, Washington, DC, for SEC.

Donald B. Marks, Marks & Brooklier, Los Angeles, CA, Leonard S. Sands, Leonard S. Sands Law Offices, Los Angeles, CA, Tucker K. Trautman, Ireland Stapleton Pryor & Pascoe, Denver, CO, for Sands.

Charles W. Knapp, Los Angeles, CA, Pro Se.

Berrien E. Moore, Playa Del Ray, CA, Pro Se.

Leonard S. Sands, Leonard S. Sands Law Offices, Los Angeles, CA, for First Pacific Bancorp, Inc., PacVen, Inc.

ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, GRANTING IN PART AND DENYING IN PART PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT, AND GRANTING IN PART AND DENYING IN PART MOTIONS TO STRIKE CERTAIN AFFIRMATIVE DEFENSES

DAVIES, District Judge.

On July 10, 1995, the following motions were argued: (1) Defendant Sands' Motion for Summary Judgment; (2) Plaintiff's Cross-Motion for Summary Judgment; (3) Plaintiff's Motion to Strike Affirmative Defenses of Defendants Sands, Bancorp, and PacVen; and (4) Plaintiff's Motion to Strike Certain Affirmative Defenses of Defendant Knapp. Having considered the parties' written submissions, and the oral argument of counsel, the Court hereby DENIES Defendant Sands' motion for summary judgment, GRANTS in part and DENIES in part the Plaintiff's motion for summary judgment, GRANTS in part and DENIES in part the motion to strike the affirmative defenses of Sands, Bancorp, and PacVen, and GRANTS the motion to strike certain affirmative defenses of Defendant Knapp.

FACTS

This civil enforcement action arises from the alleged violation of certain securities laws in conjunction with the management and operation of Defendant First Pacific Bancorp ("Bancorp"). At all relevant times, Defendant Leonard S. Sands was the chairman of the board and chief executive officer of Bancorp. Bancorp is a bank holding company incorporated under the laws of the State of Delaware in July 1981. Sands owned 54.6% of Bancorp's common stock. Prior to August 1990, Sands was director and corporate counsel of First Pacific Bank, Inc. ("FPB"), the sole bank owned by Bancorp. FPB became Bancorp's wholly owned subsidiary in October 1982. FPB was Bancorp's major asset. Sands was also the president and CEO of Defendant PacVen, Inc., a "blank check" corporation incorporated under the laws of Nevada. PacVen was formed for the purpose of merging with or acquiring other companies.

Defendant Charles W. Knapp and Sands were business associates. Defendant Berrien E. Moore was a member of the Bancorp board of directors and an executive vice-president of the Bank.¹ Defendant Daniel S. Geiger was a vice-president of FPB. Defendant Mulc Raj Dass is a citizen of India, and resides in Texas. Defendant Apex Investment Securities, Ltd. was a Panamanian corporation owned by Dass.

Bancorp's stock was publicly traded in the over-the-counter market, except for a period of suspension from June 1989 to April 1990. The Bank was taken over by federal regulators in August 1990.

The Securities and Exchange Commission ("SEC") charges the Defendants with violations of the anti-fraud provisions of certain securities laws. The claims against Defendants Bancorp and Sands may be categorized as follows: (1) failure to return funds and disclose material information to investors in connection with stock offerings by Bancorp and PacVen in 1987; (2) improper classification and disclosure of Residual Interest Wrap Notes in financial statements filed with the SEC; and (3) improper booking on Bancorp's financial statements of certain certificates of deposit issued by the Nation Bank of Liberia which were unfunded and uncollectible.

The Bancorp Stock Offering

In April 1987, Bancorp commenced a public offering (hereafter, the "Bancorp offering") by filing an amended registration statement and prospectus with the SEC. The prospectus became effective May 14, 1987. The Bancorp offering was underwritten by P.J. Jameson Company, Inc. The amended registration statement provided for a "mini-max" offering. In a mini-max offering, the offering company is required to sell a minimum number of shares on an all or none basis. Once the minimum is reached, the balance of shares are sold on a best-efforts basis.

Bancorp offered a minimum of 750 "units" on an all or none basis. A unit consisted of (1) 500 shares of common stock; (2) warrants to purchase 250 additional shares of common stock; and (3) a 5-year $1,000 convertible debenture at 9¼ percent interest. Each unit was sold for $2,000. Under the terms of the prospectus, Bancorp was required to sell at least 750 units by August 12, 1987. The underwriter had discretion to extend the deadline by 60 days, and did so extend the deadline to October 10, 1987. Proceeds from the sale were to be held in escrow until the requisite number of units were sold. The prospectus stated that if 750 units were sold, i.e. $1.5 million was raised, Bancorp would have the right to sell up to 1,275 units on a best efforts basis. If at least 750 units were not sold within the offering period, the offering would be cancelled and the investors' funds would be returned.

On October 9, 1987, $1,688,000 was forwarded to the escrow agent for investment in the Bancorp offering. Of these funds, $1 million was in the form of a personal check written by Paul Kutik, and drawn on the Bank of Montreal. This check was later returned unpaid. Bancorp did not sell the minimum number of units by October 10, 1987, and it failed to refund the investors' funds. Sands informed the Federal Reserve Board of San Francisco that the minimum portion of the Bancorp offering had been completed. Bancorp continued with the offering. On December 30, 1987, Sands purchased 500 units, paying $1 million of his own funds. Sands asserts that he acquired Kutik's position when the latter's check was returned unpaid. Of the remaining $688,000 raised in the offering, $500,000 was invested by Trafalgar Holdings, Inc., a company controlled by Defendant Knapp. The parties dispute whether the $500,000 was raised in a public offering conducted by PacVen and indirectly invested by Sands in the Bancorp offering. The remaining $188,000 was raised by personal investors.

On December 31, 1987, Bancorp declared the offering closed. The escrow agent wire transferred $1,688,000, less fees, to Bancorp. The $688,000 acquired from investors other than Sands was never returned to the investors.

The PacVen Stock Offering

PacVen was a "blind pool" company which was formed for the purpose of merging with and acquiring existing companies. In April 1987, PacVen engaged in a public offering of common stock. It proposed to "allocate the proceeds from the offering, together with its existing capital, toward seeking, investigating, and acquiring an interest or becoming engaged in a business opportunity." PacVen Registration Statement at 16. The registration statement for the public offering stated:

All funds not being utilized by the Company for its proposed business will be held in interest bearing accounts or investments in commercial financial institutions until such time as it appears that they will be required.

Id. The PacVen offering raised approximately $541,000. On July 27, 1987, PacVen filed with the SEC a Form S-R stating that the proceeds from the 1987 stock offering had been placed in "short term bank and other deposits." Form S-R at 4. The parties dispute whether the Form S-R misrepresented the actual use of the proceeds. The SEC alleges that PacVen indirectly invested the proceeds in the 1987 Bancorp offering. PacVen did not file a final Form S-R disclosing the disposition of the offering proceeds.

Residual Interest Wrap Notes

In 1989, Bancorp acquired $5,618,000 of Residual Interest Wrap Notes ("RIWNs"). Bancorp recorded the RIWNs as assets on its balance sheet. A RIWN was a secondary financing instrument. It was used in the sale of low income apartment projects sponsored by the Department of Housing and Urban Development ("HUD"). The interest on the note accrued over the note's term, but no interest was paid until the underlying property was sold or refinanced. When the property was sold or refinanced, the RIWN was paid, but only if the sale or refinancing yielded sufficient funds to first pay off all primary financing. The value of the RIWN was thus tied to the appreciation of the underlying property.

The RIWNs presented great risk to their owners. The owner was entitled to interest payments at the time the primary financing of the property was extinguished. The RIWNs were not collateralized by the underlying properties. They provided additional leverage on the property to increase equity yield. Bancorp could liquidate the RIWNS only if HUD approved repayment or refinancing of the underlying property. In 1990, HUD instituted a moratorium on such repayments and refinancings.

The Liberian Certificates of Deposit

In 1989, Bancorp owned six certificates of deposit issued by the National Bank of Liberia (the "Liberian CDs"). On its balance sheet, Bancorp recorded the Liberian CDs as $3 million in assets. The Liberian CDs were issued to Defendant Apex Investment Securities, Inc. They were not funded when issued. Apex was to lodge the certificates in an account designated by the National Bank of Liberia ("NBL"), at which time the CDs would be funded. NBL informed Bancorp and Sands that it would not honor the Liberian CDs unless they were funded. Bancorp acquired the Liberian CDs in exchange for Bancorp preferred stock.

In December 1989, NBL informed Bancorp that the Liberian CDs...