S.E.C. v. Deyon

• Decision Date: 27 August 1997
• Docket Number: Civ. No. 95-164-B.
• Citation: 977 F.Supp. 510
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Ellis DEYON, et al., Defendants.
• Court: U.S. District Court — District of Maine

977 F.Supp. 510

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Ellis DEYON, et al., Defendants.

Civ. No. 95-164-B.

United States District Court, D. Maine.

August 27, 1997.

COPYRIGHT MATERIAL OMITTED

David E. Marder, Celia Moore, S.E.C., Boston, MA, for Plaintiff.

Paul W. Chaiken, Rudman & Winchell, Bangor, ME, for Defendant Gullett.

Lewellyn R. Michaud, Law Offices of Lewellyn R. Michaud, Bangor, ME, for Defendant Craig.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BRODY, District Judge.

Plaintiff, the Securities and Exchange Commission ("SEC"), alleged in a Complaint dated July 25, 1995, that Defendants, Ellis Deyon, Bradley Gullett, Sherwood Craig, William Hanke, and Dove Investment Group, Inc., violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, and Section 15(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(a). After Deyon settled with the SEC, the Court issued a judgment by consent against him on January 14, 1997. The Court enjoined Deyon from committing further violations of the securities laws and ordered him to disgorge $512,000 of his ill-gotten gains. After $407,071.89 had been deposited into the Registry of the Court, the remainder was waived due to Deyon's inability to pay. The Court issued judgments against Hanke and his corporation, Dove Investment Group, Inc., on October 9, 1996, and November 2, 1995, respectively, after they defaulted.¹

A trial was held before the Court from July 28, 1997, through August 1, 1997, to determine the liability of the remaining Defendants, Craig and Gullett, and to assess penalties to be levied against them, if any.

I. Findings of Fact

A. Background

In the early 1990s, Bradley Gullett was introduced to a minister named William McKnight, who claimed expertise in finance including a background of having earned nine doctorate degrees. McKnight later introduced Gullett to Ellis Deyon, who was working at the time for the Charter Trading Corporation, which, according to McKnight and Deyon, had as employees agents of the Central Intelligence Agency.

In 1993, Gullett, McKnight, and Deyon executed a joint venture agreement with Atlas Langford, an elderly and affluent long time friend of Gullett's from Tennessee. Pursuant to the agreement, Langford would pay the other parties' expenses while they marketed "Prime Bank" programs. These programs in reality were fraudulent schemes that purported to generate substantial profits through the trading of fictional instruments in a fictional market said to be regulated by a "Grand Master." The parties agreed to split the profits generated by the programs. Gullett persuaded Langford to execute the agreement by falsely depicting Langford's potential profits as being in the hundreds of millions of dollars. Gullett, knowing Langford to be a devoutly religious Christian, also purported to share his religious beliefs and told him that a prophet named Bernard Leuschner told Gullett that Gullett was the "right man on the East Coast to fulfill the finances before the last harvest of Christ before the end time." Gullett also performed faith healing services in the presence of Langford.

In June 1993, pursuant to the joint venture agreement, Gullett and Deyon sought investors for a "bill of exchange" program. In advertising this program to potential investors, Gullett promised that he was to receive a pre-approved loan of five billion dollars that was "self-liquidating," indicating, he claimed, that he did not have to pay it back. Gullett told potential participants that he would use the money to buy and sell Prime Bank Debentures, which, unknown to the investors, did not exist.

An additional program executed pursuant to the joint venture agreement was known as the "Hong Kong program." In furtherance of this scheme, Langford paid for Gullett's expenses while he supposedly trained in Hong Kong with the Grand Master. Langford was told that he could expect to receive $730 million in profits from this program.²

Another investment scheme Deyon and Gullett executed before they began working on the bank program that is the subject of this suit was an arrangement with an individual named Ivan Pearson. Pursuant to this scheme, Pearson would use investors' money to trade bank debentures for a profit of 25% per month. Gullett, Deyon, and Pearson agreed to split the profits. Deyon assured Gullett that Pearson was trustworthy, and continued to do so even after Pearson had been named as a defendant in a twelve-count court proceeding, ultimately resulting in Pearson's incarceration.

B. The Mexican Bank Account

In April 1995, Deyon was living and working in Mexico in an effort to initiate additional Prime Bank schemes pursuant to the joint venture agreement with McKnight, Gullett, and Langford. On April 25, 1995, Deyon opened a bank account at a branch of Bancomer, S.A. in Saltillo, Mexico, with money sent to him by Gullett. Deyon sent a copy of the contract opening the account to Gullett, who, despite the fact that he did not speak Spanish, never had the contract, which was written in Spanish, translated.

According to Deyon, the account paid an interest rate of approximately 85% per month and would guarantee a return of 25% per month to any investor who deposited a minimum of $25,000 and agreed to leave the money in the account for at least one year. Gullett began seeking investors for this account, telling them, in addition to the alleged terms of the account, that the account was not available to the general public and that Deyon had procured it only because he had certain high level connections in the bank. Gullett also told potential investors that the investment was as safe as any savings account in the United States and that the only risk they faced was if the bank collapsed, which he said was highly unlikely because the bank was supported by the Mexican government. Additionally, Gullett told potential investors that he had spoken with other investors who were prepared to invest $500 million in the account and that Gullett himself had invested in the account.

In an effort to prove that the Bancomer bank account truly offered the terms that he had been reporting, Gullett planned to travel to Mexico with two potential investors so they could determine the account's legitimacy for themselves. At about this time Gullett enlisted William Hanke, whom Gullett had met in early 1995 and knew had been involved in fraudulent "roll programs" in the past. Hanke thereafter called Sherwood Craig.³ He discussed the bank account with Craig, describing it as being risk-free. Craig, who was a licensed broker for the firm of Waddell & Reed from approximately 1964 to 1968, thought that the rates Hanke said the bank offered were "too good to be true." Hanke assured Craig that the rates were correct, and explained that the bank could afford to offer such high rates because it made 200% per month on its money. Craig admitted being pessimistic about the account. Nevertheless, he continued to discuss the account with Hanke, despite knowing that the Mexican banking industry was in the middle of the worst financial crisis in its history and that the peso had devalued approximately 50% in the previous five months.

Hanke finally told Craig that if Craig brought investors into the program and the investors agreed to accept a return of 15% per month, Craig would be entitled to recover the difference between the 25% return the account allegedly promised investors and the 15% the investors agreed to accept.⁴ Gullett later confirmed this arrangement during a meeting in Florida between Craig, Hanke, and Gullett on May 9, 1995. Additionally, Gullett explained to Craig that the bank could afford to offer an account that had a return of 85% per month because it was a "World Bank." Craig did not know what a "World Bank" was nor did he make any inquiry to learn about it or to determine if Bancomer indeed was a "World Bank." Gullett also told Craig that Deyon was once employed by the Central Intelligence Agency and that Gullett had discussions with a potential investor, whose name he did not disclose, who was prepared to invest $500 million into the account. Craig did not ask for the name of the investor or make any further inquiries.

The next day, May 10, 1995, Gullett traveled to Florida with two potential investors from Pennsylvania, and on May 11 they went to the bank with Deyon and his lawyer. Gullett and the investors could not read, speak, or understand Spanish. The bank employees with whom they met could not read, speak, or understand English. Deyon's lawyer, Yolanda Cortes, translated their conversations. Although the bank employees stated that the current interest rate paid by the bank was 85% per year, the two potential investors thought that the employees had confirmed Deyon's statement that the account paid 85% per month. Gullett, however, indicated that based on representations made to him by bank employees the account rate could fluctuate to as low as 55% per month. Based on Gullett's representations, and upon visiting the bank in Mexico, the two individuals from Pennsylvania decided to wire money to the bank and invest in the account.

Gullett and Craig continued to present the program to potential investors. Soon after returning from Mexico, Gullett talked to Terry Nelson, a Christian missionary, describing the account as he had done to the Pennsylvania investors although Gullett did not tell Nelson that the account could produce a rate as low as 55% per month. Nelson eventually invested in the account. For his part, Craig prepared an advertising circular that he distributed to potential investors. They described the bank as being "one of the top 200 World Banks," and that the program had been started by Christian men for church related programs. Craig faxed the circular to Hanke, who reviewed it with...