S.E.C. v. Credit Bancorp, Ltd.

• Decision Date: 30 September 2010
• Docket Number: No. 99 Civ. 11395,99 Civ. 11395
• Citation: 738 F.Supp.2d 376
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CREDIT BANCORP, LTD., Credit Bancorp, Inc., Richard Jonathan Blech, Thomas Michael Rittweger, and Douglas C. Brandon, Defendants.
• Court: U.S. District Court — Southern District of New York

738 F.Supp.2d 376

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.CREDIT BANCORP, LTD., Credit Bancorp, Inc., Richard Jonathan Blech, Thomas Michael Rittweger, and Douglas C. Brandon, Defendants.

No. 99 Civ. 11395.

United States District Court,

S.D. New York.

Sept. 13, 2010.

Order Adhering to Opinion Sept. 30, 2010.

Securities and Exchange Commission, by Thomas M. Melton, Esq., Salt Lake City, UT, Securities and Exchange Commission, by Robert Blackburn, Esq., New York NY, for Plaintiff.

Thomas Rittweger, Fort Dix, NJ, pro se.

OPINION

SWEET, District Judge.

Defendant Thomas Rittweger, pro se, ("Rittweger" or the "Defendant") has moved for declaratory judgment to bar the plaintiff Securities and Exchange Commission ("SEC" or the "Plaintiffs") from prosecuting this action against him, in view of the criminal prosecution against him resulting in his incarceration and the imposition of an order of restitution in the amount of $18,128,599.40. Upon the conclusions set forth below, the motion of Rittweger is denied.

The SEC has moved under Rule 56, Fed.R.Civ.P. for summary judgment against defendant Thomas Michael Rittweger ("Rittweger" or the "Defendant") for violation of Section 17(a)(1), (2) and (3) of the Securities Act of 1933 ("Section 17(a)") (15 USC § 77q(a)(1), (2)); the Defendant violated Section 10(b) of the Securities and Exchange Act of 1934 ("Section 10(b)") (15 USC § 78j(b)) and Rule 10b-5 thereunder ("Rule 10b-5") (17 C.F.R. § 240.10b-5); a permanent injunction against future violations of these statutes; disgorgement; and a civil monetary penalty. Upon the findings and conclusions set forth below, the motion of the SEC is granted.

I. Prior Proceedings

The SEC filed this action on November 17, 1999, a Temporary Restraining Order, Asset Freeze and Order to Show Cause on November 17, 1999. SEC v. Credit Bancorp, Ltd., et al., 99 Civ. 11395, Docket No. 3.

On January 24, 2000, an Order was entered appointing Carl H. Loewenson, Jr., as Receiver (the "Receiver") for Credit Bancorp and all its subsidiaries and affiliated entities. Credit Bancorp, 99 Civ. 11395, Docket No. 87. Pursuant to the Order, the Receiver was granted control of Credit Bancorp's assets, files, and records. Id.

On September 7, 2001, this Court awarded Summary Judgment against defendant Richard Blech ("Blech"). Credit Bancorp, 99 Civ. 11395, Docket No. 753.

On January 31, 2002, Rittweger was indicted in the Southern District of New York on counts of Conspiracy to Defraud the United States, Securities Fraud, Wire Fraud, and Racketeering. USA v. Blech, et al., 02 Cr. 122, Docket No. 8.

On March 28, 2002, this Court awarded Summary Judgment against Douglas Brandon ("Brandon"). Credit Bancorp, 99 Civ. 11395, Docket No. 832.

On June 26, 2003, in the parallel criminal case, Rittweger was found guilty of four counts of Conspiracy to Defraud the United States, two counts of Securities Fraud, two counts of Wire Fraud, and two counts of Racketeering. Blech, 02 Cr. 122, Docket No. 110. On June 28, 2005, in the parallel criminal case, Rittweger received a sentence of 135 months and was ordered to pay restitution of $18,128,599.40 and a special assessment of $1,300.00. Blech, 02 Cr. 122, Docket No. 192. On August 4, 2005, in the parallel criminal case, the Court issued an order requiring Rittweger to surrender to the Bureau of Prisons on October 28, 2005. Blech, 02 Cr. 122, Docket No. 224. Rittweger surrendered for imprisonment on January 27, 2006 to serve his time at the Federal Correctional Institution in Fort Dix, New Jersey. Blech, 02 Cr. 122, Docket No. 239.

Through his prison sentence, Rittweger continues to appeal to the court, including a petition for writ of habeas corpus, denied by the Honorable Noel L. Hillman of the U.S. District Court of New Jersey on July 29, 2009 for lack of jurisdiction. See Rittweger v. United States, 09 Civ. 3514, 2009 WL 2390600 (D.N.J.) at Docket # 2.

In response to his denial, Rittweger submitted a letter to Judge Hillman on August 17, 2009 requesting to either stay the matter for further consideration or appeal the decision of the court. Letter from Thomas Rittweger, Defendant to The Honorable Noel L. Hillman, U.S. District Judge (Aug. 12, 2009). Id. at Docket # 4.

On September 2, 2009, Judge Hillman issued an order to reopen Rittweger's petition for a writ of habeas corpus. Order Reopening Case. Id. at Docket # 5. To date, no decision has been made.

On October 28, 2009, the SEC submitted the present motion for summary judgment. On February 22, 2010, Rittweger submitted the present motion for declaratory judgment. Both motions were considered fully submitted on June 5, 2010.

II. The Facts

The facts are set forth in the SEC Statement of Undisputed Facts and are challenged by letters of Rittweger dated June 3 and 21, 2010.

Rittweger, age 50, is a resident of New Jersey. He is currently held as an inmate in the Federal Correctional Institution in Fort Dix, New Jersey, beginning on January 27, 2006 and sentenced to 135 months. USA v. Blech, et al., 02 Cr. 122, Docket No. 239. Rittweger formerly held the title of Managing Director for North America of Credit Bancorp, Ltd.

Beginning in 1997 Credit Bancorp began contacting individuals, such as chairmen and chief executive officers of public companies, to solicit their investment in Credit Bancorp's "Insured Credit Facility Program." Solicitation for this program was done through Credit Bancorp employees as well as representatives that were not employed directly by Credit Bancorp. The insured credit facility program was represented to investors as providing an investment opportunity to high net worth individuals with a minimum investment of $250,000.

Investors could borrow money at financing rates substantially lower than competing brokerage houses using a variety of assets as collateral. Additionally, investors were given the opportunity to earn a "dividend" based on the value of their unencumbered collateral. This dividend was in addition to the normal dividends or interest earned on the collateral asset. The amount of the promised "dividend" generally ranged from four to six percent.

Participation in Credit Bancorp's credit facility program began by submitting the proposed collateral for approval to a Credit Bancorp representative. Once the collateral was approved, Credit Bancorp instructed the investor to execute and send to a designated Credit Bancorp office two documents: the "CBL Insured Credit Facility Agreement," which was the contractual agreement laying out the terms of the credit facility program, and a separate "Letter of Engagement," which engaged the trustee. The investors would then transfer their securities or other assets to Credit Bancorp to be placed in a Credit Bancorp account pursuant to specific directions in the Letter of Engagement. Often, securities were transferred directly to Rittweger pursuant to the instructions in the Letter of Engagement.

Credit Bancorp would direct investors to remove the restrictive legends on their securities. Credit Bancorp told investors that the U.S. dollar assets placed in trust would be transferred electronically to a Credit Bancorp custodial account in a U.S. money center bank, which was rated AA or better by Moody's Investor Services.

Credit Bancorp told investors that Lloyd's of London would insure all assets pledged by investors for $500 million per loss.

The "CBL Insured Credit Facility Agreement" stated that "[n]either CBL nor the Trustee will at any time sell, pledge, assign, margin, lien, hypothecate, encumber, or otherwise dispose" of an investor's assets. The Engagement Letter from Brandon stated; "[o]nly I as trustee will have signatory or withdrawal power over the account under the terms of the Credit Facility...." Rittweger also represented to investors that securities and assets deposited with Credit Bancorp would not be transferred, disposed of, or otherwise encumbered.

In reality, investors' assets were routinely margined, pledged, hypothecated, and sold short without investors' knowledge. The proceeds from the misuse of investor assets were used to fund a variety of different trading strategies, business expenses, personal expenses, and various business investments. Credit Bancorp's business investments were largely unprofitable and included an investment of over $1,000,000 in a hotel in the south of France, a $3,000,000 investment in the University of Southern Europe, and the purchase of a $600,000 yacht.

Credit Bancorp claimed to make money by engaging in a propriety investment strategy that took advantage of Credit Bancorp's unique relationships with European banking/institutional counterparts. Credit Bancorp claimed to use customer assets that were held in the credit facility program as collateral for intra-day trading strategies that had zero losses. This Court has found "the uncontested facts prove that [investors'] assets were not held in custodial accounts and investor securities were sold or margined." SEC v. Credit Bancorp, Ltd., 195 F.Supp.2d 475, 492 (S.D.N.Y.2002).

Rittweger's official titles at Credit Bancorp were Managing Director, North America of Credit Bancorp, Ltd. and President of Credit Bancorp & Co. Rittweger was held out to investors as a licensed securities broker. Rittweger acted as the contact person between investors and Credit Bancorp in order to facilitate participating in the credit facility program.

Rittweger started his career with Credit Bancorp while he was working at Summit Financial Resources ("Summit"), primarily marketing Credit Bancorp's credit facility to the Summit clients that he managed. In late 1997, Rittweger became a salaried employee of Credit Bancorp as the ManagingDirector, North America at Credit Bancorp, Ltd.

Rittweger had a team of independent agents that hawked the credit facility program to investors and referred potential investors to Rittweger's office in Tom's River, New Jersey. By 1999, there were approximately 30 brokers reporting to...