S.E.C. v. George
| Decision Date | 30 August 2005 |
| Docket Number | No. 03-3791.,No. 04-3063.,No. 03-4583.,No. 03-4472.,No. 03-4580.,No. 03-4608.,No. 03-4582.,03-3791.,03-4472.,03-4580.,03-4582.,03-4583.,03-4608.,04-3063. |
| Citation | 426 F.3d 786 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Allen GEORGE (03-3791); Carl E. Jackson (03-4472); Frederick D. Harris (03-4580; 04-3063); Derrick McKinney (03-4582); Rick R. Malizia (03-4583); Steven E. Thorn, Durietha Dziorny (03-4608), Defendants/Relief Defendants-Appellants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ON BRIEF: C. William Brownfield, Columbus, Ohio, for Appellants. Angel Yang, Susan S. McDonald, Securities and Exchange Commission, Washington, D.C., for Appellee. Allen George, Cleveland, Ohio, Carl E. Jackson, Highland Heights, Ohio, Frederick D. Harris, Cleveland Heights, Ohio, Derrick McKinney, Lewis Center, Ohio, Rick R. Malizia, Weston, Florida, Frederick D. Harris, Cleveland Heights, Ohio, pro se.
Before: SILER and SUTTON, Circuit Judges; O'MEARA, District Judge.**
Steven Thorn, Derrick McKinney and Rick Malizia (the "defendants") appeal the district court's entry of summary judgment against them in this securities-fraud case. They argue that numerous material fact disputes prohibited the district court (1) from imposing liability on them under several anti-fraud and unregistered-trading provisions of the federal securities laws and (2) from imposing a disgorgement remedy and several civil penalties on them. Durietha Dziorny, Allen George, Carl Jackson and Frederick Harris (the "relief defendants," so named because they profited from the defendants' scheme but did not facilitate it) also challenge the district court's entry of summary judgment, arguing that they should not be required to remit the entirety of their gains. We affirm.
In this civil-enforcement action, the Securities Exchange Commission (SEC) alleged that the defendants ran a Ponzi scheme. With the assistance of Malizia and McKinney, Thorn raised $75.8 million from individuals in the United States and abroad that purportedly would be invested in a secretive European securities market. As advertised by the defendants, the investment opportunity had all of the hallmarks of a "free lunch": The investments would be virtually risk-free and would generate lucrative returns. They also represented that the Federal Reserve Bank was involved in the investments and that the investments would benefit humanitarian projects. As it turned out, the SEC alleged, the European market was not secretive; none of the money was ever invested in this market or any other; neither the Federal Reserve Bank nor any humanitarian project was involved in the programs; the only "returns" came from other individuals' initial investments; and the defendants took much of the other money (that was not used to pay fictitious returns) for their own use.
The SEC showed that the defendants used two investment programs to commit the fraud. The defendants started the first program, referred to as the "Global" or "GIG" program, in February 1998 and raised about $21.8 million under it through March 2001. They started the second program, referred to as the "Financial Ventures" or "FV" program, in November 1999 and raised about $53.5 million under it through November 2000. In both programs, the defendants told potential investors that their funds would be used to invest in, or finance the trading of, European fixed-instrument securities, including medium term notes. Thorn represented that these securities, traded in secretive markets, could be bought at discounts by unidentified traders. All three defendants represented that the investors' money would be pooled together to reach threshold levels for preferred rates of return. And all three defendants represented that the investments would be risk free and that they would generate significant monthly returns. Thorn and McKinney also represented that the Federal Reserve Board was involved in the programs, and Thorn added that a humanitarian project would benefit from the trading. In the FV program, Thorn also told investors that the funds would remain in a United States bank, that the investors would retain control of the funds and that the funds would be used to "mirror" money at a European bank that would serve as collateral for the trader's line of credit.
The SEC also established that each of the defendants was more than a casual participant in the scheme. Thorn testified that he was the sole owner and managing director of Global Investors, a company he formed in 1998, and the namesake of the GIG program. He also created new entities to further the investment scheme, including First Financial Ventures (in 1999), Second Financial Ventures (in 2000) and Third Financial Ventures (in 2000), the namesakes of the FV program. Thorn personally communicated with investors about the investment programs, and he received approximately $72 million from investors (including those recruited by Malizia and McKinney). For their parts, Malizia raised $2.4 million from 37 investors between September 1999 and March 2001, and McKinney raised $5.6 million from 116 investors between February 1999 and April 2001.
As it turns out and as the undisputed evidence showed, the defendants never used the investors' money to finance or trade in any security instrument. Instead, the FV investors' money, which was to remain segregated in individual investors' accounts, was swept from the deposit account into accounts in the name of Financial Ventures, which Thorn and his associate Stuart Rose controlled, and commingled with other investors' money. And the defendants used money invested in both the GIG and FV programs to pay purported profits to other investors or to make extravagant personal purchases. For example, as detailed in the declaration of Luz Aguillar, a senior SEC investigator:
[O]n November 17, 2000, [one] Global Investors account . . . had a negative balance of approximately $6,953. From November 20, 2000 to December 8, 2000, Thorn deposited $1,494,655 from [two] [i]nvestors . . . into that account. Thorn used those funds as follows: (a) from November 27, 2000 to December 7, 2000, he paid $357,340 to seven investors; (b) from December 11, 2000 to February 28, 2001, he paid $726,445 to fifteen investors; (c) on December 11, 2000, he paid $61,500 to Cartier, Inc. to purchase a diamond ring; and (d) from December 28, 2000 to February 28, 2001, a total of $186,497 was used by Thorn for his benefit, including $50,000 in legal expenses, $80,000 transferred to his personal account at Key Bank, and [the] purchase of a $12,219 cashier's check to close the account; this cashier's [check] was cashed by Relief Defendant Durietha Dziorney [Thorn's fiancee].
JA 649. Altogether, Thorn spent $3.9 million on personal expenses, including $66,500 on a diamond ring, $362,853 toward a $1.1 million home, $93,989 on automobile lease payments, $221,000 on home furniture and $235,000 on legal expenses.
Malizia took a similar path. From September 1999 to March 2001, Malizia and RMAZ, a corporate entity through which he operated, raised $2.4 million from investors and sent $1.7 million of that money to Thorn. From June 1999 to March 2000, Malizia and RMAZ received about $1.4 million from Thorn and used $742,500 of that money to pay purported profits to various investors. He used $619,994 of the remaining $638,700 as follows: $183,500 for a check to himself and his then fiancee; $90,000 in gifts to his two brothers; $133,500 to an individual who had not invested in the scheme; $171,000 to a Third Financial Ventures account; and $41,994 for personal expenses including loan repayments.
So did McKinney. Through ITP, a corporate entity through which he operated, McKinney raised over $5.6 million from investors between February 1999 and April 2001, $4.2 million of which he sent to Thorn. McKinney used the remaining $1.4 million—as well as over $200,000 in unidentified deposits—as follows: $75,169 in cash withdrawals; $329,850 in payments to himself; $129,829 in various debit card purchases, mortgage payments and bank fees; $318,980 in payments to non-investor entities; $149,006 in checks to ITP; and $614,900 in transfers to unrelated ITP brokerage accounts, which was subsequently lost in domestic trading.
The SEC also introduced the expert testimony of Leonard Zawistowski, a Senior Special Investigator for the Federal Reserve, who explained that the defendants' investment programs contained many of the features of a Ponzi scheme:
(1) [T]he [d]efendants claim to invest in offshore jurisdictions; (2) the investments are allegedly made through the purchase of bank instruments with "blocked" funds; (3) the instruments are alleged to be traded at deep discounts to generate high yields; (4) the [d]efendants promise extraordinary returns to investors; (5) the [d]efendants claim involvement by the Federal Reserve in the purported trades; and (6) the [d]efendant[s] claim that the programs may involve some humanitarian project or goal.
D. Ct. Op. at 18 (summarizing SEC Exhibit 25).
All three of the defendants, the evidence also showed, were not securities-industry neophytes. Thorn was a stockbroker at Merrill Lynch and Morgan Stanley Dean Witter from March 1991 to November 1996. SEC Exhibit 3. Malizia was a registered representative at Merrill Lynch from October 1987 to May 1995 (when he met Thorn) and a Morgan Stanley branch office manager from 1995 to 1998. McKinney worked as a registered representative at Merrill Lynch from November 1991 to August 1992 (when he met Thorn) and as an insurance agent and stockbroker for Hamilton Investments, Linsco Private Ledger and Mutual Service Corporation from February 1994 to December 1999.
Despite this experience, Thorn never received any documents confirming that trading had occurred in the investment programs, and he never witnessed any trading. Instead of verifying the validity of the...
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