S.E.C. v. Lybrand
| Decision Date | 10 May 2002 |
| Docket Number | No. 00 CIV.1387 SHS.,00 CIV.1387 SHS. |
| Citation | 200 F.Supp.2d 384 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Peter C. LYBRAND, f/k/a Peter C. Tosto, Richard S. Kern, Donald R. Kern, Charles Wilkins, Admiral Investments Ltd., Compulink International Corp., Drawbridge Investments Ltd., Glittergrove Investments Ltd., Grafton Investments Ltd., Greenford Investments Ltd., McDonalds Ltd., Oasis Enterprises Ltd., Investor Relations, Inc., Tellerstock, Inc., Conversant Enterprises, Inc., EFI Corp. a/k/a Electronic Funds, Inc., Barclay Bankcard, Inc., Canyon Vista Corp., Salteaux Ltd. a/k/a First American Security Corp. a/k/a First American Securities Corp., Defendants, and Hannah G Irrevocable Trust and Hannah R Trust, Relief Defendants. |
| Court | U.S. District Court — Southern District of New York |
Antonia Chion, William R. Baker, III, Christian J. Mixter, Charles J. Clark, Christina S. Yu, Securities and Exchange Commission, Washington, DC, David P. Stich, Solomon, Pearl, Blum, Heymann & Stich, L.L.P., New York City, for Securities and Exchange Commission, Plaintiff.
David P. Stich, Solomon, Pearl, Blum, Heymann & Stich, L.L.P., New York City, for Peter C. Lybrand, Richard S. Kernn, Donald R. Kern, Charles Wilkens, Admiral Investments Ltd., Compulink International Corp., Drawbridge Investments, Ltd., Glittergrove Investments Ltd., Grafton Investments Ltd., Greenford, Investments Ltd., McDonalds Ltd., Oasis Enterprises Ltd., Investor Relations, Inc., Tellerstock, Inc., Conversant Enterprises, Inc., EFI Corp., Barclay Bankcard, Inc., Canyon Vista Corp., Salteaux Ltd., Hannah G. Irrevocable Trust, Hannah R. Trust, defendants.
Sheryl A. Whipple, Brenman, Bromberg & Tenenbaum, PC, Denver, CO, for Canyon Vista Corp.
The Securities and Exchange Commission ("SEC") brought this civil enforcement action charging Peter C. Lybrand, Richard S. Kern, Donald R. Kern and Charles Wilkins with violations of the securities laws in connection with the public sale of shares in three "shell" corporations. The SEC alleges that 1) Lybrand, Wilkins and the Kerns illegally traded securities in interstate commerce without filing the registration statements required by Sections 5(a) and (c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) and 77e(c); and 2) Lybrand, aided and abetted by Wilkins and the Kerns, defrauded investors by engaging in matched trades of shares in those corporations in order to create the appearance of voluminous trading and artificially inflate the value of the shares in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10(b)-5 thereunder, 17 C.F.R. § 240.10b-5. The corporations employed in the scheme and two trusts that received a portion of the proceeds were also named as defendants. Lybrand and the entities he controlled did not file or serve an answer to the complaint and the Court entered a default judgment against these defendants on March 29, 2002.1 The SEC has now moved for summary judgment against defendants Richard Kern, Donald Kern, Charles Wilkins, EFI Corp., Barclay Bankcard, Inc., Canyon Vista Corp., and Salteaux Ltd. on the Section 5 claim and against relief defendants Hannah G Irrevocable Trust and Hannah R Trust on the grounds that they received ill-gotten funds. Defendants have cross-moved for summary judgment on the aiding and abetting claim. For the reasons set forth below, the SEC's motion is granted and defendants' motion is denied.
Lybrand, formerly known as Peter Tosto, is a stock promoter and recidivist securities law violator who has participated in more than 22 separate incidents of illegal stock manipulation. See United States v. Browne, 130 F.Supp.2d 552, 554 (S.D.N.Y. 2001). In May 1994, Lybrand entered into a plea agreement with the United States Attorney for the Southern District of New York that obligated him, among other things, to truthfully respond to any inquiries the government made of him and to "not commit any further crimes whatsoever." (Simpson Dec. Ex. E, ¶ 12.) Notwithstanding this agreement, in April 1998 Lybrand began concealing from the government his ownership of eight foreign and three domestic entities originally named as defendants in this action. He continued to make false statements to the U.S. Attorney's Office and the SEC throughout their investigation of the transactions at issue in the present complaint until his arrest in February 2000. (Simpson Dec. SA1109-10.)
Richard Kern and his brother Donald have engaged in a number of small business ventures together. The Kerns jointly owned or controlled corporate defendants EFI Corp., also known as Electronic Funds, Inc. ("EFI"), Barclay Bankcard, Inc., and Canyon Vista Corp. (Simpson Dec. A265-67.) They also created relief defendants Hannah G Irrevocable Trust and Hannah R Trust, both of which are trusts benefitting the Kerns' respective children. (A269, B194.) Charles Wilkins owned and controlled corporate defendant Salteaux, Ltd., also known as either First American Security Corp. or First American Securities Corp. (A306-07.)
In the mid-1990s, the Kerns and Wilkins were jointly engaged in the business of creating and selling publicly traded "shell" corporations. (A140-45, A1026.) A "shell" corporation is one that has neither assets nor revenues and generally exists as a vehicle for another company's business activities. See Black's Law Dictionary 344 (7th Ed.1999). Once approved for public trading, such corporations could be sold for between $200,000 and $500,000, typically for merger with companies that were not approved for public trading. (See Bromberg Aff. B127.) In 1997 and 1998 defendants secured listings on the over-the-counter ("OTC") bulletin board market operated by the National Association of Securities Dealers ("NASD") for seven shell corporations, including the three corporations at issue in this action: Polus, Inc., Citron, Inc., and Electronic Transfer Associates, Inc. ("ETA"). (B194-95.)
Defendants followed essentially the same procedure for all the shell corporations they sold. (A148-53, B194-95.) First, they created a corporation or acquired a majority interest in an existing one and distributed its shares among friends and associates. After some time had elapsed, they submitted Form 211 filings pursuant to SEC Rule 15c2-11 for the corporation in order to register it on the NASD bulletin board. Defendants then sought a buyer for the corporation. After locating a buyer, defendants would gather the corporation's shares from their friends and associates, who in most cases had held the shares for more than two years, and transfer ownership of the company in exchange for an agreed purchase price.
Richard Kern founded Citron in 1993 and served as its president. (A418.) Richard Kern and his wife Debra were the company's only officers and directors. (A185-86, A413.) Shortly after its incorporation Citron issued 150,000 of the five million outstanding shares to Richard and Debra Kern, and the remainder to friends and associates of the Kerns. (A147, A188, A429-32.) Donald Kern incorporated ETA in 1996. (A481.) ETA issued 1.5 million shares to Richard and Debra Kern and another half million shares to friends and associates of the Kerns. (A505-08.) Wilkins purchased 98 percent of the outstanding common stock of Polus in July 1996. (A293.) He distributed the stock as gifts to relatives, friends, and business associates, including EFI, which acquired 12,000 shares. (A305, A307, A369-76.) Wilkins appointed Scott French, an acquaintance of his son, as president. (A5, A309-10.) Debra Kern, using her maiden name Debra Martinez, served as secretary, treasurer and director. (A345.)
In 1998, defendants submitted Form 211 statements for Polus, Citron and ETA to the NASD so that the companies could be listed on the bulletin board for public trading. (A183, SA 828, A339-529.) Defendants submitted the materials for Polus and Citron in March 1998, and the companies were cleared for public trading in June. (A342, A400, A409, A467.) They filed the Form 211 statement for ETA in September 1998 and received approval for public trading on October 6, 1998. (A476, A529.)
As defendants awaited approval for public trading of Polus and Citron, Lybrand contacted Thomas C. Laucks of Holladay Stock Transfer, the transfer agent for the shell corporations, and inquired if he knew of any public shell corporations for sale. (B120.) Laucks referred Lybrand to Wilkins, who in turn referred him to Richard Kern. In late May or June 1998, Lybrand spoke with Richard Kern and informed him that "he wanted to buy a shell corporation for his clients and he had a purpose that he wanted to use it for." (A166.) Richard Kern then negotiated with Lybrand, on behalf of himself, Wilkins and Donald Kern, to arrive at terms for the sale of Polus. (A167.)
Kern and Lybrand subsequently agreed that Lybrand's clients would pay $150,000 for as close to 90 percent of Polus' outstanding shares as defendants could deliver, and Lybrand's clients would have an option to buy an additional 5 or 6 percent of Polus for another $150,000. (A168.) Rather than transmitting the purchase money directly to defendants, Richard Kern and Lybrand agreed that Lybrand's investors would purchase Polus shares through the OTC bulletin board, with the money generated by such sales credited toward the $150,000 purchase price. (B23-24.)
Several weeks after beginning negotiations over Polus, Kern and Lybrand agreed on terms for the acquisition of Citron through essentially the same procedure. (A56-57, A107, A192, A197, A226.) The parties' subsequent agreement for ETA followed the same pattern, except that Lybrand agreed to pay $200,000 rather than $150,000 in the event his clients decided to acquire an additional 5 percent of ETA. (A240-41.) Unl...
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