S.E.C. v. Randy, 94 C 5902.
| Decision Date | 02 March 1999 |
| Docket Number | No. 94 C 5902.,94 C 5902. |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Michael RANDY, a debtor in bankruptcy, P. Michael Goodman, Peter W. Woodbridge, a debtor in bankruptcy, Michael J. Clark, James C. Morris, David C. Wiley, George J. Conway, David A. Johnston, H. Ralph Sylvester, Donald R. Krueger and John C. Hawver, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
The Securities and Exchange Commission ("SEC") filed this action against eleven individuals alleging that they violated the registration and anti-fraud provisions of the federal securities laws by engaging in a scheme to defraud over 500 public investors out of approximately $16 million by offering and selling bogus certificates of deposit issued by an entity called Canadian Trade Bank. The SEC alleges that defendants violated Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. § 77e(a) and (c), by offering and selling certificates of deposit that were not registered with the SEC. The SEC also alleges that the defendants violated Section 15(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(a)(1), by engaging in securities transactions for others while not registered as broker-dealers. The SEC also claims that defendants committed fraud in violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5.
Since the SEC filed its complaint on September 27, 1994, defendants Morris, Woodbridge, Clark, and Wiley have settled with the SEC. Defendants Randy, Slyvester, Conway, Krueger, Hawver, and Goodman have defaulted and this court has entered final judgment against them. David A. Johnston is the only remaining defendant. The SEC has filed a motion for summary judgment against Johnston on all counts of the complaint. For all of the foregoing reasons, this court grants the motion for summary judgment.
The following facts, taken from the parties' 12M and 12N statements and accompanying exhibits, are undisputed unless otherwise noted. In 1988, Michael J. Randy ("Randy") contracted with WFI of Beverly Hills, California to create Canadian Trade Bank in the Caribbean Colony of Monteserrat, a tiny island in the British West Indies. WFI was a corporation that was in the business of organizing, establishing, and selling previously unnamed banks on the islands of Montserrat and Grenada. Later in 1990, in an effort to eliminate "paper banks" that had no employees and no assets beyond the name and the banking license, the government of Montserrat sent notices of revocation to a number of banks including Canadian Trade Bank. The government informed Canadian Trade Bank that its license would be revoked because it failed to maintain a $300,000 minimum capital requirement. When Canadian Trade Bank failed to respond, the Montserrat government revoked the license.
Thereafter, in March 1990, Randy organized Canadian Trade Bank under the laws of Granada and attempted to establish it as a licensed bank. Because Granada had no law authorizing the licensing of offshore banks, Randy simply called Canadian Trade Bank a bank and conducted illegal and unauthorized bank business. Canadian Trade Bank had no assets, employees, or established business. In 1991, Granada began to tighten up its banking laws and required all companies acting like banks to become licensed. Canadian Trade Bank did not apply for a license and so in December 1991 it was eliminated from the rolls of registered corporations. From at least September 1990 through December 1992, Randy did business as Canadian Trade Bank, operating from his residence in Richton Park, Illinois. Randy controlled all operations and assets of Canadian Trade Bank from his home offices in Illinois. During this period, Randy also did business as International Brokers and as the God Is Real Universal Life Church, operating those companies from his home.
Randy advertised in "Broker World," a nationally circulated insurance trade publication. In "Broker World" Randy offered insurance professionals an opportunity to earn "big commissions" through the sale of high yield "domestic (FDIC-insured) CDs and international bank CDs." Through the advertisement, Randy developed a nationwide network of brokers who sold Canadian Trade Bank certificates of deposit. Randy also created false and misleading promotional literature that he distributed to investors and his salespersons. This literature falsely guaranteed that Canadian Trade Bank certificates of deposit would pay up to 12 to 14% interest annually that was compounded monthly, that Canadian Trade Bank maintained $100 in reserve for every $100 on deposit, that the bank was audited five times per year (one being a surprise government audit), and that Canadian Trade Bank's investment portfolio consisted of "only major national government bonds" and bonds of "major AA rated or better corporations."
The literature also falsely claimed that the certificates of deposit were safe investments that were fully insured to a minimum of 100% of each account by "International Insurance." Randy also claimed that the funds were insured by Lloyds of London (which demanded that he stop saying this), "Polaris" (which did not exist), and by international insurance companies that insured $150 for every $100 on deposit. Randy failed to disclose to investors that the Grenadian and Canadian governments had not legally licensed Canadian Trade Bank as a bank and that the U.S. government had not licensed it to conduct banking business. Randy also failed to disclose that the bank was not located in Montserrat, Grenada, or Canada, but that Randy conducted substantially all activities relating to Canadian Trade Bank at his offices in Illinois. Randy further failed to disclose that he used investor funds for, among other things, personal expenses, unrelated business expenses, paying off earlier investors, and speculative investments and loans.
Johnston first learned of Canadian Trade Bank in 1991 when he was contacted by Jim Conway. At that time, Johnston was a licensed Florida life and health insurance agent who sold various insurance products through Edison Worldwide Capital, a company he formed in 1990. Conway provided Johnston with Canadian Trade Bank promotional literature that described the purported advantages of the certificates of deposit and provided favorable comparisons of the international banking system to the U.S banking system. Conway explained that Canadian Trade Bank was a company doing business in Montserrat and Grenada. Subsequently, Johnston met with Conway and they both spoke with Randy over the telephone. Randy stated that he was dealing with offshore banks but did not provide their names. Randy told Johnston that Conway had been selling the certificates of deposit and that Conway would give him the necessary information. Randy also gave Johnston the telephone number of a contact person in Montserrat he could call to verify the information Randy had given him.
Shortly after the telephone call with Randy, Johnston and Conway contacted Montserrat to verify that Canadian Trade Bank was licensed to conduct business as a bank. Johnston and Conway spoke with a barrister who informed them that Canadian Trade Bank's charter was revoked in Montserrat and that it was moving to another island. Despite this information, Johnston agreed to sell Canadian Trade Bank certificates of deposit. In late 1991, Johnston was joined at Edison Worldwide by Ralph Slyvester, a licensed insurance agent in Florida. Johnston introduced Slyvester to Conway so that Slyvester could sell Canadian Trade Bank certificates of deposit. Johnston and Slyvester agreed to sell the certificates in exchange for a 10% commission. Johnston and Sylvester agreed to divide equally any commissions received from the sale of insurance products through Edison Worldwide. Conway, claiming to be the Canadian Trade Bank representative in Florida, demanded a percentage of the commissions Johnston and Sylvester received for referring them to the bank.
Johnston and Slyvester then began, along with other sales agents at Edison Worldwide, to offer and sell Canadian Trade Bank certificates of deposit. Johnston conducted seminars to discuss the certificates. From 1991 to 1993, Johnston conducted two luncheon investment seminars as the President of Edison Worldwide in which he presented information about the certificates of deposit. These seminars were intended for, and attended by, elderly retirees who were looking for safe, conservative investments. At some of these seminars, Johnston and other Edison Worldwide agents spoke about various safe investment vehicles, including annuities. Johnston presented Canadian Trade Bank certificates of deposit as a safe investment that paid a high rate of return. Johnston and other Edison Worldwide agents requested potential investors to sign a card to schedule an appointment to discuss further the certificates of deposit. In some instances, Edison Worldwide agents gave investors documents on Canadian Trade Bank and international banking.
Typically, after the seminars, Johnston and other Edison Worldwide agents met with potential investors at their homes. During these meetings, Johnston and the agents would stress the certificates' exceptionally high rate of return and its safety and would give the investors literature on Canadian Trade Bank. Johnston and the other agents helped the investor complete an application or "CD Purchase Order" form that included the terms of their investment....
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