Sec. & Exch. Comm'n v. Smith

• Decision Date: 02 July 2015
• Docket Number: Civil No. 14-cv-192-PB
• Citation: 2015 DNH 134
• Parties: Securities and Exchange Commission v. Allen R. Smith
• Court: U.S. District Court — District of New Hampshire

2015 DNH 134

Securities and Exchange Commission v. Allen R. Smith

Civil No. 14-cv-192-PB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

July 2, 2015

MEMORANDUM AND ORDER

The Securities and Exchange Commission (the "SEC") claims in this securities fraud action that Allen Smith participated in an advance-fee investment fraud scheme in his capacity as an attorney and fiduciary. The SEC now moves for summary judgment and asks the court to impose injunctive relief, disgorgement, and a monetary civil penalty against Smith. Most of the SEC's claims require proof of scienter, which ordinarily must be resolved during a trial. Here, however, the SEC has produced compelling evidence of Smith's involvement in the fraud, and Smith's meager opposition to the SEC's motion neither identifies a genuine dispute of material fact nor explains why the SEC's motion should be denied. Accordingly, I determine that the SEC is entitled to summary judgment on both its substantive claims and its requests for disgorgement and permanent injunctive relief. But because the SEC's claim for a monetary penalty requires further factual and legal development, I deny the SEC'srequest for a civil monetary penalty without prejudice to its right to renew its request in a properly supported motion.

I. BACKGROUND

The SEC alleges that Smith participated in an investment fraud scheme in his capacity as an attorney and fiduciary. I first summarize the scheme itself and then describe Smith's involvement.

A. The Fraudulent Scheme

Between 2009 and 2011, Martin Schläpfer, James Warras, and Hans-Jurg Lips (the "Principals") conducted an advance-fee investment scam that defrauded more than 30 investors out of over $10.8 million. The Principals conducted their fraud through a number of business entities, including:

• Malom Group AG (with "Malom" being an acronym for "make a lot of money"), a Swiss business organization run by Schläpfer and Lips.

• Northamerican Sureties (Europe) AG ("NAS Europe"), another Swiss business organization where both Schläpfer and Warras served as executives.

• Northamerican Sureties Ltd. ("NAS Ltd."), a Utah organization that specialized in issuing surety bonds guaranteeing loan performance. Although Schläpfer was a board member of both NAS Europe and NAS Ltd., the two firms were separate entities.

• M.Y. Consultants, Inc., a Nevada firm with few, if any, regular employees that facilitated Malom's transactionswith investors.

• Maxmore Corporation Ltd., a Hong Kong business organization of which both Schläpfer and Warras were principals.

The Principals devised two separate investment scams. The first, which the SEC calls the "joint venture offering," lasted from August 2009 until August 2011. For an advance fee of between $150,000 and $200,000, this scam invited investors to enter into joint venture arrangements with several of the business entities controlled by the Principals, most frequently Maxmore. Those entities, the Principals claimed, would then use their capital to purchase U.S. treasury securities at a discount, resell them for a 100 percent profit, and repeat the cycle, generating a significant yield on the investors' original contribution. In fact, the entire arrangement was fraudulent; no such trades ever took place. The Principals raised $7.5 million through 25 such joint venture agreements, $7.3 million of which was lost to the fraud's victims.

The second scam, which the SEC calls the "structured note offering," lasted from February 2011 until the fall of 2011. Unlike the joint venture offering, the Principals conducted the structured note offering only through the Malom entity. Through this scam, the Principals would invite investors to contribute an "underwriting fee" that would allow the Principals tosecuritize, register, and issue "structured notes" in various and unspecified "Western European exchanges." Once issued, the Principals promised, these securities would generate significant returns on the investors' initial contributions. As with the joint venture offering, the structured note offering was fraudulent; no notes were ever created or traded. Six investors were defrauded out of $3.35 million through the structured note offering scam. One of these investors was USA Springs, Inc., a New Hampshire firm that was undergoing bankruptcy proceedings in this District when, seeking to raise new financing for its restructuring plan, it agreed to participate in the offering.

Based on their alleged involvement in the scheme, Schläpfer, Lips, Warras, and the Malom entity are all named as defendants in an SEC civil enforcement action in the District of Nevada.¹ This action is stayed pending resolution of a separate criminal action in that District against the same defendants, which also arises from their involvement in the scheme.²

B. Smith's Involvement

Smith, a licensed attorney, was admitted to the Florida bar in 1974. Since then, he has practiced mostly criminal law, although he has done some civil work as well. He has no experience in international banking and finance, structured notes, or bank instruments. In 2008, Smith began to accept work as a "paymaster" for several clients engaged in various financial investment transactions. As paymaster, Smith would receive third-party investor funds into his attorney trust account, which he would then disburse either to his clients or to other third parties at his clients' direction.

Smith's involvement with the scheme's Principals began in late 2008, when Smith met Warras, who was then the executive vice president of NAS Europe. Between 2008 and 2010, Smith's involvement with the Principals and their business entities was minimal. In April 2010, however, Smith began to act as a paymaster for NAS Europe, Malom, and some of the other business entities used by the Principals. In this capacity, Smith received and disbursed millions of dollars of funds received from investors who had been deceived into participating in the two fraudulent schemes.

Smith's role in the scheme expanded in early 2011, when he agreed to represent Malom as its attorney. In that role, Smith made a number of material statements that proved to be false in a series of communications to prospective investors whom the Principals were trying to persuade to invest in their schemes. These communications and misrepresentations include:

• An April 2011 certification letter to prospective investors. Although one of the Principals' associates appears to have drafted the letter, Smith signed it and placed it on his attorney letterhead. Knowing that the Principals planned to show the letter to prospective investors, Smith made a number of material representations in the letter that appear to be false based on the summary judgment record. These include a claim that Smith had represented Malom in transactions "measured in the hundreds of millions of US dollars" and a certification that Malom had sufficient liquidity to honor refund requests from investors.³

• A series of letters and emails, which the SEC calls the "lulling communications," that the Principals asked Smith to send to investors who had already invested in the scheme but had not yet received any refund or return on their investments. Smith did so shortly after he signed the April 2011 certification letter. In these communications, Smith assured the investors that the Principals were working on a "Senior Life Settlement" transaction that would yield investors their promised returns within one week. In fact, no "Senior Life Settlement" transaction ever existed. The SEC alleges that the Principals askedSmith to send these communications to the fraud's victims to lull them into inaction.

• A series of communications to USA Springs, Inc., a New Hampshire firm undergoing bankruptcy proceedings in this District that needed to find a new source of financing to avoid liquidation. Beginning in early 2011, Malom's Principals sought to raise $2.4 million from USA Springs, which they characterized as an "underwriting fee," through their structured note offering fraud. As part of this effort, Smith sent USA Springs a number of emails containing misrepresentations similar to those he made in the April 2011 certification letter - for instance, that Malom had conducted transactions involving hundreds of millions of dollars and that Malom and its Principals had sufficient liquidity to honor refund requests. Smith repeated these misrepresentations during multiple telephone calls and personal meetings with both USA Springs officials and attorneys and the Creditors' Committee for the USA Springs bankruptcy. USA Springs, convinced that Malom was legitimate and that Malom's structured note offering was viable, finally agreed to invest with Malom. Malom allowed USA Springs to participate for a reduced "underwriting fee" of $1.2 million, which USA Springs raised from third-party investors.

• A "certification" regarding Malom that Malom was required to submit as part of its transaction with USA Springs. The certification, which Smith signed, contained a number of apparent misrepresentations, most notably Smith's verification that USA Springs' investment was secured by a freely assignable and negotiable "bank draft" issued by a certain Swiss bank. In fact, Malom held no assets at that bank at the time Smith made this statement. No such instrument ever existed, at least authentically.

Smith received $39,525 from Malom in compensation for his paymaster work and legal representation, all of which originated from investor funds. His participation in the fraud contributed to the decisions of at least four investors to invest theirmoney in the scheme, causing them to lose over $2 million.

II. STANDARD OF REVIEW

Summary judgment is appropriate when the record reveals "no genuine dispute as to any material fact and [that] the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Where, as here, the moving party bears the burden of proof, summary judgment may not...