SEC v. Cross Financial Services, Inc.

• Decision Date: 05 September 1995
• Docket Number: No. CV 94-4228 RAP (Ex).,CV 94-4228 RAP (Ex).
• Citation: 908 F. Supp. 718
• Court: U.S. District Court — Central District of California
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CROSS FINANCIAL SERVICES, INC., et al., Defendants.

908 F. Supp. 718

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CROSS FINANCIAL SERVICES, INC., et al., Defendants.

No. CV 94-4228 RAP (Ex).

United States District Court, C.D. California.

September 5, 1995.

Elaine M. Cacheris, Sandra J. Harris, Robert D. Laframenta, Karen Matteson, Kathleen Herkenhoff, for Plaintiff.

Richard C. Chier, Mark T. Mauerman, Arthur H. Barens, Brian O'Neill, Edward Klein, Charles E. Slyngstad, Alfred V. Greco, Rigoberto

Obregon, M. Nelson Segel, for Defendants.

ORDER GRANTING SECURITIES AND EXCHANGE COMMISSION'S MOTIONS FOR SUMMARY JUDGMENT AGAINST DEFENDANTS FOX, FRANKLIN, CROSS, SIEMENS, AND RELIEF DEFENDANT COLELLO AND DENYING COLELLO'S MOTION TO DISMISS OR FOR SUMMARY JUDGMENT

PAEZ, District Judge.

I INTRODUCTION

This case illustrates the adage "if it sounds too good to be true, it probably is." From March 1993 through June 1994, defendants devised and participated in a scheme to raise money from investors by representing that they would use investors' funds to engage in factoring accounts receivable.¹ Defendants represented that investors would receive returns at an annual rate between fifteen and twenty percent and that their investments were low risk. Defendants never, however, factored even one account. Although defendant Cross Financial Services later changed its business focus from factoring to purchasing letters of credit, defendants continued to promise the same high rates of return and low risk and used the same means to solicit and obtain investor funds.

Defendants raised more than $21 million from over 700 investors nationwide. Defendants never complied with the securities registration requirements; misappropriated investor funds for their own purposes and without ever disclosing their duplicity to those investors; and operated a Ponzi scheme. CFS never loaned investor funds to entities secured by accounts receivable (the stated business purpose of CFS) and paid nearly $4 million to defendant Colello to buy "false" or uncollectible letters of credit.

After conducting an investigation, the Securities and Exchange Commission ("SEC" or "Commission") filed its Complaint for Temporary Restraining Order, Preliminary and Permanent Injunctions, Appointment of a Receiver, and Other Equitable and Legal Relief ("the Complaint") against Cross Financial Services, Inc. ("CFS"), Owen R. Fox, Carroll E. Siemens, Bruce Franklin, Michael J. Colello, and Douglas S. Cross on June 23, 1994. That same day, the SEC applied ex parte for a "Temporary Restraining Order, Temporary Orders: (1) Prohibiting the Transfer of Assets and Destruction of Documents; (2) Freezing Assets; (3) Appointing a Receiver; and (4) For an Accounting, Order to Show Cause Why a Preliminary Injunction Should Not be Granted and the Temporary Orders Should Not Be Continued, and Request for Waiver of Notice Pursuant to Local Rule 7.18.2" ("the Ex Parte TRO Application"). The Commission submitted three volumes of exhibits supporting its application.

Judge Hatter entered an order granting the SEC's Ex Parte TRO Application on June 23, 1994, appointing Richard G. Shaffer the temporary receiver. The Court then issued a preliminary injunction with respect to two of the defendants, CFS and Franklin, on July 5, 1994. The Court also appointed a permanent receiver over Cross Financial Services, Inc. that same date.

The case was then transferred to this Court, and on July 26, 1994, the Court issued a preliminary injunction enjoining Fox, Siemens, and Cross, but not Colello. On July 27, 1994, the Court entered a separate order denying the SEC's request for a preliminary injunction against Colello and other relief and dissolving the June 23, 1994 temporary restraining order against him.

The SEC's First Amended Complaint was filed on May 8, 1995. The Commission changed defendant Colello's status to a "nominal" or "relief" defendant and deleted its request for damages.

The SEC has moved for summary judgment against defendants in two stages. First, as against Fox, Franklin, and Cross, the SEC contends that no genuine issue of material fact exists regarding defendants' offer and sale of unregistered securities to the public and their untrue statements and omissions of material fact in the course of offering and selling the securities (that is, the promissory notes CFS had its investors sign). The SEC also sought summary judgment against relief defendant Colello in the same motion, requesting that the Court order him to disgorge funds he received to purchase the uncollectible letters of credit ("LCs").

Only Colello opposed the first motion. He also moved to dismiss or for summary judgment on the grounds that the court lacked subject matter jurisdiction and that the SEC failed to state a claim against him as a nominal defendant.²

The SEC subsequently moved for summary judgment against defendant Siemens. Siemens filed no points and authorities in opposition to the motion, although he submitted two declarations, certain documents, and a Statement of Genuine Issues. Rule 7.6 of the Local Rules of the Central District of California requires a party opposing a motion to file and serve the evidence it relies on and "a brief but complete memorandum which shall contain a statement of all the reasons in opposition thereto and the points and authorities upon which the opposing party will rely." Failure to do so "may be deemed by the Court consent to the granting ... of the motion." L.R. 7.9. Although the Court could find that Siemens failed to oppose the SEC's motion, the Court considered Siemens' "evidence" and declarations on the merits, as discussed below.

For the reasons set forth in this order, the SEC's motions for summary judgment against defendants Fox, Franklin, Cross, Siemens, and nominal defendant Colello are granted and Colello's motion to dismiss or for summary judgment is denied. This order constitutes the Court's reasons for finding that there are no material triable issues of fact and that plaintiff is entitled to judgment as a matter of law. Fed.R.Civ.P. 52(c).

II FACTUAL BACKGROUND³

Defendant Carroll E. Siemens ("Siemens") has worked as a consultant since 1985, advising ten to fifteen companies where to go to incorporate and to obtain loans. He does business as Siemens, Inc. and Siemens Consultants. Siemens is the president, director, and sole shareholder of Siemens, Inc., which has never had a physical office. Siemens, Inc. has had bank accounts located at Bank One in Phoenix, Arizona and First Interstate Bank in Las Vegas, Nevada. He signed the signature card for the Siemens, Inc. account at Bank One.

Siemens used the name "IGOC" for his Bank One account in which he deposited consulting fees. He signed the signature card for the IGOC account at Bank One's corporate predecessor, Valley National Bank. He also signed a signature card on the Bank One account for Marquis Management Group, Inc. ("Marquis"), which listed him as president. Siemens' wife signed the signature card as a director of Marquis. Siemens signed checks on the Marquis account at Bank One.

Siemens previously consulted for American Contractors Funding ("ACF"), which factored U.S. government accounts receivable. Siemens and defendant Bruce Franklin found investors for ACF.

Franklin introduced Siemens to defendant Douglas S. Cross in 1993. Siemens picked up Cross at the Phoenix airport and drove him to ACF's office. Siemens brought Cross to ACF as an investor.

Cross consulted Siemens in early 1993 for advice about setting up as a Nevada corporation the entity that became defendant Cross Financial Services. Cross told Siemens that he wanted to go into government contracting, and Siemens understood that Cross was setting up CFS as a factoring company. Cross and his wife, Kathleen Cross, met with Siemens in February 1993 to discuss CFS's factoring operations and how to raise money from individuals. Siemens also met with Franklin and Cross to discuss where to incorporate CFS and the interest rates CFS would pay its investors. Siemens gave Cross the name of an incorporator, told him where to go to the library to research, and advised him that he needed an attorney. Siemens accompanied Cross to Bank One to set up the CFS bank account. Siemens also accompanied Cross and spent four hours with him while Cross explained to the Securities Division of the Secretary of State's office in Nevada what CFS was going to do. Cross later contacted Siemens to determine whether he had obtained CFS's license from the City of Las Vegas to do business in the State of Nevada.

Cross Financial Services was incorporated in Nevada in March 1993 and had an office in Las Vegas. Siemens physically occupied the CFS Las Vegas office, received telephone calls on the CFS line, and deposited checks to the CFS Bank One account. Cross testified that Siemens "was largely responsible for starting me up in business; ... he indicated that he would help me raise the money and place the money." Cross also testified that Siemens "put Bruce Franklin on as chief financial officer and would work with other consultants who would assist in raising money from private lenders."

Douglas S. Cross, age 43, was CFS's President, treasurer, secretary, and sole shareholder from March through November 1993. As President, Cross wrote all checks and made all the wire transfers for CFS, oversaw its bank account, kept track of the investors to be sure they were paid, sent promissory notes to the investors for their loans, and paid the sales consultants. He also sent welcome letters to investors and made oral representations to investors about CFS.

Bruce Franklin, 32, was CFS's Chief Financial Officer from March through December 1, 1993. He worked at the Las Vegas office and read all incoming correspondence. Franklin helped market the CFS Promissory Notes, acted as a sales consultant, and worked with (helped train) other sales consultants for CFS until at least December 1993. He apprised Siemens...