The opinion of the court was delivered by: PAUL L. FRIEDMAN
On the motion of the plaintiff Securities and Exchange Commission, the Court entered an Order to Show Cause why defendants Bankers Alliance Corp., Lee Financial Group, Ltd., L.F.S. Lee Financial Services, B.A. Holding Co., Roy Lee, Steven Higley, Allan Nash and John Finegan (the "Bankers Alliance defendants") should not be held in civil contempt. The Court gave counsel for defendants an opportunity to file an opposition and scheduled a hearing for Wednesday, March 29, 1995. Prior to the hearing, counsel for the Bankers Alliance defendants filed a motion to reschedule the herring and a motion for leave to withdraw as counsel.
Since at least March of 1994, defendants or their predecessors have solicited investor funds through personal contacts and through advertisements in the Wall Street Journal and USA Today. Declaration of Howard T. Carolan, Jr. ("Carolan Decl.") at PP 5,7 and Ex. 3. The defendants have induced potential investors to invest approximately $ 3.7 million in $ 200,000 minimum investments in a program using investor funds for purportedly highly leveraged trading in foreign currencies and debentures. The defendants have projected profitability of as high as 15 percent per week, and solicitations included in the Wall Street Journal and USA Today have stated in bold print: "We will pay two times any published rate of return." Carolan Decl. P 5, Exs. 1 & 3.
In its complaint and in the declaration of SEC attorney Howard T. Carolan, Jr., the SEC has described a series of allegedly misleading and inconsistent representations and claims that have been made to potential investors, including statements that Bankers Alliance is an affiliate of one of the world's largest financial institutions, that it has existed for hundreds of years when in fact it was just incorporated in 1993 and receives all of its calls through a telephone answering service, that it represents 22 trusts and holding companies, that it has funds of at least $ 50 million from other investors, that it controls one-fourth of the world's largest currency trading markets, and that it has been checked out with the SEC and is legitimate. Carolan Decl. at PP 13, 24, 31, 51, 63, 66, 69, 76, 81.
Potential investors have been told different stories about what the investment actually is and have been given different information as to exactly how their money will be used and what rate of return to expect. According to the SEC, Bankers Alliance has told some investors that if they invest $ 200,000 their returns will in fact be based on an investment amount of one million dollars, has told some investors that Bankers Alliance will double whatever return the investor is currently receiving, and has told others they will receive a return of approximately 30 percent per month. Carolan Decl. at PP 5, 8, 46, 57, 65, 83. The SEC alleges that through these activities the defendants have engaged in transactions, acts, practices and courses of business that constitute violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
On February 16, 1995, the Commission issued a formal order of private investigation pursuant to Section 20(a) of the Securities Act and Section 21(a) of the Securities Exchange Act and authorized designated members of the staff of the Division of Enforcement to issue subpoenas compelling witnesses to appear for testimony and to produce documents. Declaration of Jonathan I. Golomb, executed on February 28, 1995, ("Golomb Decl.") at PP 2-3, Ex. 1. A subpoena for document production was issued to Bankers Alliance and served upon defendant Roy Lee as its designated agent for service. Subpoenas requiring the appearance for testimony and production of documents were issued and served upon defendants Roy Lee and Allan Nash, among others. Id. at P 3. All defendants served with subpoenas refused to comply. Id. at P 4. In nearly identical letters to the SEC staff, defendants Lee and Nash asserted that they were "unaware of any activity" on the part of Bankers Alliance or themselves "which would require Securities and Exchange Commission regulation," and refused to appear for testimony. Each noted, "I will comply to any court order and/or request so described by your office." Golomb Decl., P 5, Ex. 2. In response to a telephone call from the SEC, defendant Lee left a voice mail message stating that he would not provide information absent a court order. Golomb Decl. at P 7.
According to the SEC, there is evidence that some of the defendants discouraged investors from cooperating with the Commission's investigation. For instance, Bankers Alliance sent a telecopy instructing Bankers Alliance's investors that if they were contacted by the SEC they should contact defendant Allan Nash, who would "direct this information to the legal department for immediate action." Carolan Decl., Ex. 8. One investor, after being interviewed by the SEC staff, agreed to provide a declaration, but later refused to do so after defendant Wayne Wakefield told him that Bankers Alliance's lawyers were handling the matter, that no investors had complained to the SEC, and that the SEC was just harassing Bankers Alliance. Carolan Decl. at P 28. Another investor who had agreed to testify informed the staff, after talking with representatives of Bankers Alliance, that he would not testify absent a court order. Id. at P 38.
II. COMPLAINT, TRO AND PRELIMINARY INJUNCTION
On March 1, 1995, the SEC filed a complaint in this Court alleging that defendants had violated 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, as well as Section 17(a) and Sections 5 and 5(c) of the Securities Act, 15 U.S.C. §§ 77g(a), 77e(a), 77e(c). It requested a permanent injunction restraining and enjoining the defendants from further violating the Exchange Act and the Securities Act, directing the defendants to disgorge all illegal gains, together with prejudgment interest, and directing defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3). The SEC also filed an ex parte application for temporary restraining order, asset freeze, accountings and order to show cause.
Upon consideration of the SEC's ex parte application, affidavits in support thereof, exhibits thereto and memoranda of law, the Court entered the requested temporary restraining order on March 2, 1995. The Court directed the defendants to hold and retain within their control, and otherwise prevent any disposition, assignments or concealment of any funds or assets received from any actual or potential investors or any other person pursuant to the acts and practices described in the complaint, or any funds or assets held by them, under their control or over which they exercise actual or apparent investment or other authority. It further directed them to cease from soliciting, receiving or depositing into any account any additional investor funds, from advertising or promoting their investment schemes, and from offering to sell or selling investments relating to currency transactions, debenture transactions, off-shore funds, letters of credit or roll programs. The Court also ordered the defendants to file with the Court and serve upon the Commission a sworn accounting and to take steps to repatriate to the United States all funds and assets of investors, partners or associate partners described in the complaint held by them or under their control and to provide a written description of the funds and assets repatriated. The Court restrained the defendants from destroying, concealing, altering or disposing of any documents relevant to this matter. The Court directed the defendants to appear on March 13, 1995, for a hearing on the SEC's application for a preliminary injunction.
Prior to the March 13, 1995 date set for hearing, the defendants retained counsel who met with counsel for the SEC. Counsel for the SEC and counsel for all of the defendants negotiated consents to the entry of preliminary injunctions which in large part continued the terms of the Temporary Restraining Order, with some modifications as negotiated by counsel. Each of the Bankers Alliance defendants and their counsel signed the same consent Preliminary Injunction, as did counsel for the Commission. Defendant Steven Higley signed for Bankers Alliance, and defendant Roy Lee signed for the other entities. The consent Preliminary Injunction was approved by the Court on March 13, 1995, without the necessity for a contested hearing.
all funds received from investors, partners, associate partners, or any other person in connection with the activities alleged in the complaint, including a list of:
(i) the name, address, and telephone number of each investor, partner, or associate partner; and
(ii) the amount invested by each investor, partner, or associate partner and a statement of the location and disposition of any funds received from investors, partners, associate partners, or other person;
Preliminary Injunction at 11-13 (March 13, 1995).
Paragraph VIII of the consent Preliminary Injunction ordered that the defendants "and each of them"
a. will, no later than March 20, 1995, or on such other date as the Commission shall agree, repatriate to the territory of the United States all funds and assets of United States investors, partners, or associate partners which are held by them or are under their direct or indirect control, jointly or singly, and deposit such funds into the registry of the United States District Court for the District of Columbia; and
b. provide the Commission and the Court a written description of the funds and assets so repatriated.
Late in the day of March 13, 1995, the Bankers Alliance defendants submitted a joint sworn accounting to the SEC. Accounting of Bankers Alliance Corporate Defendants ("Joint Accounting"), Plaintiff's Exhibit No. 1 at Contempt Hearing. The Joint Accounting reflected a total of $ 3.725 million that had been received from investors, the names of the investors and the amount invested by each. The Joint Accounting, however, disclosed no information about the current location and disposition of investor funds, as required by the Preliminary Injunction. Instead, it stated that
A certificate of deposit (Cert. No. 931101.0828/USD-IBD) in the face amount of USD $ 5,000,000 maturing on November 1, 1995, issued by the Industrial and Commercial Bank of China, Shangro Branch on November 1, 1993, is available to be liquidated by Steven Higley to generate funds for repatriation to the United States.
On the morning of March 20, 1995, the deadline for repatriation of investor funds under the Court's Order, the Bankers Alliance defendants informed the SEC, through counsel, that they were unable to liquidate or free up the necessary funds but expected to be able to do so by the end of the week. Declaration of Jonathan I. Golomb ("Second Golomb Decl."), executed on March 22, 1995, at P 5. Counsel also informed the SEC that the Bankers Alliance defendants were sending, for delivery on Wednesday, March 22, 1995, an original certificate of deposit in the amount of $ 5 million from a bank on mainland China, and a document evidencing assignment of that certificate of deposit to an entity controlled by defendant Steven Higley. Counsel asserted that this was being done to evidence the good faith of the Bankers Alliance defendants in attempting to repatriate the required funds. Id.
On March 22, 1995, the Bankers Alliance defendants, through counsel, advised the SEC that they were in the final stages of liquidating instruments that would yield cash for repatriation and hoped to repatriate those funds by Thursday, March 23, or by Monday, March 27, Singapore time (i.e., Sunday, March 26, in the United States) at the latest. Second Golomb Decl. at P 10. In the interim, counsel for the Bankers Alliance defendants would hold the original certificate of deposit and original assignment of rights. An examination of the certificate of deposit, which thereafter was provided to the Court, shows ...