UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION,
AMERICAN FINANCIAL GROUP OF AVENTURA, INC.,
AMERICAN WEALTH MANAGEMENT OF AVENTURA,
COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF
Plaintiff Securities and Exchange Commission ("Commission") alleges:
1. The Commission brings this action to restrain and enjoin Defendants from continuing to violate the federal securities laws in connection with their fraudulent offer and sale of securities in the form of investment contracts. From approximately 1997 through at least June 2002 (the "relevant time period"), Defendants American Financial Group of Aventura, Inc. ("AFG") and its "head trader" David H. Siegel ("Siegel") raised approximately $87 million from investors by selling them interests in a so-called "Restricted Stock Loan Program" ("Loan Program"). Siegel, a recidivist securities violator, has misappropriated investor monies, issued false statements to investors and absconded with all or nearly all of the Loan Program documents from AFG's offices. The Commission also brings this action to seek a temporary order freezing the assets of the Defendants and the Relief Defendant. Unless an asset freeze order is issued immediately, investor funds are at serious risk of continued diversion and theft.
2. Defendant AFG was incorporated in Florida in January 1992 and has offices in Aventura, Florida. AFG purportedly is a capital management company specializing in alternative investments, including investment opportunities in the restricted securities markets.
3. Defendant Siegel, age 65, resides in Ft. Lauderdale, Florida and is AFG's senior vice president and director of investments. On July 22, 1987, Siegel was enjoined as a result of an enforcement action brought by the Commission alleging that he participated in a stock manipulation scheme. SEC v. Magna Technologies, Inc., Case No. 87-2895 MRP GX. (C.D. CA). In addition, Siegel has an extensive disciplinary history in connection with violations of the securities laws.
4. Relief Defendant American Wealth Financial Group of Aventura, Inc. ("American Wealth") was incorporated in Florida in June 2000 and has offices located in Aventura, Florida. At least $200,000 of investor funds earmarked for the Loan Program was deposited with American Wealth.
JURISDICTION AND VENUE
5. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d) and 77v(a), and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d), 78u(e) and 78aa.
6. Certain of the acts and transactions constituting violations of the Securities Act and the Exchange Act have occurred within the Southern District of Florida. The offices of Defendant AFG are located within the Southern District of Florida, and Defendant Siegel resides in the Southern District of Florida. Defendants have engaged in many of the acts and practices complained of herein within the Southern District of Florida.
7. Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, the means and instruments of transportation and communication in interstate commerce, and the mails, in connection with the acts, practices, and courses of business complained of herein.
THE FRAUDULENT SCHEME
The Loan Program Offering
8. During the relevant time period, AFG raised approximately $87 million by offering and selling investment contracts in the form of fractional participation in its Loan Program. The investments in the Loan Program are investment contracts and, therefore, securities as defined by Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and Section 3(a)(10) of the Exchange Act, 15 U.S.C. § 78c(10).
9. Investors heard of the Loan Program investment by referrals and through word-of-mouth.
10. AFG's Loan Program purported to pool investor monies and then use those funds to make secured loans to various individuals and/or entities who were required to pledge restricted stock to AFG as collateral.
11. Investors relied on AFG to earn the promised returns on their investment interests in the Loan Program. Investors had no input in deciding whether AFG would lend money to a particular borrower or whether to approve a certain restricted stock as collateral. Moreover, investors had no role in AFG's management or operation.
12. The loans underlying the Loan Program would pay off in one of three ways: (1) the loan would mature full term, with all monthly interest payments made on schedule and the principal being repaid on the maturity date; (2) the borrower would repay the loan prior to the end of the contracted period and would pay all realized and accrued interest and any applicable pre-payment penalties; or (3) the loan would go into default.
13. Supposedly, if a borrower defaulted on a loan, AFG could seize title to its collateral through foreclosure and immediately sell the restricted securities into the market, i.e., the shares would then become free trading. In addition, AFG, through Siegel, would hedge its positions by shorting a portion of the securities in the borrowers' companies.
14. AFG claimed that there was full recourse to the borrower, and further that the lending process included obtaining loan documentation as set forth in a checklist, purportedly evidencing sound loans.
15. AFG's offering materials promised very high returns. The offering materials describe the collateral coverage as "4-5 times [the loan]," purport to offer investors the opportunity to receive monthly interest payments, and boast of "above average returns and low volatility." The materials describe the loans as "over collateralized" and tout AFG's purported "highly profitable niche-market."
16. AFG's offering materials promise investors returns of approximately 18-20% on their investments. Projected returns include 8% from loan interest plus additional 7% to 10% capital gains from hedging. According to the materials, the average loan period is 9-14 months, and a $100,000 minimum investment is required.
17. At least one investor was told that 60% of the investment would be used to fund the loans and that AFG would keep the remaining 40% to "hedge their positions."
18. Because of the collateral arrangement and the hedging (through short sales), investors were led to believe the risk of the investment was "extremely low."
19. Investors were told through AFG's offering materials and its website about the company's purported successful trading history, high rates of return, and the financial expertise and experience of those managing AFG. Siegel is described on AFG's website as having "over 25 years of experience in the brokering and fund management businesses . . . [and] is widely recognized as a leading expert in the field of restricted Securities [sic]." In fact, AFG's offering materials describe the company as "Your Specialist In Restricted Securities."
20. Neither the offering materials nor the website disclose the entry of a 1987 permanent injunction against Siegel for violations of the registration and antifraud provisions of the federal securities laws in connection with a stock manipulation scheme, or his other disciplinary history.
21. During the course of the scheme, Siegel and AFG caused investors to receive fraudulent periodic statements by providing false data to the investment groups who passed this information on to the individual investors.
22. The false monthly statements indicated that the Loan Program was showing consistently high returns, when, in fact, it was losing value due to Siegel's mismanagement and/or misappropriation of as much as $87 million in investors' assets. In fact, one investor received a statement showing that he had earned 21.93% over 256 days.
Role of Siegel
23. Siegel has been described by AFG's management and its investors as AFG's "head trader." Siegel had exclusive control over certain of AFG's books and records.
24. In fact, Siegel was the only person with a combination to AFG's safe containing all or nearly all AFG's Loan Program documents, including the restricted securities.
25. Siegel was responsible for the dissemination of the bogus monthly statements AFG sent to investors that represented false returns.
26. Siegel was also responsible for all of AFG's financial operations pertaining to the Loan Program.
27. Moreover, Siegel had signatory authority over most, if not all, of AFG's bank accounts and controlled the movement of funds in those accounts.
28. In addition, Siegel met with investors, explained the Loan Program to them, and described to at least one investor the success of AFG and his 15 or 20 years of experience in making loans involving restricted stock.
29. Recently, when investors began seeking to redeem their investments, Siegel attempted to lull them into believing that their money would be forthcoming. For example, in or about mid-June, Siegel represented to an investor that the returns for the Loan Program had declined due to "increasing illiquidity of the stock collateral and greater than expected margin requirements." Siegel then gave the investor a check, which was ultimately returned for insufficient funds.
30. Siegel continues to attempt to lull investors. In fact, on or about July 8, 2002, Siegel stated that he could return $5-10 million to investors within the next six months and an additional $20 million "over time."
Misrepresentations and Omissions
31. AFG's offering materials, website, and monthly statements mailed to investors contain material misrepresentations and omissions concerning, among other things, purported profits, the dissipation of investor funds, Siegel's manipulation of AFG's books and records, and Siegel's disciplinary past, including an injunction against him for his participation in a stock manipulation scheme.
32. For example, AFG's monthly statements falsely indicated returns of over 20% with the preservation of principal, when, in fact, as much as $87 million in investors' monies and assets were being mismanaged and/or misappropriated by Siegel.
33. Moreover, AFG's website boasted that Siegel had over 25 years of experience in the brokering and fund management businesses and touted Siegel as "widely recognized as a leading expert in the field of restricted securities." Yet neither AFG's website nor offering materials disclose that Siegel has been enjoined, censured, fined and barred from the securities industry for his fraudulent conduct involving, among other things, a stock pump-and-dump scheme and various other violations while a principal at two separate registered broker-dealers.
34. Additionally, AFG's website and offering materials tout AFG's successful operations over a 9+ year period and present the appearance of a well-run and highly organized investment firm.
35. For example, AFG touts itself as "your specialist in restricted securities" and boasts, "For over 9 years AFG has specialized in this highly profitable niche-market." In fact, AFG lacked even the most rudimentary internal controls, which permitted Siegel to manipulate AFG's books and records and misappropriate funds, and corporate account documents to such an extent that AFG has no idea how much it has in investor assets or their location.
36. Siegel has manipulated AFG's books and records in an attempt to conceal his fraudulent scheme and the misappropriation of approximately $87 million in investors' funds.
37. Furthermore, Siegel has absconded with key AFG documents regarding the Loan Program, including certificates of the restricted securities that collateralize the loans. These documents are critical in order to locate and account for the assets from the Loan Program.
38. Siegel told at least one investor that the invested money "was gone" and that he (Siegel) would go to jail for these activities.
FRAUD IN VIOLATION OF
SECTION 17(a)(1) OF THE SECURITIES ACT
39. The Commission repeats and realleges paragraphs 1 through 38 of the Complaint.
40. Since a date unknown, but from approximately 1997 through at least June 2002, Defendants AFG and Siegel, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by use of the mails, in the offer or sale of securities, as described herein, have been, knowingly, willfully or recklessly employing devices, schemes or artifices to defraud.
41. By reason of the foregoing, Defendants AFG and Siegel, directly and indirectly, have violated and, unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1).
FRAUD IN VIOLATION OF
SECTIONS 17(a)(2) AND 17(a)(3) OF THE SECURITIES ACT
42. The Commission repeats and realleges paragraphs 1 through 38 of its Complaint.
43. Since a date unknown, but from approximately 1997 through at least June 2002, Defendants AFG and Siegel, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by the use of the mails, in the offer or sale of securities, as described herein, have been: (a) obtaining money or property by means of untrue statements of material facts and omissions to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (b) engaging in transactions, practices and courses of business which are now operating and will operate as a fraud or deceit upon purchasers and prospective purchasers of such securities.
44. By reason of the foregoing, Defendants AFG and Siegel, directly and indirectly, have violated and, unless enjoined, will continue to violate Sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77(q)(a)(2) and 77(q)(a)(3).
FRAUD IN VIOLATION OF SECTION 10(b)
OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER
45. The Commission repeats and realleges paragraphs 1 through 38 of its Complaint.
46. Since a date unknown, but since approximately 1997 through at least June 2002, Defendants AFG and Siegel, directly and indirectly, by use of the means and instrumentality of interstate commerce, and of the mails, and of any facility of any national securities exchange, in connection with the purchase or sale of the securities, as described herein, have been, knowingly, willfully or recklessly: (a) employing devices, schemes or artifices to defraud; (b) making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (c) engaging in acts, practices and courses of business which have operated, are now operating and will operate as a fraud upon the purchasers of such securities.
47. By reason of the foregoing, Defendants AFG and Siegel, directly or indirectly, have violated and, unless enjoined, will continue to violate Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240. 10b-5, thereunder.
WHEREFORE, the Commission respectfully requests that the Court:
Declare, determine and find that Defendants AFG and Siegel committed the violations of the federal securities laws alleged herein.
Permanent Injunctive Relief
Issue a Permanent Injunction, restraining and enjoining Defendants AFG and Siegel, their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them, and each of them, from violating: (i) Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a); (ii) Sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77(q)(a)(2) and (a)(3); and (iii) Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder.
Issue an Order requiring Defendants AFG and Siegel, and Relief Defendant American Wealth, to disgorge all ill-gotten profits or proceeds that they have received as a result of the acts and/or courses of conduct complained of herein, with prejudgment interest.
Issue an Order directing AFG and Siegel to pay civil money penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78(d)(3).
Asset Freeze and Accounting
Issue an Order temporarily freezing the assets of Defendants AFG and Siegel, and Relief Defendant American Wealth until further Order of the Court, and requiring accountings by AFG and Siegel, and Relief Defendant American Wealth.
Records Preservation and Expedited Discovery
Issue an Order requiring Defendants AFG and Siegel to preserve any records related to the subject matter of this lawsuit that are in their custody, possession or subject to their control, and requiring Defendants AFG and Siegel and Relief Defendant American Wealth and others to respond to discovery on an expedited basis.
Repatriation of Investor Proceeds
Issue an Order requiring Defendants AFG and Siegel and the Relief Defendant to take such steps as are necessary to repatriate to the territory of the United States all funds and assets of investors described in the Commission's Complaint in this action 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 Southern District of Florida, and provide the Commission and the Court a written description of the funds and assets so repatriated.
Grant such other and further relief as may be necessary and appropriate.
Retention of Jurisdiction
Further, the Commission respectfully requests that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be entered, or to entertain any suitable application or motion by the Commission for additional relief within the jurisdiction of this Court.
July ____, 2002
John R. Teakell
Senior Litigation Counsel
SD-FL Bar No. A5500517
Direct Dial: (305) 982-6322
Terence M. Tennant
Florida Bar No. 0739881
Direct Dial: (305) 982-6346
Trisha D. Sindler
Florida Bar No. 0773492
Direct Dial: (305) 982-6352
Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
801 Brickell Avenue, Suite 1800
Miami, Florida 33131
Telephone: (305) 982-6300
Facsimile: (305) 982-6394
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