IN THE UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges for its Complaint the following:
1. This matter involves defendant 1st Atlantic Guaranty Corporation ("1st Atlantic"), an investment company registered with the Commission. From at least September 2001 to the present, 1st Atlantic, a form of investment company known as a face-amount certificate company, has been and is continuing to operate with reserves well below the legal minimum required by Sections 28(a) and 28(b) of the Investment Company Act of 1940 ("Investment Company Act"). Without sufficient reserves, 1st Atlantic is unable to pay all of its certificate holders, and investors who seek immediate payment could dissipate the remaining assets of the company to the detriment of other investors.
2. As a result of its failure to maintain sufficient reserves, 1st Atlantic is violating and, unless restrained and enjoined by this Court, will continue to violate Sections 28(a) and 28(b) of the Investment Company Act, 15 U.S.C. 80a-28(a) and 28(b), which prohibit face-amount certificate companies such as 1st Atlantic from operating without maintaining sufficient reserves at all times.
3. The Commission brings this action pursuant to the authority conferred upon it by Section 42(d) of the Investment Company Act, 15 U.S.C. 80a-41(d), to enjoin such acts and practices and enforce compliance with the Investment Company Act, and for other equitable relief.
4. The Court has jurisdiction over this action pursuant to Section 44 of the Investment Company Act, 15 U.S.C. 80a-43.
5. Certain of the acts and practices constituting the violations alleged herein occurred within the District of Maryland and elsewhere.
6. 1st Atlantic Guaranty Corporation is an investment company in the form of a face-amount certificate company, registered with the Commission since December 1997 pursuant to Section 8(a) of the Investment Company Act, with its main office in Bethesda, Maryland. 1st Atlantic has approximately 170 certificate holders.
7. State Bond & Mortgage Company, LLC ("State Bond"), is a wholly owned subsidiary of 1st Atlantic, which established it in March 2000. State Bond makes certain personnel, equipment and facilities available to 1st Atlantic and SBM Certificate Company for use in their business operations.
8. SBM Certificate Company ("SBM"), a Maryland corporation, has been registered with the Commission as a face-amount certificate company under the Investment Company Act since 1991. State Bond acquired SBM in July 2000 from another company for approximately $1.4 million, and owns all of SBM's stock. SBM has approximately 1,840 certificate holders.
9. Face-amount certificate companies issue fixed-income debt securities. These companies agree to pay the principal amount of the instruments (the "face-amount") plus accrued interest on maturity. Their profitability is dependent upon the difference between the return that they generate on their investment portfolio and the expenses incurred from selling and satisfying certificate obligations. Investors purchase face-amount certificates by either a single principal investment or in installments.
10. Although 1st Atlantic's certificates have a twenty-year maturity date, they also have intervening "guarantee periods" of three, five, seven or ten years. Upon the expiration of a guarantee period, the certificate holder has the option of rolling over the investment or withdrawing the value of the account. A penalty may be charged, depending on the date of withdrawal. If the certificate holder rolls over the investment, the terms of the initial certificate apply, but the interest rate is subject to change.
11. As a face-amount certificate company, 1st Atlantic is required at all times to maintain a minimum level of reserves calculated pursuant to Section 28 of the Investment Company Act. In general, Sections 28(a) and 28(b) of the Investment Company Act require 1st Atlantic to maintain reserves equal to the maturity amount of the outstanding certificates when due, plus $250,000 of capital stock to be maintained in cash. Certificate reserves may only consist of cash or "qualified investments."
12. Qualified investments (also referred to as "qualified assets") are defined in the Investment Company Act as "investments of a kind which life insurance companies are permitted to invest in or hold under the provisions of the Code of the District of Columbia." The Investment Company Act further precludes face-amount certificate companies from issuing or selling face-amount certificates, or collecting or accepting payments on such certificates, unless their reserve levels are maintained.
13. Between 1998 and 2002, the former chief executive officer and chairman of both 1st Atlantic and SBM, who was also 1st Atlantic's majority shareholder, diverted approximately $1 million from 1st Atlantic. Between December 2000 and June 2002, he also transferred assets with a total value of $2,839,040 from 1st Atlantic to SBM without consideration to 1st Atlantic. As a direct result of these diversions and transfers, 1st Atlantic's qualified assets were significantly depleted, leaving 1st Atlantic unable to meet its reserve requirements.
14. Beginning in September 2001, 1st Atlantic began to include the value of its State Bond common stock as a qualified investment in its reserve calculations. However, State Bond does not fall within the definition of a qualified investment under the Investment Company Act, and its value may not be used for such purposes.
15. As of March 24, 2003, 1st Atlantic claimed to have a minimum reserve requirement of $4.4 million (certificate liabilities plus the $250,000 capital base) and, excluding the value of State Bond, qualified assets of only $450,000. Thus, 1st Atlantic is and has been operating with a reserve deficiency of $3,950,000, well below its minimum reserve requirement.
16. As a result of its failure to comply with the Investment Company Act, 1st Atlantic does not currently have sufficient reserve assets to ensure its ability to meet all payment demands by investors. This could have the inequitable effect of leaving many certificate holders unpaid, while distributing the company's limited assets to a few.
CAUSE OF ACTION
17. Paragraphs 1 through 16 are realleged and incorporated herein by reference.
18. From at least September 2001 through the present, 1st Atlantic has been issuing or selling face-amount certificates, or collecting or accepting payments on face-amount certificates issued by it, without maintaining at all times minimum certificate reserves on all its outstanding face-amount certificates in an aggregate amount set forth in, and calculated in accordance with, Sections 28(a) and 28(b) of the Investment Company Act.
19. By reason of the foregoing, defendant 1st Atlantic has violated and, unless restrained and enjoined, will continue to violate Sections 28(a) and 28(b) of the Investment Company Act, 15 U.S.C. 80a-28(a) and 28(b).
WHEREFORE, the Commission respectfully requests that this Court:
Issue an injunction permanently restraining and enjoining defendant 1st Atlantic, its agents, officers, servants, employees, attorneys, and those persons in active concert or participation withthem, directly or indirectly, singly or in concert, from violations of Sections 28(a) and 28(b) of the Investment Company Act, 15 U.S.C. 80a-28(a) and 28(b).
Order such other and further relief as the Court may deem just and appropriate.
Dated: April 23, 2003