UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
Presidents Trust Company, LLC, Jon Patrick Pierce, and David D. Klasna,
Civil Action No.
COMPLAINT FOR PERMANENT INJUNCTION AND OTHER RELIEF
Plaintiff Securities and Exchange Commission ("Plaintiff" or "Commission") for its complaint alleges as follows:
1. This is a governmental enforcement action seeking injunctive and other equitable relief against three defendants based upon their fraudulent offer and sale of an unregistered security. Between August 1, 2003 and September 26, 2003, defendants Presidents Trust Company LLC ("Presidents Trust"), a South Dakota-chartered trust company, and its control persons Jon Patrick Pierce ("Pierce") and David D. Klasna ("Klasna"), offered and sold to the public an unregistered financial instrument that they called "Fixed Income Trust-Secured" ("the Trusts"). The defendants sold the Trusts to approximately 150 investors nationwide, raising approximately $14 million. On September 26, 2003, a cease-and-desist order was entered by South Dakota against Presidents Trust, which curtailed sales of the Trust program nationwide.
2. Although depicted in sales literature as a "secured" and conservative trust instrument offering higher rates of return than conventional bank CDs, the Trusts were in economic reality unsecured promissory notes issued by Presidents Trust. Contrary to representations in the offering documents that investors' funds would be placed into a diversified portfolio of investments which would guarantee not only annual income but the return of 100% of their invested principal, the defendants immediately diverted a significant portion of the offering proceeds into two highly risky ventures: Presidents Trust itself, which was strapped for cash, and a speculative debt collection business. The proposed defendants misrepresented Presidents Trust's financial condition to investors, and failed to disclose any financial information about the debt collection business.
3. Offering documents provided to prospective investors in the Trusts also falsely described the Trusts as "secured" and emphasized that the investment would avoid the risks associated with the stock and bond markets. These representations were false. No security arrangements for the Trusts existed. The Trusts were essentially unsecured promissory notes of Presidents Trust, and in fact exposed investors to risks equal to or greater than those of stock or bond investments.
4. The Trusts program constituted an unregistered investment company. During all relevant periods, more than forty percent of its assets were invested in the securities of other issuers. Presidents Trust failed to register the Trusts with the Commission as required.
5. Through these actions, defendants Presidents Trust, Pierce and Klasna have violated, and unless restrained and enjoined will continue to violate, the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, as amended ("Securities Act") [15 U.S.C. §77q(a)], Section 10(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act") [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
6. The Commission brings this action pursuant to authority conferred on it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)], and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)] to restrain and enjoin the defendants from engaging in the acts, practices and courses of business described in this Complaint and acts, practices and courses of business of similar purport and object. The Commission seeks permanent injunctions against all defendants. The Commission also seeks equitable relief in the form of an order freezing all assets derived from the Trusts offering, wherever located, and appointing a receiver to marshal such assets and distribute them back to defrauded investors. Finally, the Commission seeks an order requiring that defendants Pierce and Klasna pay disgorgement and a civil penalty.
7. This Court has jurisdiction in this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. 8. The defendants, directly or indirectly, made use of the means and instrumentalities of interstate commerce, and of the mails, in connection with the acts, practices, and courses of business alleged in this complaint.
9. Certain of the acts, practices and courses of business constituting the violations of law alleged herein occurred within the District of Nebraska. Defendants Pierce and Klasna reside in Omaha, Nebraska and defendant Presidents Trust headquartered in Omaha, Nebraska.
10. Presidents Trust Company, LLC is a South Dakota limited liability company with a South Dakota trust company charter. Presidents Trust is based in Omaha, Nebraska. Presidents Trust's core business is the provision of trust and custodial services to the financial services community, including investment advisory and insurance firms. On November 4, 2003, the South Dakota Department of Revenue and Regulation, Division of Banking ("Division of Banking ") assumed control of Presidents Trust's operations and assets, based upon the company's submission on November 3, 2003 of financial statements, which indicated that Presidents Trust is currently insolvent. As part of this action, the Division of Banking froze various bank accounts held by Presidents Trust.
11. Jon Patrick Pierce, age 59, is an owner and control person of Presidents Trust. Pierce is the president and chief executive officer of Freedom Financial Group, a holding company that owns Presidents Trust.
12. David D. Klasna, also of Omaha, was until recently the president of Presidents Trust.
13. U.S. Equity, Inc., is a South Dakota corporation headquartered in Omaha. U.S. Equity has a contract to provide portfolio management services to Presidents Trust. Pierce is a director of U.S. Equity.
14. Collins Financial Services, Inc. is a Texas corporation headquartered in Austin. Collins Financial specializes in purchasing, reselling, and collecting distressed consumer receivables from financial institutions such as banks and credit card companies. Collins Financial uses third-party funds to purchase the debt and shares the proceeds of the re-sales or collections with the third-party that financed the purchase of the debt. U.S. Equity contracted with Collins Financial to use funds raised in the sale of the Trusts for the purchase of debt.
15. Between August 1, 2003 and September 26, 2003, defendants Presidents Trust, Pierce and Klasna offered and sold the Trusts to public investors. The offering was targeted to investors who were seeking low-risk investments with high returns. Despite their denomination of the investment as a "trust" instrument, the offering documents for the Trusts (consisting essentially of a four page brochure and a written contract) showed that the Trusts were more akin to promissory notes, because they offered fixed rates of return depending on the length of time that the investor agreed to invest money. Three-year Trusts offered 5% annually; five-year Trusts offered 7%; and seven year Trusts offered 9%.
16. After deducting a commission payable to the insurance agent, investment adviser, or other "servicer" who sold the Trusts, the defendants told investors that Presidents Trust would invest a portion of the proceeds in investments that would grow to equal 100% of the amount invested at the maturity date (the "Secured Repayment Trust"). The defendants told investors that the remaining investor proceeds would be invested in "liquid, income-producing assets" which would produce the income needed to make the required fixed return payments to investors (the "Income Trust"). These payments were promised on a monthly, quarterly or annual basis, as designated by each particular investor
17. Presidents Trust sold the offering in part through an affiliated broker-dealer network called Freedom Financial, Inc. Several Freedom Financial registered representatives advertised the Trusts in major metropolitan newspapers. The Trusts were also sold by independent sales agents, including financial planners, insurance agents and investment advisers. Several of these sales agents advertised the program through general solicitations, including Internet advertisements. These independent agents submitted their proposed general advertising for the Trusts to Klasna for approval.
18. Between August 1, 2003 and September 26, 2003, the defendants raised approximately $14 million through the offer and sale of the Trusts.
19. The defendants used approximately $4.8 million in Trust offering proceeds, which purportedly constituted the "Secured Repayment Trust", to invest in Collins Financial. The defendants used approximately $500,000 in investor proceeds, which were denominated the "Income Trust" portion of the investment, the purchase notes issued by defendant Presidents Trust. The defendants used at least $862,463 in investor money to pay sales commission and other fees in connection with the offer and sale of the Trust. Remaining funds raised in the offering are currently held in various money market or bank accounts, where they have been effectively frozen since the Director of the Division of Banking in South Dakota assumed control of Presidents Trust in early November 2003.
20. Presidents Trust retained U.S. Equity, an affiliated entity, to manage the investment of Trust proceeds. Prior to the commencement of the Trust offering, on July 23, 2003, U.S. Equity signed an agreement with Collins Financial providing Collins Financial with authority to use Trust proceeds to purchase charged-off debt. The contract between U.S. Equity and Collins Financial is for a three-year term. Under the terms of the arrangement with Collins Financial, Presidents Trust and U.S. Equity are passive investors in that they have no involvement whatsoever in the purchase, collection or sale of the debt that Collins Financial buys with the funds they invest.
21. Defendants Presidents Trust, Pierce and Klasna made numerous false and misleading statements in connection with the offer and sale of the trusts, including those set forth in paragraphs 22 through 33 below.
22. The main thrust of the offering literature for the Trusts was the false depiction of the instruments as a conservative investment, offering the safety of a financial institution but a higher rate of return than a CD. As stated above, the sales materials falsely described the Trusts as "secured" when in fact they were uncollateralized notes.
23. The defendants also deceived investors as to the qualifications of U.S. Equity, a purported "servicer" to the Trusts selected by Presidents Trust to ostensibly select investments for the Trusts. Although the defendants disclosed U.S. Equity's status as an affiliate of Presidents Trust, they falsely described U.S. Equity as "an institutional portfolio manager" which "utilizes some of the top international managers available", to "construct, maintain and manage the [trusts] portfolio to optimize return within specific risk parameters". In fact, U.S. Equity consisted of two employees, neither of who have investment advisory training, credentials or Commission registration, who reported to defendant Pierce.
24. Offering materials for the Trusts represented that the annual income to investors (escalating from 5% to 9% annually, depending on the term of the Trust) was guaranteed. This ostensible guarantee was buttressed by the representation in the offering documents that the "income" portion of the Trust proceeds would be invested only in "highly liquid, income-producing assets." This representation was fraudulent. As set forth above, the money for this portion of the scheme was immediately invested in capital notes issued by Presidents Trust. The Capital Notes, which are issued for a 30year term and purportedly pay a 7% rate of return, are unsecured, general promissory obligations of Presidents Trust that are illiquid and cannot be resold in a public market.
25. Further, although investors in the Trusts purchased approximately $486,069 worth of Capital Notes, no financial statements of Presidents Trusts were disclosed to investors. Presidents Trust's financial statements during the period of the offering demonstrate that the company lacks the ability to repay the Capital Notes. The defendants failed to disclose these financial statements or other financial information about Presidents Trust to Trust investors
26. The defendants not only concealed Presidents Trust's financial condition, but also took affirmative steps to misrepresent the company's financial situation to prospective investors in the Trusts. In offering materials, the defendants described Presidents Trust as having "sustained steady and rapid growth" since its acquisition by Pierce and his affiliated entities in July 2001. In one offering brochure, the defendants set forth capsule "unaudited financial results" for Presidents Trust which falsely claimed that the company had total assets of $29.8 million in 2002 and $63.5 as of the time of the offering of the Trusts in September 2003. This claim is refuted by the company's own internal financial statements, which show that at the time of the offering, Presidents Trust had minimal revenues and assets far below the stated value.
27. At the time of the offerings, Presidents Trust was in a cash crisis, with little prospect of repaying the notes with any measure of "liquidity" as promised to investors by the defendants. Presidents Trust quickly became insolvent once the revenue stream from sales of the Trusts had been shut down by South Dakota's a cease-and-desist order.
28. The defendants' guarantee that investors' principal would be preserved was also fraudulent. The "Secured Repayment" portion of the Trust offering proceeds was invested by U.S. Equity in Collins Financial, which, as stated above, received approximately $4.8 million of Trust proceeds to purchase charged-off debt. The defendants failed to disclose any financial statements of Collins Financial to investors, and had no reasonable basis upon which to guarantee the future results of that company.
29. Offering the investment in the guise of a trust instrument was deceptive, because it inherently represented that the defendants would comply with basic fiduciary duties imposed by state law upon trustees, with concomitant benefits and protections to investors. The sales literature stressed as an additional "safeguard" the fact that Presidents Trust was regulated by state trust law. However, while Presidents Trust was chartered under, and governed by, South Dakota state trust law, the claim that this offered additional protections to investors was misleading, because Presidents Trust, Pierce and Klasna failed to comply with fiduciary duties imposed on Trustees by state law in connection with their operation of the Trusts.
30. One such violation of fiduciary duty arose in connection with an "Institutional Portfolio Management Agreement" Presidents Trust entered into with U.S. Equity for the management of the Trusts. Under that agreement, U.S. Equity was authorized to retain for its management fee any profits that were earned from the investment of Trusts proceeds over and above the "agreed Rate of Return" due to investors. The defendants thereby set up the management of the Trusts such that, while investors bore all of the risk of the Trust investments, U.S. Equity (and derivatively its affiliates Presidents Trust and Pierce) would reap any rewards in the event the investments performed well. This arrangement enabled the defendants to profit at the expense of Trust investors, in violation of their fiduciary duty.
31. In his role as president of Presidents Trust, Klasna was involved in the day-to-day operation of the Trusts which included: (a) drafting and reviewing enrollment materials; (b) authorizing transfers from Presidents Trust bank accounts to pay commissions and fees; (c) drafting, reviewing, and distributing promotional materials; and (b) authoring the use of Trust funds to purchase investment products, such as money markets, and to purchase Collins Financial charged-off debt.
32. Pierce controlled Presidents Trust, although he had no official title at the company. Pierce orchestrated the acquisition of Presidents Trust in July 2001, is its controlling shareholder, and appointed Klasna as its president. Pierce assisted Klasna in drafting and reviewing enrollment packages and promotional materials for the offering of the Trusts. Pierce also set negotiated fee and commission schedules with the sales agents who sold the Trusts.
33. Pierce also negotiated the investment of Trust proceeds with Collins Financial. Although Deborah Bogar ("Bogar") U.S. Equity's putative president, signed the agreement on behalf of U.S. Equity, Collins Financial had negotiated the terms of the contract with only Pierce and Klasna.
34. Paragraphs 1 through 33 are hereby realleged and incorporated by reference.
35. Defendants Presidents Trust, Pierce and Klasna, directly and indirectly, with scienter, in connection with the purchase and sale of securities, by use of the means or instrumentalities of interstate commerce, or of the mails, have employed devices, schemes or artifices to defraud; have made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or have engaged in acts, practices or courses of business which have been and are operating as a fraud or deceit upon the purchasers or sellers of such securities.
36. By reason of the conduct described in paragraph 35, defendants Presidents Trust, Pierce and Klasna have violated and, unless restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5].
37. Paragraphs 1 through 33 are hereby realleged and incorporated by reference.
38. Defendants Presidents Trust, Pierce and Klasna, directly and indirectly, with scienter, in the offer and sale of securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, have employed devices schemes or artifices to defraud.
39. By reason of the conduct described in paragraph 38, defendants Presidents Trust, Pierce and Klasna have violated and, unless restrained and enjoined, will continue to violate Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)].
40. Paragraphs 1 through 33 are hereby realleged and incorporated by reference.
41. Defendants Presidents Trust, Pierce and Klasna, directly and indirectly, in the offer and sale of securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, have obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or have engaged in transactions, practices, or courses of business which have been, and are operating as a fraud or deceit upon the purchasers of such securities.
42. By reason of the conduct described in paragraph 41, defendants Presidents Trust, Pierce and Klasna have violated and, unless restrained and enjoined, will continue to violate Sections 17(a)(2) and (3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and (3)].
WHEREFORE, the Commission respectfully requests that the Court:
Find that the Defendants, and each of them, committed the violations alleged.
Enter an Order of Permanent Injunction as to each defendant, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining each defendant from further violations of the provisions of law and rules alleged in this complaint.
Enter an Order requiring all defendants to disgorge proceeds obtained from their unlawful conduct.
Enter an Order requiring all defendants to pay civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.
Enter an order appointing a Receiver to take possession and control of all assets derived from the offering of the Trusts, and marshal and protect such assets for the benefit of defrauded investors.
Grant such further equitable relief as this Court deems appropriate and necessary.
DATED: December 30, 2004
Ellyn Grant, Esq. (Nebr. Bar No. 19474) [Ellyn.Grant@USDOJ.gov]
Assistant U.S. Attorney
District of Nebraska
1620 Dodge Street, Suite 1400
Omaha, Nebraska 68102-1506
Fax (402) 661-3081
Julie K. Lutz, Esq. (Calif. Bar No. 77246) [LutzJ@SEC.gov]
John Badger Smith, Esq. (Colo. Bar No. 25303) [SmithJB@SEC.gov]
Securities and Exchange Commission
1801 California Street, Suite 1500
Denver, CO 80202
Fax (303) 844-1068
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