UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
PATROLLERS CAPITAL FUND and FRANKLIN S. MARONE, Jr.
- and -
MARITA D. MARONE,
04 Civ. _____ ( )
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against Defendants Patrollers Capital Fund, Patrollers Capital Fund I, II, III, The Wedel Fund and The Whistler Fund (collectively, "PatCap") and Franklin S. Marone, Jr. ("Marone"), and, as Relief Defendant, Marita D. Marone ("M. Marone"), alleges as follows:
1. The Commission brings this action to halt an ongoing securities fraud by PatCap, and by their purported portfolio manager, Marone. PatCap is a purported stock investment fund that claims to manage "over $8.4 million in assets" and claims to engage in "short-term trading on a daily basis." Marone has invited members of the ski patrol at Windham Mountain Ski Resort in Windham, New York, and their family and friends, to open accounts with PatCap at $5,000 to almost $20,000 per share. Marone claims that he buys and sells "securities in large blocks" through accounts at Spear, Leeds & Kellogg, LP ("Spear Leeds"), where he also claims to be an institutional trader. Marone has touted PatCap investments as risk-free because of "stop sell orders" that "limit investor losses to no more than 10%" of their initial investment" and because it invest "solely in equities."
2. In truth, PatCap is a blatant fraud. Marone himself has admitted in a voluntary statement given to law enforcement authorities on February 9, 2004 ("February 9 Statement") that, between January 1999 and January 2004, he made material misrepresentations and omissions to induce at least 36 individuals into purchasing at least $3.2 million of PatCap securities and thereafter diverted virtually all of the funds to his personal bank accounts at Fleet Bank and Chase Manhattan Bank in Fairfield, Connecticut. None of the $3.2 million PatCap and Marone fraudulently obtained was invested, or otherwise used for the benefit of PatCap or its investors. Instead, Marone used the investor funds to support a lavish lifestyle, including the purchase of cars, boats, and snowmobiles, trips to Europe and for other personal expenses.
3. As Marone acknowledged in his February 9 Statement, PatCap simply does not exist as a segregated fund of securities. PatCap has never had trading accounts at Spear Leeds or elsewhere, and Marone has never use investor proceeds to buy stock in initial public offerings of high tech companies and in Fortune 500 companies, as he fraudulently represented to investors. To conceal their fraud, Marone and PatCap issued investors phony account statements and emails - some of which falsely purported to come from Spear Leeds - that also fraudulently represented that investor holdings were growing dramatically. If calculated, some account statements effectively indicated cumulative returns of between 98% and 140% for others, when PatCap earned no such returns at all. Beyond that, an investment in PatCap was most definitely not risk-free. Marone acknowledges that his conduct was "wrong as well as illegal" and that he "hurt many individuals."
4. The PatCap fraud is continuing. As of January 2004, Marone was still issuing shares in PatCap to investors, while at the same time, he was exhorting others to rollover their investments into trading accounts he purportedly established at Morgan Stanley. Also in January 2004, Marone fraudulently conveyed the deed to his $3 million Fairfield, Connecticut home to his wife, M. Marone, who also appears to have benefited from PatCap investor funds. Moreover, PatCap and Marone have deliberately concealed from investors the fact that over $3.1 million in investor funds remain missing.
5. PatCap and Marone, directly or indirectly, have engaged, are engaging, and are about to engage, in transactions, acts, practices and courses of business that constitute or would constitute violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.
6. Unless PatCap and Marone are temporarily restrained and preliminarily and permanently enjoined, they will continue to engage in the transactions, acts, practices, and courses of business alleged herein, and in transactions, acts, practices, and courses of business of a similar type and object.
7. The Commission brings this action pursuant to authority conferred upon it by Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), seeking to temporarily restrain, and preliminarily and permanently enjoin PatCap and Marone from engaging in the wrongful conduct alleged herein, and to obtain certain other equitable relief, including disgorgement of ill-gotten profits plus prejudgment interest thereon, civil monetary 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. § 78u(d), and for such other and further relief as this Court may deem appropriate. The Commission also seeks equitable relief during the pendency of this action, including an Order: (a) temporarily restraining and preliminarily enjoining PatCap and Marone from future violations of the provisions of the Securities Act and Exchange Act they are alleged to have violated; (b) freezing the assets of Pat Cap, Marone and M. Marone; (c) directing PatCap, Marone and M. Marone each immediately to provide verified written accountings, under penalty of perjury, of their assets and their transactions in securities in PatCap; (d) prohibiting the destruction, alteration or concealment of documents by PatCap, Marone and M. Marone; and (e) granting expedited discovery.
8. This Court has jurisdiction over this action and venue lies in this District, pursuant to Sections 20(b) and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(b) and 77v(a), and Sections 21(d), 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d), 77u(e) and 78aa. PatCap and Marone, directly or indirectly, singly or in concert, have made use of the means or instruments of transportation or communication in, or the means or instrumentalities of, interstate commerce, or the use of the mails, in connection with the transactions, acts, practices, and courses of business alleged herein.
9. Certain of the transactions, acts, practices, and course of business constituting the violations alleged herein occurred, and are occurring, within the Southern District of New York, including but not limited to, the offer and sale of unregistered securities to investors, the use of the United States mail and interstate wires and the deposit of investor funds into the personal trading account of Marone at a registered broker-dealer in this District.
10. Defendant PatCap is a purported stock investment fund that was formed in January 1999, and that purports to have trading accounts at Spear Leeds. As of November 2003, PatCap claimed to have "$8.4 million in assets" under management through diverse securities offerings. On occasion, PatCap, through Marone, conducted presentations at investor homes and met with other investors at the Windham Mountain Ski Resort. Apart from the proceeds derived from its fraudulent securities offerings, PatCap virtually has no assets, and little to no operating revenue. Its securities are not registered with the Commission.
11. Defendant Marone, age 41, resides in Fairfield, Connecticut, and during the course of his wrongdoing, described himself as PatCap's portfolio manager and trader and an institutional trader at Spear Leeds. Marone was a registered representative at various broker-dealers between November 1991 and October 2003: namely, Carlin Equities ("Carlin"), Generic Trading of Philadelphia ("Generic") and Merrill Lynch, Pierce, Fenner & Smith, Incorporated but was never employed by Spear Leeds and never opened trading accounts at that firm. Marone was a registered representative of Generic from November 1999 through October 2003, when Generic, through Carlin, terminated Marone's employment after a PatCap investor made inquiries about Marone and the current value of his purported account at Spear Leeds. Spear Leeds was the clearing firm for Carlin and Genric, registered broker-dealers in New York, New York that PatCap and Marone used to receive certain misappropriated investor funds. Marone maintained a personal trading account and, between January 1999 and January 2004, deposited into his account investor funds, which he transferred to personal bank accounts at Fleet Bank and Chase Manhattan Bank in Fairfield, Connecticut for his benefit and that of M. Marone.
12. Relief Defendant M. Marone, age 40, resides in Fairfield, Connecticut, and is Marone's wife. M. Marone appears to have used PatCap investor funds for her personal benefit. In May 2003, M. Marone and Marone transferred, by wire, an investor check in the amount of $20,000 from Marone's personal trading account at Generic into their joint account at Chase Manhattan Bank in Fairfield, Connecticut. On January 6, 2004, Marone fraudulently conveyed the deed to his $3 million Fairfield home to M. Marone.
13. From January 1999 to the present, defendants PatCap and Marone have conducted an offering of unregistered securities in PatCap. PatCap and Marone offered and sold PatCap securities to at least 36 investors for amounts ranging $5,000 to $20,000 per share, or a total of at least $3.2 million. Marone held himself out as PatCap's portfolio manager and trader to members of the ski patrol at Windham Mountain Ski Resort, and their family and friends. During this period, Marone and PatCap boasted that PatCap was earning extraordinary returns with little or no risk. Marone and PatCap claimed to offer such returns because PatCap negotiated "stop sell orders" with Spear Leeds to limit investor losses investor losses to no more than 10% of their initial investments and because it invested "solely in equities." PatCap and Marone conducted the offer and sale of PatCap securities using the Internet, the telephone, the United States mail and interstate wires and the deposit of investor funds into the personal trading account of Marone at a registered broker-dealer in this District.
14. Marone and PatCap told actual and prospective investors that PatCap engaged in essentially day-trading and invested in initial public offerings of high tech companies, including initial public offerings of AT&T and Goldman Sachs. On other occasions, Marone and PatCap represented that PatCap's purported investment strategy was to invest in Fortune 500 companies such as American Online, Cisco Systems, Citigroup, Dell Computers, General Electric, Home Depot, Johnson & Johnson, Microsoft, Pfizer, Inc. and Wal-Mart. At various times, Marone and PatCap represented that PatCap invested only 65% of investor funds, with the remainder held in cash positions at Spear Leeds. In doing so, PatCap, according to Marone and PatCap, would benefit from the substantial discounts offered by Spear Leeds - i.e., margins of between eight-to-one and ten-to-one ratios.
15. Marone instructed investors to send checks made payable to him. Marone and PatCap then issued stock certificates to investors to reflect their purported shares in PatCap and which purportedly represented that PatCap was organized under the laws of the State of New York. Marone and PatCap advised investors that they would receive annual distributions based on profits earned with an option to rollover their distributions into the next year. In the interim, Marone and PatCap agreed to provide investors with account statements and other materials that showed PatCap's current value and the stocks in which it invested.
16. Initially, Marone and PatCap told investors that investment proceeds could be redeemed at any time and he would waive his management fees as PatCap was formed on "friendship and trust." At subsequent times, Marone and PatCap told investors that no proceeds could be distributed until the end of the fiscal quarter and he had deducted management fees ranging from 5% to 20%. For example, in July 2003, Marone sent an email to investors, stating: "[i]f [investors] let me know at the beginning of the quarter, you should have your distribution at the end of the quarter." Yet, if investors have "urgent needs" PatCap "will not be able to generate funds for [a] distribution" because in part of the tragedy of September 11, 2001 and because PatCap invests exclusively in large blocks of stock and purchases such stock on margins of between "8-to-1 and 10-to-1 ratios."
17. As of January 15, 2004, Marone and PatCap were still issuing shares to PatCap investors. For example, on September 11, 2003, Marone caused an investor to issue a check to him, in the amount of $9,979, for the purchase of two shares of PatCap. The check was returned to Marone. Marone instead instructed the investor to wire the funds into one of his personal bank accounts at Fleet Bank. Marone, in turn, agreed to destroy the investor's check. Unbeknownst to the investor, Marone redeposited the check into his Fleet account. Initially, Marone told the investor he would refund him the total amount of the check. Then, on January 15, 2004, Marone told the investor he used his funds to purchase two additional PatCap shares on his behalf. As a result, Marone fraudulently obtained $19,958 from the investor.
18. In the offer and sale, and in connection with the purchase and sale of securities in PatCap, Marone and PatCap made several misrepresentations of fact to actual and prospective PatCap investors. These statements were material. Marone and PatCap knew or recklessly disregarded the fact that these statements were false and misleading. In his February 9 Statement, Marone admitted that PatCap was a fraud and that he misappropriated most of the investor proceeds.
(a) Misrepresentations and Omissions About the Existence of PatCap
19. Marone and PatCap have made misrepresentations that PatCap is a segregated investment fund. In truth and fact, PatCap does not exist as a segregated investment fund and has no securities assets at locations identified by Marone. None of the investor funds that PatCap and Marone fraudulently obtained were used to purchase securities through accounts Marone purportedly controlled at Spear Leeds. PatCap has never maintained accounts at Spear Leeds and Marone has never executed trades for PatCap or its investors. Likewise, Marone was never employed by Spear Leeds. PatCap is not registered with the Commission in any capacity and is not incorporated or otherwise registered with any state, including New York.
20. Instead, between January 1999 and January 2004, PatCap and Marone fraudulently obtained at least $3.2 million in investor funds from at least 36 investors. PatCap, through Marone, transferred those funds into his personal bank accounts at Fleet and Chase Manhattan in Fairfield, Connecticut.
21. The representations described in paragraphs 19 through 20 were and are material, and Marone and PatCap knew or recklessly disregarded the fact that those statements were false and misleading. Marone admitted in his February 9 Statement that he repeatedly lied to investors about the existence of PatCap and its purported trading accounts at Spear Leeds and elsewhere, and that he misappropriated at least $1.9 million. Indeed, the misappropriated investor funds actually total at least $3.1 million. Moreover, PatCap and Marone have failed to disclose to investors that their funds were not safely placed in trading accounts at Spear Leeds and that PatCap does not have $8.4 million in assets.
(b) Misrepresentations and Omissions About the Use of Investor Proceeds
22. Marone and PatCap falsely claimed that PatCap invested in securities during initial public offerings of high tech companies and later in securities of Fortune 500 companies. This representation is materially false and misleading because none of the $3.2 million Marone fraudulently obtained was invested in the securities in which Marone claimed PatCap invested. This misrepresentation was and is material, and Marone and PatCap knew or recklessly disregarded the fact that it was false and misleading. Marone admitted in his February 9 Statement that he lied to investors when he represented that he used their funds to purchase securities and that he had systematically misappropriated investor funds for his personal benefit and that of M. Marone.
(c) Misrepresentations and Omissions about PatCap's Investment Risks
23. PatCap and Marone represented that investments in PatCap securities presented little or no risk. The claim that PatCap's investments are virtually without risk was and is materially false and misleading since (a) Marone did not actually use investment proceeds for purported purposes but instead diverted them for his own use, and (b) in any event, PatCap's purported underlying business activity was particularly risky because it involved short-term stock trading on margin, essentially day-trading - activities that clearly are not risk free. PatCap and Marone knew or recklessly disregarded the fact that this representation was false and misleading because, among other things, Marone and PatCap knew that Marone was misappropriating investor proceeds rather than investing them on behalf of PatCap or any investors.
(d) Misrepresentations and Omissions About PatCap's Performance
24. PatCap and Marone made misrepresentations about PatCap's asset value and performance. PatCap and Marone provided investors with falsified account statements and emails that baselessly reported that PatCap was a profitable stock fund. Although the account statements and emails purported to show that the value of PatCap was steadily increasing, these statements and emails were not issued by Spear Leeds and investor funds were not invested as Marone represented. After receiving these account statements and emails - certain of which referred to Spear Leeds and identified the purported stocks in which PatCap invested - some individuals invested more in PatCap.
25. The misrepresentations described in paragraph 24 were and are material and Marone and PatCap knew or recklessly disregarded the fact that the account statements and emails sent to investors were false and misleading. Among other things, Marone and PatCap knew that PatCap had not invested in securities for itself or on behalf of any investors, and that Marone was misappropriating investor proceeds.
26. The PatCap fraud is continuing. As recently as January 15, 2004, PatCap and Marone accepted funds from, and issued PatCap shares to, a PatCap investor. PatCap and Marone lied to - and are continuing to lie - to investors about the purported value of PatCap securities and the location of investor proceeds. In fact, in a tape-recorded investor meeting held in early November 2003, Marone touted that PatCap still had "$8.4 million in assets," when he knew full well that PatCap had no such assets. Further, PatCap and Marone lied to - and are continuing to lie - to investors by falsely claiming that they intend to liquidate PatCap's securities positions and to provide investors with a full distribution of their proceeds, when they knew full well that neither had had the ability to do that - and indeed did not do that by the date they promised - i.e., December 31, 2002.
28. In the wake of this misconduct, Marone admitted in his February 9 Statement, that his conduct was "wrong as well as illegal," and that he "hurt many individuals." Marone claimed that he fully intends "to cooperate" with law enforcement authorities and "to repay" the victims of his fraud. As of this time, however, at least $3.1 million in investor funds remain missing and PatCap and Marone have failed to disclose to investors that Marone has stolen their funds.
29. M. Marone was unjustly enriched when she received the investor proceeds fraudulently obtained by PatCap and Marone. In May 2003, M. Marone and Marone transferred, by wire, an investor check in the amount of $20,000 from Marone's personal trading account at Generic into their joint account at Chase Manhattan Bank. On January 6, 2004, Marone fraudulently conveyed the deed to his Fairfield home to M. Marone, which home the Marones apparently purchased with investor funds. In addition, M. Marone received other investor funds that she used for her personal benefit, including the purchase of real estate and for other personal items.
30. The Commission repeats and realleges the allegations contained in Paragraphs 1 through 29 by reference as if fully set forth herein.
31. PatCap and Marone, directly and indirectly, singly and in concert, knowingly or recklessly, by the use of the means and instruments of transportation or communication in, and the means or instrumentalities of, interstate commerce, or by the use of the mails, in the offer or sale and in connection with the purchase or sale of securities, have: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of, or otherwise made untrue statements of material facts or 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 (c) engaged in transactions, acts, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities or other persons.
32. As part of and in furtherance of this violative conduct, PatCap and Marone, directly or indirectly, made the representations and omitted to state the facts in paragraphs 1 through 29 above.
33. The false statements and omissions made by PatCap and Marone, more fully described in paragraphs 1 through 29 above, were material.
34. PatCap and Marone knew, or were reckless in not knowing, that the material misrepresentations, more fully described in paragraphs 1 through 29 above, were false or misleading.
35. By reason of the acts, omissions, practices, and courses of business set forth in this Complaint, PatCap and Marone have violated, are violating, are about to violate, and, unless restrained and enjoined, will continue violating, Section 17(a) of the Securities Act, 15 U.S.C. § 17q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder.
36. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 29.
37. M. Marone was unjustly enriched when she received the investor proceeds PatCap and Marone fraudulently obtained from PatCap investors between January 1999 and January 2004. Because PatCap and Marone engaged in fraudulent securities offerings when he transferred investor funds to M. Marone for her personal use, it is not just, equitable, or conscionable for M. Marone to benefit from PatCap's and Marone's ill-gotten gains. As a consequence of the foregoing, M. Marone has been unjustly enriched.
WHEREFORE, Plaintiff Commission respectfully requests that this Court issue
Orders temporarily and preliminarily, and final judgments permanently, restraining, and enjoining Defendants PatCap and Marone, their agents, servants, employees, attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating Section 17(a) of the Securities Act, and Sections 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
An Order directing that assets of Defendants PatCap and Marone and Relief Defendant M. Marone be frozen.
An Order directing Defendants PatCap and Marone and Relief Defendant M. Marone to file with this Court and serve upon Plaintiff Commission verified written accountings, signed by each of them, under penalty of perjury.
An Order permitting expedited discovery.
An Order enjoining and restraining Defendants PatCap and Marone and Relief Defendant Marone, and any person or entity acting at their direction or on their behalf from destroying, altering, concealing, or otherwise interfering with the access of Plaintiff Commission to relevant documents, books and records.
A final judgment requiring Defendants PatCap and Marone and Relief Defendant to disgorge their ill-gotten gains from the fraudulent conduct alleged in this Complaint, and to pay prejudgment interest thereon.
A final judgment imposing against Defendants PatCap and Marone civil monetary penalties, pursuant to Section 20(d) of the Securities Act, and 21(d)(3) of the Exchange Act, for the violations alleged therein.
Such other and further relief as the Court deems appropriate.
Dated: February 13, 2003
New York, New York
EDWIN N. NORDLINGER (EN-6258)
Attorney for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
Northeast Regional Office
New York, New York 10279
Barry W. Rashkover
Jayne K. Blumberg (not admitted in S.D.N.Y.)
Howard S. Kim
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