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UNITED STATES DISTRICT COURT
COMPLAINT FOR INJUNCTIVE AND OTHER RELIEF Plaintiff Securities and Exchange Commission ("Commission") alleges the following against defendant Alfred M. Lemcke, individually and d/b/a Lemcke & Associates ("Lemcke"): PRELIMINARY STATEMENT 1. This enforcement action concerns Lemcke's scheme to defraud several clients, most of whom live in Rhode Island, of approximately $1 million which he obtained while acting as their investment adviser between December 1995 and September 2001. The clients include a close personal friend (and best man at his wedding), the friend's sister and her then husband, the sister's three minor children, the husband's elderly parents, and even a neighbor who was helping renovate Lemcke's kitchen. Lemcke told the clients that he was going to invest their money in various stocks, mutual funds, and other investments through a financial services company based in Chicago. He even provided them with periodic account statements showing that their investments were generating substantial returns. Unfortunately, the financial servicescompany, the returns,and the investments themselves did not exist. Indeed, Lemcke has recently admitted that he diverted the clients' funds for his personal use and that most, if not all, of the money has been lost. 2. Through the activities alleged in this Complaint, Lemcke engaged in: (i) fraud in the offer or sale of securities, in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act"); (ii) fraudulent or deceptive conduct in connection with the purchase or sale of securities, in violation of Section 10(b) of the Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; and (iii) fraudulent or deceptive conduct with respect to investment advisory clients, in violation of Sections 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers Act"). 3. Accordingly, the Commission seeks: (i) entry of a permanent injunction prohibiting Lemcke from further violations of the relevant provisions of the federal securities laws; (ii) disgorgement of Lemcke's ill-gotten gains, plus pre-judgment interest; and (iii) the imposition of a civil monetary penalty due to the egregious nature of Lemcke's violations. In addition, because of the risk that Lemcke will continue violating the federal securities laws and the danger that any remaining investor funds will be dissipated or concealed before entry of a final judgment, the Commission seeks preliminary equitable relief to: (i) prohibit Lemcke from continuing to violate the relevant provisions of the federal securities laws; (ii) freeze Lemcke's assets and otherwise maintain the status quo; (iii) require Lemcke to submit an accounting of investor funds and other assets in his possession; (iv) prevent Lemcke from destroying relevant documents; and (v) authorize the Commission to undertake expedited discovery. JURISDICTION 4. The Commission seeks a permanent injunction and disgorgement pursuant toSection 20(b) of the Securities Act [15 U.S.C. §77t(b)], Section 21(d)(1) of the Exchange Act [15 U.S.C. §78u(d)(1)], and Section 209(d) of the Advisers Act [15 U.S.C. §80b-9(d)]. The Commission seeks the imposition of a civil monetary penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C.§77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)]. 5. This Court has jurisdiction over this action pursuant to Sections 20(d) and 22(a) of the Securities Act [15 U.S.C. §§77t(d), 77v(a)], Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§78u(d), 78u(e), 78aa], and Sections 209(3) and 214 of the Advisers Act [15 U.S.C. §80b-9(d), 80b-14]. Venue is proper in this District because much of Lemcke's wrongful conduct occurred here and most of the defrauded clients live here. 6. In connection with the conduct described in this Complaint, Lemcke directly or indirectly made use of the mails or the means or instruments of transportation or communication in interstate commerce. DEFENDANT 7. Lemcke, age 42, resides in Hingham, Massachusetts. At all relevant times, he sold life insurance and acted as an unregistered investment adviser under the name of "Lemcke & Associates", with an office in Hingham. He has been associated with three broker-dealers since he was first licensed in 1993. He is currently a registered representative associated with MML Investor Services, Inc. ("MML"), a broker-dealer based in Springfield, Massachusetts, but MML recently suspended him. He holds series 6 and 63 licenses, which permit him to sell a limited class of securities including mutual funds. He previously held a series 7 license, which permitted him to sell additional types of securities including stocks. STATEMENT OF FACTS Lemcke Obtained $1 Million from his Clients 8. Lemcke's scheme centered on Dr. Frank Fraioli, Jr., a physician whose residence and office are both in Smithfield, Rhode Island. Lemcke had known Dr. Fraioli's then wife, Louise Fraioli, and her brother, Michael Verville, since the mid-1980s when they were in college. Louise introduced Lemcke to Dr. Fraioli in late 1993. Lemcke told Dr. Fraioli that he was an investment adviser and that he could provide complete financial services, including insurance products and investment advice. He also provided Dr. Fraioli with a business card indicating that he conducted a "financial designs and services" business under the name Lemcke & Associates. 9. On several occasions in 1994 and 1995, Lemcke met with Dr. Fraioli at the latter's office in Smithfield to discuss insurance and investments. During those meetings, Dr. Fraioli stated that he wanted to save for retirement and for his children's education, and Lemcke stated that he could help Dr. Fraioli achieve those objectives by purchasing stocks and other investments on his behalf. Lemcke also stated that he would invest Dr. Fraioli's money through a company known as Individual Investment Portfolio Design Company or I2PDCO ("Portfolio Design"). Lemcke stated that Portfolio Design was a financial services company based in Chicago which designed customized investment programs for individual investors. Lemcke indicated that his compensation would be a percentage of the assets under management. 10. Starting in December 1995 and continuing until September 2001, Dr. Fraioli provided Lemcke with approximately $900,000 for Lemcke to invest on behalf of Dr. Fraioli and his family. That figure included approximately $92,000 that had been held in education accounts for Dr. Fraioli's three minor children and $100,000 that Dr. Fraioli had raised through a businessline of credit. 11. Dr. Fraioli made the investments through checks that he gave to Lemcke when Lemcke visited his office in Smithfield once or twice a month. At Lemcke's direction, Dr. Fraioli made the checks payable to Portfolio Design, to Lemcke & Associates, or to Lemcke personally. 12. Dr. Fraioli almost always relied upon Lemcke to decide what investments to make. On one occasion, however, Dr. Fraioli told Lemcke to invest $100,000 in a particular stock. 13. On various occasions, Lemcke asked Dr. Fraioli for referrals to other potential clients. Dr. Fraioli provided Lemcke with several names, including those of his elderly parents, Frank Sr. and Dora Fraioli, who also live in Smithfield, Rhode Island. 14. In the summer of 1997, Dr. Fraioli introduced Lemcke to his parents in a meeting at their home in Smithfield. Shortly thereafter, Dr. Fraioli's parents decided to invest their entire life savings of $65,000 with Lemcke. They made the investment by writing two checks to Dr. Fraioli, who then wrote checks for the same amounts to Lemcke. Thereafter, Lemcke mailed quarterly "interest" payments of $1,076 to Dr. Fraioli's parents and, on one occasion, returned additional funds at their request so they could buy a car. It appears that Dr. Fraioli's parents received a total of approximately $35,000 from Lemcke. 15. Sometime in 1998, Lemcke told Michael Verville that he was managing investments for his sister, Louise Fraioli. In December 1998, Michael Verville transferred $13,368 to Lemcke so that Lemcke could invest in mutual funds on his behalf. In May 1999, at Verville's request, Lemcke returned $13,000 to Verville. 16. Dr. Fraioli and his wife Louise were divorced in May 1999. After the divorce, Louise continued to reside in Smithfield. As part of the divorce, the Fraiolis agreed that their investments with Portfolio Design would be split into two accounts. Lemcke told the Fraiolis thathe would divide their investments into two separate accounts and indicated that the investments in Louise's account were worth almost $220,000. 17. In October 2000, Lemcke advised Louise Fraioli to redeem several savings bonds in the names of her three children and to invest the money with him through Portfolio Design. She followed Lemcke's advice, redeemed the savings bonds for approximately $4,000, and invested the entire proceeds with Lemcke through a check payable to Portfolio Design. 18. Lemcke also obtained money from at least one client unrelated to the Fraiolis. In 1996, Sean Ford, a former neighbor of Lemcke's who also worked as a contractor on the renovation of Lemcke's kitchen, transferred $1,300 to Lemcke so that Lemcke could invest in unit investment trusts on his behalf. In July 2000, Ford transferred an additional $1,000 to Lemcke so that Lemcke could purchase stock in Dell Corporation on his behalf. At Lemcke's direction, Ford gave Lemcke a $1,000 check payable to Portfolio Design. Lemcke Made Fraudulent Statements to his Clients about their Investments 19. On numerous occasions between December 1995 and September 2001, Lemcke told Dr. Fraioli that his money was invested in stocks and unit investment trusts and that his investments were performing well. Lemcke made similar statements to his other clients. For example, he told Dr. Fraioli's parents sometime in 1999 that their stocks were doing well and that he treated their investments just like he treated his grandmother's investments. Similarly, he told Louise Fraioli on several occasions between May 1999 and September 2001 that her money was invested in CDs and bonds, that her investments were performing well, and that her money was not invested in anything risky. These statements were false and misleading because, as Lemcke has since admitted, the investments did not exist and he diverted the clients' money for hispersonal use. 20. On numerous occasions between January 1996 and September 2001, Lemcke provided Dr. Fraioli and the other clients with account statements indicating that the money they had given to Lemcke was invested with Portfolio Design and identifying the value of their investments. These include: a. account statements dated September 2, 1997 provided to Dr. Fraioli indicating that he owned several specific stocks (including Yahoo and Intuit); b. account statements dated May 15, 1998 provided to Dr. Fraioli's parents indicating that they owned a specific number of "Class I" "shares" worth more than $80,000; c. an account statement dated January 11, 1999 provided to Michael Verville indicating that he owned "Class I" "shares" worth more than $15,000; d. an account statement dated April 15, 1999 provided to Dr. Fraioli's parents indicating that they owned "Class I" "shares" worth more than $54,000; e. an account statement provided to Dr. Fraioli and his wife in connection with their May 1999 divorce indicating that their total investments exceeded $541,000 and that Louise now had a separate account worth more than $220,000; f. an account statement dated July 15, 1999 provided to Dr. Fraioli's parents indicating that they owned "Class I" "shares" worth more than $57,000; g. an account statement dated September 27, 1999 provided to Sean Ford indicating that he owned an unspecified security worth $1,937; h. account statements dated January 2000 provided to Dr. Fraioli indicating that he owned six specific stocks worth more than $342,000 and that his taxes were being paid; i. an account statement dated January 17, 2000 provided to Michael Verville (after the May 1999 repayment) indicating that he still owned "Class I" "shares" worth more than $5,000; j. account statements dated May 19, 2000 provided to Dr. Fraioli indicating that he owned seven different stocks worth more than $248,000 and unitinvestment trust interests worth $60,000; k. account statements dated August 15, 2000 provided to Dr. Fraioli indicating that he owned stocks worth more than $242,000 and unit investment trust interests worth more than $76,000; l. account statements dated August 15, 2000 provided to Dr. Fraioli's parents indicating that they owned unit investment trust interests worth more than $94,000; m. an account statement dated September 13, 2000 provided to Sean Ford indicating that he owned a unit investment trust interest worth $2,518; n. account statements dated July 13, 2001 provided to Dr. Fraioli indicating that he owned unidentified stock and unit investment trust interests worth more than $615,000; and o. account statements dated July 17, 2001 provided to Louise Fraioli indicating that she owned unidentified stock and unit investment trust interests worth more than $300,000. 21. Each of the account statements identified in the preceding paragraph was false and misleading because, as Lemcke has since admitted, Portfolio Design did not exist, the investments did not exist, and Lemcke had diverted the clients' money for his personal use. 22. In addition, Lemcke told Dr. Fraioli that he would take care of paying Dr. Fraioli's taxes. On several occasions, Lemcke even provided Dr. Fraioli with copies of cashier's checks reflecting tax payments. These statements were false and misleading because, as Lemcke has since admitted and as Dr. Fraioli has since verified, Lemcke was not paying Dr. Fraioli's taxes and the cashier's checks were fictitious. Lemcke Admitted that He Diverted and Lost his Clients' Money 23. In July 2001, Louise Fraioli became concerned about how her investments were performing in light of the recent economic downturn. When she asked Lemcke for more detailed information about her account, he was evasive and simply assured her that she was "makingmoney" and that her investments were "guaranteed". When she insisted on more information, Lemcke provided her with account statements dated July 17, 2001 (described above) indicating that her investments were worth more than $300,000. In other words, the statements indicated that Louise's retirement account had grown by more than 33% since the Fraiolis' divorce two years earlier. 24. Louise Fraioli was not satisfied with Lemcke's assurances. In August 2001, she told him that she wanted to transfer her investments to PaineWebber. She then asked PaineWebber to facilitate the transfer of her assets from Lemcke. However, Lemcke refused to respond to PaineWebber's phone calls or to effect the transfer. 25. On or about August 31, 2001, Lemcke called Louise's brother, Michael Verville, and told him that Louise's attempt to transfer her investments to PaineWebber could result in criminal liability for Lemcke. Lemcke asked Verville to persuade Louise to give him more time "to come up with the money." Shortly thereafter, Verville asked Louise to give Lemcke more time, but she refused. 26. Louise Fraioli then communicated her concerns to Dr. Fraioli, who confronted Lemcke in early September 2001. At a meeting in Dr. Fraioli's house, Lemcke stated that the money designated for Louise's retirement "was never there" and "it is going to look like I took the money." Lemcke nevertheless assured Dr. Fraioli that the money invested for himself, his parents and his children was safe. Dr. Fraioli demanded that Lemcke return all the remaining money, but Lemcke failed to do so. 27. Also in September 2001, Dr. Fraioli's parents asked Lemcke to verify the security of their investments. Lemcke agreed to meet them at their home on September 13, 2001. However, Lemcke called them that morning to cancel the meeting. In a separate conversation,Lemcke explained to Dr. Fraioli that he needed to attend the funeral of a Portfolio Design work associate who had died in the World Trade Center terrorist attack on September 11, 2001. 28. Shortly thereafter, Dr. Fraioli asked Lemcke for additional documentation about the family's investments. Lemcke responded that the records were lost because Portfolio Design's offices in the World Trade Center had been destroyed in the terrorist attack. 29. In late September and October 2001, under continued pressure to account for the Fraiolis' money, Lemcke finally told Dr. Fraioli that all of the money was "gone" and that he could not identify the people to whom he had given the money because his life was in danger. Lemcke made similar statements to Verville in October 2001, admitting that he had used the money "to support a lifestyle" and to repay a loan. 30. By reason of Lemcke's fraudulent scheme and his failure to return his clients' money, Dr. Fraioli and Louise Fraioli have lost their entire $900,000 investment, Dr. Fraioli's parents have lost approximately $30,000, Sean Ford has lost $2,300, and Michael Verville has lost $368. FIRST CLAIM FOR RELIEF (Violation of Section 17(a) of the Securities Act) 31. The Commission repeats and incorporates by reference the allegations in paragraphs 1-30 of the Complaint as if set forth fully herein. 32. Lemcke, directly and indirectly, acting intentionally, knowingly or recklessly, in the offer or sale of securities by the use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails: (a) has employed or is employing devices, schemes or artifices to defraud; (b) has obtained or is obtaining money or property by means of untrue statements of material fact or omissions to state a material factnecessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) has engaged or is engaging in transactions, practices or courses of business which operate as a fraud or deceit upon purchasers of the securities. 33. As a result, Lemcke has violated and, unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. §77q(a)]. 34. Lemcke's violations of Section 17(a) of the Securities Act have involved fraud, deceit or deliberate or reckless disregard of regulatory requirements and have resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 20(d) of the Securities Act [15 U.S.C. §77t(d)]. SECOND CLAIM FOR RELIEF (Violation of Section 10(b) of the Exchange Act and Rule 10b-5) 35. The Commission repeats and incorporates by reference the allegations in paragraphs 1-34 of the Complaint as if set forth fully herein. 36. Lemcke, directly or indirectly, acting intentionally, knowingly or recklessly, by the use of means or instrumentalities of interstate commerce or of the mails, in connection with the purchase or sale of securities: (a) has employed or is employing devices, schemes or artifices to defraud; (b) has made or is making untrue statements of material fact or has omitted or is omitting to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) has engaged or is engaging in acts, practices or courses of business which operate as a fraud or deceit upon certain persons. 37. As a result, Lemcke has 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 thereunder [17 C.F.R. §240.10b-5]. 38. Lemcke's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder have involved fraud, deceit or deliberate or reckless disregard of regulatory requirements and have resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)]. THIRD CLAIM FOR RELIEF (Violation of Sections 206(1) and (2) of the Advisers Act) 39. The Commission repeats and incorporates by reference the allegations in paragraphs 1-38 of the Complaint as if set forth fully herein. 40. Lemcke was an "investment adviser" within the meaning of Section 202(a)(11) of the Advisers Act [15 U.S.C. §80b-2(a)(11)]. 41. Lemcke, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, acting intentionally, knowingly or recklessly: (i) has employed or is employing devices, schemes, or artifices to defraud; or (b) has engaged or is engaging in transactions, practices, or courses of business which operate as a fraud or deceit upon a client or prospective client. 42. As a result, Lemcke has violated and, unless enjoined, will continue to violate Sections 206(1) and (2) of the Advisers Act [15 U.S.C. §§80b-6(1), (2)]. 43. Lemcke's violations of Sections 206(1) and (2) of the Advisers Act have involved fraud, deceit or deliberate or reckless disregard of regulatory requirements and have resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)]. PRAYER FOR RELIEF WHEREFORE, the Commission requests that this Court: A. Enter a temporary restraining order, order freezing assets and order for other equitable relief in the form submitted with the Commission's motion for such relief and, upon further motion, enter a comparable preliminary injunction, order freezing assets and order for other equitable relief; B. Enter a permanent injunction restraining Lemcke and each of his agents, servants, employees and attorneys and those persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, including facsimile transmission or overnight delivery service, from directly or indirectly engaging in the conduct described above, or in conduct of similar purport and effect, in violation of: 1. Section 17(a) of the Securities Act [15 U.S.C. §77q(a)]; 2. 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]; 3. Sections 206(1) and (2) of the Advisers Act [15 U.S.C. §80b-6(1), (2)]; C. Require Lemcke to disgorge his ill-gotten gains and losses avoided, plus pre-judgment interest, with said monies to be distributed in accordance with a plan of distribution to be ordered by the Court; D. Order Lemcke to pay an appropriate civil monetary penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)], and Section 209(e) of the Advisers Act [15 U.S.C. §80b-9(e)]; E. Retain jurisdiction over this action to implement and carry out the terms of all orders and decrees that may be entered; and F. Award such other and further relief as the Court deems just and proper.
http://www.sec.gov/litigation/complaints/complr17237.htm
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