IN THE UNITED STATES DISTRICT COURT
COMPLAINT FOR INJUNCTIVE RELIEF
Plaintiff, Securities and Exchange Commission ("Commission") alleges, that:
1. From September 1997 through at least June 1999, defendant C. David Hallman ("Hallman") and defendant CDH & Affiliates, Inc. ("CDH"), a corporation that Hallman controlled, fraudulently raised more than $2.2 million in fees from at least 27 customers, purportedly to prepare corporate bond offerings for those customers and to sell the corporate bonds for the customers. In fact, the defendants misappropriated the funds for their own purposes. In an effort to avoid detection of their scheme, until at least July 2001, the defendants continually told their customers that the customers' bond issues would be funded and made other misrepresentations to encourage the customers to believe that funding was imminent. The defendants' activities violated the antifraud and broker-dealer registration provisions of the federal securities laws.
2. Defendant CDH has engaged, and unless restrained and enjoined by this Court, will continue to engage in acts and practices that constitute and will constitute violations of Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78o(a)], and Rule 10b-5 thereunder [17 C.F.R. §§ 240.10b-5].
3. Defendant Hallman has engaged, and unless restrained and enjoined by this Court, will continue to engage in acts and practices that constitute and will constitute violations of Sections 10(b) and 15(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78o(a)], and Rule 10b-5 thereunder [17 C.F.R. §§ 240.10b-5].
JURISDICTION AND VENUE
4. The Commission brings this action pursuant to Section Section 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)] to enjoin Defendants from engaging in the transactions, acts, practices, and courses of business alleged in this complaint, and transactions, acts, practices, and courses of business of similar purport and object, and other equitable relief.
5. This Court has jurisdiction over this action pursuant Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa].
6. Defendants, directly and indirectly, made use of the mails and the means and instrumentalities of interstate commerce in connection with the transactions, acts, practices, and courses of business alleged in this complaint that constituted violations of the Exchange Act.
7. Certain of the transactions, acts, practices, and courses of business constituting violations of the Exchange Act occurred in the Northern District of Georgia. Defendant CDH is located in the Northern District of Georgia. Defendant Hallman resides in the Northern District of Georgia.
8. Defendants, unless restrained and enjoined by this Court, will continue to engage in the transactions, acts, practices, and courses of business alleged in this complaint, and in transactions, acts, practices, and courses of business of similar purport and object.
9. C. David Hallman, age 48, resides in Fayetteville, Georgia.
10. Hallman controlled CDH and other entities participating in the scheme, signed agreements on behalf of CDH as its chairman, and made the numerous material misrepresentations to customers, which constituted securities law violations.
11. CDH & Affiliates, Inc. was incorporated in Georgia in August 1997 and is based in Fayetteville, Georgia.
12. Hallman controlled the activities of CDH and its employees.
CDH COLLECTED FEES TO PREPARE CORPORATE BOND OFFERINGS FOR ITS CUSTOMERS AND TO SELL THOSE BONDS FOR THE CUSTOMERS
13. Hallman and CDH raised more than $2,230,000 by charging customers fees for services it purportedly provided in preparing corporate bond issues for its customers and in selling those bonds for them.
14. CDH collected fees from at least twenty-seven customers ranging from $6,000 to $325,000.
15. Hallman and CDH represented that, for a fee, CDH would, among other things, conduct a feasibility study of the customers' business plan, print the bonds and offering documents, provide an attorney trust account, and "make a best effort to place the bond issue."
16. Hallman and CDH represented that the bonds would have a twenty-year term and would pay a 12% fixed annual interest rate.
17. Hallman had the customer sign two, and sometimes three, documents: a Memorandum of Agreement, a Joint Venture or Consulting Agreement and a letter appointing Hallman as a vice president for the customer's company to sell the bonds.
18. The first document, entitled the "Memorandum of Agreement," referred to the fee as the initial "hard cost" for the bonds and claimed that those costs included "printing, production disclosure, facilitation, consulting, and feasibility studying." The Memorandum of Agreement stated that an officer of the customer's company for "private placement" would place the bonds. Money from the sale of the bonds was to be placed in an attorney escrow account.
19. The second document, entitled either a "Joint Venture Agreement" or a "Consulting Agreement," represented that CDH had access to "companies, individuals, entities, and financial institutions that are not commonly known to the general public" and would provide bonds, disclosure documents, and an attorney trust account. CDH and its customer agreed to "standard non-circumvention and non-disclosure covenants, which are common in the industry" that purportedly prohibited the disclosure of "the amounts, or source of profits, in any manner." CDH committed to "make a best effort to place the bond issue" for the customer.
20. Several customers were also instructed to sign a letter, which appointed Hallman the "Vice-President of Sales and Public Relations" of their companies and authorized Hallman to sell the companies' bonds.
21. Hallman explained to at least one customer that he would not be a voting officer, rather, "just an employed vice-president in charge of placing the bonds. That way we don't have any securities registrations involved."
MISREPRESENTATIONS OF MATERIAL FACTS IN
CONNECTION WITH CONTRACTS TO SELL SECURITIES
22. Hallman and CDH falsely told some customers that CDH had successfully sold bonds for its customers.
23. Hallman and CDH falsely claimed that certain customers' fees would be refunded if their bonds were not sold within specific time periods.
24. Hallman and CDH made false claims that bond sales were imminent. Hallman misrepresented that the bonds would be sold within short periods of time ranging from four to twelve weeks and that customers would have to act quickly so that CDH could get their bonds finalized before the next placement. Hallman told several customers, falsely, that overseas investors were "lined up" ready to invest.
25. Hallman and CDH falsely claimed that they had access to sources of funding that were "not commonly known to the general public, and many members of the financial community."
26. Hallman and CDH had no reasonable basis to support their continuous claims that funding was imminent.
27. Hallman made these false claims to customers as early as September 1997, and he continued to make the same claims to customers until at least June 1999. Hallman knew that the representations were false when he made them.
28. As Hallman and CDH continued to solicit new customers in January 1999, an employee confronted him about collecting fees from new customers and promising to obtain funding for these customers' bonds when he had not found investors for existing customers' bonds. Hallman responded that they (CDH and Hallman) were "legally covered" and that "nowhere does it say that we are going to fund the projects."
FALSE CLAIMS ABOUT HIGH YIELD TRADING PROGRAM
29. Hallman falsely told customers that all or a portion of the proceeds from the sale of their bonds would be placed in a high yield trading program.
30. CDH prepared for each of its customers a "Use of Proceeds" section in the "Private Placement Memorandum" explaining that the bond "[p]roceeds are to be used in the investment and financing of managed programs engaged in the issuance, discount and trading of certain bank credit instruments" and that "the proceeds shall be secured by a certificate of deposit or other bank guarantee."
31. Hallman claimed to one customer that the high yield investment program would pay 30-40% every ten days and that in ninety days the bond's principal of $50 million plus interest would be paid back. Hallman and CDH misrepresented that the bonds were self-liquidating.
32. Hallman also told the customer that after its bond was paid off, the customer could keep its money in the high yield trading program and could make as much as $200 million in twenty-four months.
33. Hallman misrepresented that the high yield investment program involved European banks in a collaborative effort with the "feds" to support "world projects."
34. Hallman misrepresented that the high yield trading program involved mid-term bank notes and misrepresented that in order to enter the program you must have a project doing "humanitarian work."
35. Several joint venture and consulting agreements also stated that CDH would retain a portion of the profits from the high yield investment program where the bond proceeds would be invested.
36. Hallman and CDH had no reasonable basis to claim that these purported high yield trading programs existed or would produce the results he promised. In fact, Hallman knew when making the representations that no such trading programs exist.
EFFORTS TO AVOID DISCOVERY OF THE FRAUDULENT SCHEME
37. Hallman directed CDH and another company he controlled to send numerous lulling letters to customers, many signed by Hallman, which claimed that bonds had been sold, promised that bonds would soon be sold, or excused the delays in selling bonds.
38. In May 1998, Hallman signed and faxed a letter to at least one customer, that falsely claimed that CDH had "completed and concluded the placement of [the customer's] bonds."
39. Hallman directed CDH to send another letter to all customers in January 1999, that told customers to "stand by," that funding was "imminent," and would occur "ANYDAY."
40. In a letter, signed by Hallman and sent to customers in June 1999, CDH falsely represented that "companies are being funded right now."
41. In a letter, sent to customers in June 1999 by another company Hallman controlled, customers were told "funds were being moved to the Transfer Agent" and that the transfer agent was working to transfer funds to the customers.
42. In July 1999, Hallman directed an employee of another company that Hallman controlled to send signed "Subscription Agreements" to CDH's customers. In these Subscription Agreements, Hallman represented that the company signing the subscription agreement was an "institutional investor" and was going to buy the bonds from the customers.
43. In an April 2000 letter signed by Hallman, customers were told that their first distribution of funds should be "resolved in just a few more days."
44. In July 2001, a company Hallman controlled sent a letter to Hallman's customers that falsely stated that another entity would soon be ready to start funding customers.
45. Hallman and CDH constantly reminded customers to keep the arrangements private to avoid problems.
46. Hallman also threatened customers that if they violated their non-disclosure agreements, they would be subject to arbitration or a civil suit.
47. Hallman sent letters on behalf of CDH instructing customers how to respond to parties who might inquire into the nature of the promised funding.
48. In a July 1998 letter, Hallman stated, "[r]emember to be aware how to handle inquiries regarding this transaction .... You are doing a Reg. D private placement, and the key word is private."
49. In another July 1998 letter, Hallman instructed customers that if they were contacted by the SEC, they should tell the SEC that they are doing a Reg. D private placement, and "tell them to find some criminals to mess with or you will file an injunction."
50. By the conduct described above, Hallman engaged in business as a broker-dealer and induced and attempted to induce the purchase and sale of securities. Hallman was not registered with the Commission as a broker or dealer, and was not associated with any broker or dealer. Hallman's business was not exclusively interstate.
51. By the conduct described above, CDH engaged in business as a broker-dealer, and induced and attempted to induce the purchase and sale of securities. CDH was not registered with the Commission as a broker or dealer, was not associated with a registered broker or dealer and its business was not exclusively interstate.
52. The bonds which the defendants purported to sell on behalf of the customers, and the "high yield" trading program in which customers' funds would purportedly be placed, constitute securities, as that term is defined in the Exchange Act.
Violations of 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]
53. Paragraphs 1 through 52 are hereby realleged and are incorporated herein by reference.
54. Defendants Hallman and CDH, from 1997 through 1999, in connection with the purchase and sale of securities, directly and indirectly, by the use of means and instrumentalities of interstate commerce and by use of the mails:
a. employed devices, schemes, and artifices to defraud;
b. made untrue statements of material facts and omitted 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
c. engaged in acts, practices, and courses of business which would and did operate as a fraud and deceit upon persons, in connection with the purchase and sale of such securities, all as more particularly described above.
55. Defendants Hallman and CDH knew, or were severely reckless in not knowing, that the statements and representations alleged herein were false and misleading because Hallman knew, or was severely reckless in not knowing, among other things, that funding was not imminent, and that CDH was not placing bonds for its customers.
56. Hallman knew, despite his representations to the contrary, that no companies' bonds were funded.
57. Hallman had no basis for believing the high yield trading programs existed, and he was, at a minimum, severely reckless in misrepresenting that customers' funds would be invested in the programs, in order to obtain fees from customers.
58. By reason of the foregoing, Defendants Hallman and CDH have violated, and unless restrained and 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].
Violations of Section 15(a) of the
Exchange Act [15 U.S.C. §§ 78o(a)]
59. Paragraphs 1 through 52 are hereby realleged and are incorporated herein by reference.
60. Defendants Hallman and CDH, from 1997 through 1999, used the mails and the means and instrumentalities of interstate commerce, to effect transactions in, or induced or attempted to induce the purchase or sale of securities, without registering with the Commission as a broker, as more particularly described above.
61. By reason of the foregoing, Defendants Hallman and CDH have violated, and unless restrained and enjoined, will continue to violate Section 15(a) of the Exchange Act [15 U.S.C. §§ 78o(a)].
PRAYER FOR RELIEF
WHEREFORE, Plaintiff Securities and Exchange Commission respectfully prays for:
A permanent injunction enjoining defendants, their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise, and each of them, from violating Sections 10(b) and 15(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78o(a)], and Rule 10b-5 thereunder [17 C.F.R. §§ 240.10b-5].
An order requiring accountings by the defendants of the fees collected by the defendants and ordering the disgorgement of all ill-gotten gains from their illegal conduct with prejudgment interest.
An order pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. §§ 78u(d)(3)] imposing civil penalties against the defendants.
Such other and further relief as this Court may deem just, equitable, and appropriate in connection with the enforcement of the federal securities laws and for the protection of investors. Further, the Securities and Exchange Commission respectfully prays that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that
are entered or to entertain any suitable application or motion by the Commission for additional relief within the jurisdiction of this Court.