 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
UNITED STATES DISTRICT COURT
Plaintiff, Securities and Exchange Commission ("Commission") alleges that: I. INTRODUCTION 1. The Commission brings this action to enjoin Defendants from continuing to violate the federal securities laws in connection with their ongoing, fraudulent offering of securities issued by Defendant Discovery Capital Group, Inc. ("Discovery Capital" or "the Company"), a registered broker-dealer, and the misappropriation of investor funds by Discovery Capital's principal, Defendants Erik Walsh ("Walsh"), its chief executive officer. Since at least June 2001 through the present, Discovery Capital has raised at least $2.7 million from investors in the U.S. and abroad through the sale of securities in the form of promissory notes and preferred stock. Using high pressure, "boiler-room" tactics, sales agents employed by Discovery Capital falsely tell prospective investors, among other things, that Discovery Capital is affiliated with a well-known large broker-dealer, has "partnered" with major banks, or is poised to "go public" through an initial public offering ("IPO"). In reality, Discovery Capital is a registered broker-dealer with minimal legitimate business activities - its primary business activity since November 2001 has been to raise investor funds for the benefit of its principals and sales agents. In addition to paying themselves lucrative salaries and commissions, Defendants have failed to record on the books and records of Discovery Capital at least $1.3 million worth of loans, placing Discovery Capital in violation of net capital restrictions under the securities laws and, thereby, placing its brokerage customers at risk. Unless immediately restrained and enjoined, Defendants will continue to defraud the investing public and place investor funds at serious risk of diversion and theft. II. DEFENDANTS 2. Defendant Discovery Capital is a Florida corporation incorporated in September, 1991, with principal offices located at 2768 N. University Drive, Coral Springs, Florida. Discovery Capital is a broker dealer that has been registered with the Commission since 1992. While Discovery Capital maintains a retail operation under which registered representatives execute trades for brokerage accounts of customers, since at least November 2001, Discovery Capital has relied on the sale of its own securities to support its operations. 3. Defendant Erik Walsh, age 33, resides in Coral Springs, Florida. Walsh has been Discovery Capital's chairman and chief executive officer ("CEO") since June, 2000, when he gained control of the Company. Walsh manages the day-to-day operations of the Company. Walsh makes decisions regarding hiring, approves the company's payroll and provides information to the Company's financial operations officer for use in the maintenance of the Company's books and records. In addition, he also has signature authority over all of Discovery Capital's bank accounts and controls the movement of funds in those accounts. 4. Defendant John Abresch, age 40, resides in Coral Springs, Florida. Abresch is the vice president and director of institutional sales of Discovery Capital. He received commissions from the sale of Discovery Capital's securities totaling over $500,000. III. JURISDICTION AND VENUE 5. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d) and 77v(a), and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d), 78u(e) and 78aa. 6. Venue is appropriate in the Southern District of Florida. Certain of the acts and transactions constituting violations of the Securities Act and the Exchange Act have occurred within the Southern District of Florida. The principal offices of Defendant Discovery Capital are located within the Southern District of Florida. Defendants Walsh and Abresch reside in the Southern District of Florida. Defendants have engaged in many of the acts and practices complained of herein within the Southern District of Florida. 7. Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, the means and instruments of transportation and communication in interstate commerce, and the mails, in connection with the acts, practices, and courses of business complained of herein. IV. DEFENDANTS' FRAUDULENT OFFERING AND MISAPPROPRIATION A. Discovery Capital's Private Placement Offering 8. Since at least June 2001, Discovery Capital has been raising funds from investors through a private placement offering consisting of 70 "units," each of which includes 10,000 shares of Series A 7% convertible preferred stock, and one common stock purchase warrant, for a total offering of $3.5 million. 9. Defendants have converted Discovery Capital's offices into a boiler room where sales agents use a script prepared by Walsh to sell investments in Discovery Capital's private placement offering. As soon as a prospect is on the telephone, the sales agents launch into a high-pressure sales pitch about investing in Discovery Capital, telling prospects, inter alia, that:
10. All of these representations are false. In reality, Discovery Capital's prospects are dismal. Its quarterly FOCUS Reports filed with the Commission show that Discovery Capital has been losing money since at least December 31, 2000. As of December 31, 2001, the FOCUS Report shows Discovery Capital as having an accumulated deficit of $1,225,162, excluding the debt incurred through the sale of promissory notes. 11. The sales agents also use hard-sell tactics designed to create a sense of urgency. The sales agents routinely and falsely tell prospects that there are a limited number of units left, and that they must decide quickly or they will miss out on the opportunity to invest. The sales script that the sales agents use actually states that, "for all intents and purposes the private placement is sold out." 12. If a foreign prospect expresses interest in the offering, the sales agent provides the prospect with a "password" enabling the prospect to access Discovery Capital's Regulation S private placement memorandum ("Reg S PPM"), complete with money wiring instructions, from a restricted section of the Company's web site. Domestic prospects are mailed another version of the offering materials, Discovery Capital's Regulation D private placement memorandum ("Reg D PPM"). 13. Both the Reg S PPM and Reg D PPM, prepared by Walsh, contain material misrepresentations and omissions. For example, the Reg D PPM represents that "no commissions will be paid" in connection with the private placement, and further states that "none of the offering proceeds that the Company may receive will be used to make loans to officers, directors and/or affiliates." Contrary to those representations, Discovery Capital is in fact paying commissions to its sales agents ranging from 10% to 20% of sales. Over $900,000 has already been paid to sales agents, including over $500,000 to Abresch alone. The Reg S PPM fails to disclose any information about commissions. Additionally, both sets of PPMs describe Abresch's as holding a Series 24 license. In fact, Abresch does not hold such a license. 14. In the PPMs and through its sales agents, Discovery Capital is also making false statements and omissions about its compliance with net capital requirements. In the Reg D PPM, Discovery Capital represents to prospective investors that, "the Company has not been subject to any net capital violations since inception." In their sales pitch to investors, sales agents also present a very positive picture of Discovery Capital's finances, representing that the Company has grown by 300%. In fact, as alleged in Paragraphs 21 to 22 below, Discovery Capital has had a net capital deficiency since at least November 2001. The Reg S PPM fails to disclose any information about Discovery Capital's net capital deficiency. 15. Finally, investors are falsely told that by purchasing units through Discovery Capital's private offering, they will be purchasing an ownership interest in the Company. Discovery Capital, however, has failed to issue any certificates to investors evidencing their purchase of units in the private placement offering, and only one investor appears on the books and records of the Company as a shareholder. Further, Discovery Capital's books and records reveals that Walsh misappropriated at least $130,000 of the money raised from investors by improperly crediting those funds in Discovery Capital's books and records as his own capital contributions. B. Discovery Capital's Promissory Note Offering 16. Since at least June 2001, Discovery Capital has also sold securities in the form of promissory notes titled "Subordinated Bond Agreement" ("promissory notes"). The promissory notes represent that the holder will be paid interest on a quarterly basis at an annual rate of 14.25%, and become due on or before January 15, 2003. 17. Discovery Capital raised at least $1.3 million through the sale of five promissory notes to one U.S. investor alone. Upon information and belief, Discovery Capital has also sold promissory notes to other investors abroad. 18. Investors were told that the funds loaned to Discovery Capital would be used to, among other things, help the Company expand its business operations, hire additional personnel, and open a branch office in Finland. Each promissory note also provides that Discovery Capital will "apply the proceeds from the sale of the notes to fund its investment banking activities and to pay related transaction expenses." This representation is false because the funds were not deposited in Discovery Capital's operating accounts. Nor was any of the debt reflected in the Company's books and records. C. Misappropriation of Investor Funds 19. Defendants are misappropriating investor funds raised through the private placement offering and through the sale of promissory notes. At least 130,000 raised from investors through the sale of securities in its private offering have been "booked" on Discovery Capital's books and records as capital contributions made by Defendant Walsh. 20. Although over $1.3 million have been raised through the sale of promissory notes, none of this corporate debt is reflected in the Company's books and records. Instead, these proceeds were deposited into an undisclosed, "off the books" bank account controlled by Walsh. V. DISCOVERY CAPITAL'S NET CAPITAL AND BOOKS AND RECORDS VIOLATIONS 21. Pursuant to Section 15(c) of the Exchange Act and Rule15c3-1 thereunder, Discovery Capital is required to maintain a net capital of $5,000 or a ratio of aggregate indebtedness to net capital not to exceed 1500 percent. Commencing at least since November 2001, Discovery Capital has reported the following net capital calculations to the Commission:
22. Discovery Capital falsely reported its net capital because the Company did not include the loans made to it by virtue of the sale of the promissory notes. In reality, Discovery Capital should have accounted for the debt created by the sale of promissory notes. When the $1.3 million in promissory notes purchased by one investor are properly accounted for, Discovery Capital's true net capital requirements and deficiencies for the same periods are as follows:
23. Discovery Capital failed to give telegraphic notice pursuant to Exchange Act Rule 17a-11 informing the Commission that it has been transacting business without adequate net capital. 24. Discovery Capital has failed to create and make blotters or other records that accurately reflect the receipt and disbursement of customer funds and failed to accurately reflect customer liabilities in its financial ledgers. 25. Discovery Capital has failed to preserve original bank statements, correspondence files, and investor subscription agreements. COUNT I FRAUD IN THE OFFER OR SALE OF SECURITIES IN VIOLATION
26. The Commission repeats and realleges paragraphs 1 through paragraph 25 of the Complaint. 27. Since a date unknown but since at least June 2001 through the present, Defendants Discovery Capital, Walsh and Abresch, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, in the offer or sale of securities, as described herein, have knowingly, willfully or recklessly employed devices, schemes or artifices to defraud. 28. By reason of the foregoing, Defendants Discovery Capital, Walsh and Abresch directly and indirectly, have violated and, unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1). COUNT II FRAUD IN CONNECTION WITH THE PURCHASE OR SALE
29. The Commission repeats and realleges paragraphs 1 through paragraph 25 of the Complaint. 30. Since a date unknown but since at least June 2001 through the present, Defendants Discovery Capital, Walsh and Abresch, directly and indirectly, by use of the means and instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of the securities, as described herein, have knowingly, willfully or recklessly: (a) employed devices, schemes or 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/or (c) engaged in acts, practices and courses of business which have operated, are now operating and will operate as a fraud upon the purchasers of such securities. 31. By reason of the foregoing, Defendants Discovery Capital, Walsh and Abresch, directly or indirectly, have 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, 17 C.F.R. § 240. 10b-5, thereunder. COUNT III FRAUD IN VIOLATION OF
32. The Commission repeats and realleges paragraphs 1 through paragraph 25 of the Complaint. 33. Since a date unknown but since at least June 2001 through the present, Defendants Discovery Capital, Walsh and Abresch, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by the use of the mails, in the offer or sale of securities, as described herein, have : (a) obtained money or property by means of untrue statements of material facts and 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/or (b) engaged in transactions, practices and courses of business which are now operating and will operate as a fraud or deceit upon purchasers and prospective purchasers of such securities. 34. By reason of the foregoing, Defendants Discovery Capital, Walsh and Abresch, directly and indirectly, have violated and, unless enjoined, will continue to violate Sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77(q)(a)(2) and 77(q)(a)(3). COUNT IV FRAUD IN VIOLATION OF SECTION 15(c)1 OF THE EXCHANGE ACT AND RULE 15c1-2 PROMULGATED THEREUNDER
35. The Commission repeats and realleges paragraphs 1 through paragraph 25 of the Complaint. 36. Since a date unknown but since at least June 2001 through the present, Defendant Discovery Capital, while operating as a broker-dealer, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails, has effected a transaction in, or induced the purchase or sale of any security, as described herein, by means of manipulative, deceptive, or other fraudulent device or contrivance by: (a) making untrue statements of material facts and 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/or (b) engaging in transactions, practices and courses of business which are now operating and will operate as a fraud or deceit upon purchasers and prospective purchasers of such securities. 37. By reason of the foregoing, Defendant Discovery Capital, directly and indirectly, has violated and, unless enjoined, will continue to violate Sections 15(c)1 of the Exchange Act and Rule 15c1-2, 17 CFR § 240.15c1-2, thereunder. COUNT V VIOLATION OF SECTION 15(c) OF THE EXCHANGE ACT
38. The Commission repeats and realleges paragraphs 1 through paragraph 25 of the Complaint. 39. Since a date unknown but since at least June 2001 through the present, Defendant Discovery Capital, while operating as a broker-dealer, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails, to effect a transaction in, or to induce the purchase or sale of any security, as described herein, has: (1) failed to maintain adequate net capital; and (2) permitted its aggregate indebtedness to exceed 1500 percent of its net capital. 40. By reason of the foregoing, Defendant Discovery Capital, directly and indirectly, has violated and, unless enjoined, will continue to violate Sections 15(c) of the Exchange Act, 15 U.S.C. § 78o-5, and Rule 15c3-1, 17 CFR § 240.15c3-1, thereunder. COUNT VI VIOLATIONS OF SECTION 17(a) OF THE EXCHANGE ACT AND
41. The Commission repeats and realleges paragraphs 1 through paragraph 25 of the Complaint. 42. Since a date unknown but since at least June 2001 through the present, Defendant Discovery Capital, while operating as a broker-dealer, has: (1) failed to create and maintain current blotters or other records of original entry reflecting receipts and disbursements of customer funds; (2) failed to preserve all books and records required to be maintained by Rule 17a-3 for the period prescribed in Exchange Act Rule 17a-4, including, but not limited to, original bank statements, correspondence files and investor subscription agreements; (3) filed Part IIA of Form X-17A-5 with the NASD for the period ending December 31, 2001 containing inaccurate net capital computations; and (4) failed to give notice that its net capital declined below the minimum amount required pursuant to rule 15c3-1, and that its books and records are inaccurate. 43. By reason of the foregoing, Defendant Discovery Capital has violated and, unless enjoined, will continue to violate Section 17(a) of the Exchange Act, 15 USC § 78q and Rules 17a-3, 17a-4, 17a-5 and 17a-11, 17 CFR § § 240.17a-3, 240.17a-4, 240.17a-5, 240.17a-11, thereunder. RELIEF REQUESTED WHEREFORE, the Commission respectfully requests that the Court: I. Declaratory Relief Declare, determine and find that Defendants Discovery Capital, Walsh and Abresch committed the violations of the federal securities laws alleged herein. II. Temporary Restraining Order,
Issue a Temporary Restraining Order, a Preliminary Injunction and a Permanent Injunction, restraining and enjoining: (1) Defendants Discovery Capital, Walsh and Abresch, their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them, and each of them, from violating: (a) Section 17(a)(1) of the Securities Act [5 U.S.C. § 77q(a)]; (b) 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]; and (c) Sections 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77(q)(a)(2) and 77(q)(a)(3)]. (2) Defendant Discovery Capital Group, its officers, agents, servants, employees, attorneys, and all persons in active concert or participation with it, from violating Sections 15(c) and 17(a) of the Exchange Act [15 U.S.C. §§ 78o-5 and 78q ], and Rules 15c1-2, 15c3-1, 17a-3, 17a-4, 17a-5 and 17a-11 thereunder [17 CFR §§ 240.15c1-2, 240.15c3-1, 240.17a-3, 240.17a-4, 240.17a-5, 240.17a-11]. III. Disgorgement Issue an Order requiring Defendants Discovery Capital, Walsh and Abresch to disgorge all ill-gotten profits or proceeds that they have received as a result of the acts and/or courses of conduct complained of herein, with prejudgment interest. IV. Penalties Issue an Order directing Defendants Discovery Capital, Walsh and Abresch to pay civil money 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. § 78(d)(3). V. Asset Freeze and Accounting Issue an Order temporarily freezing the assets of Defendants Discovery Capital, Walsh and Abresch until further Order of the Court, and requiring accountings by Discovery Capital, Walsh and Abresch VI. Appointment of Receiver Issue an Order appointing a Receiver of the assets of Discovery Capital to marshal and safeguard all of said assets, and any other duties the Court deems appropriate, and to prepare a report to the Court and the Commission detailing the activities of Discovery Capital, Walsh and Abresch and the whereabouts of investor funds. VII. Records Preservation and Expedited Discovery Issue an Order requiring Defendants Discovery Capital, Walsh and Abresch to preserve any records related to the subject matter of this lawsuit that are in their custody, possession or subject to their control, and to respond to discovery on an expedited basis. VIII. Further Relief Grant such other and further relief as may be necessary and appropriate. IX. Retention of Jurisdiction Further, the Commission respectfully requests that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be entered, or to entertain any suitable application or motion by the Commission for additional relief within the jurisdiction of this Court. Respectfully submitted, March 14, 2002 By: _________________________
Walton S. Kinsey
Jennifer H. Zawid
Attorneys for Plaintiff
http://www.sec.gov/litigation/complaints/complr17420.htm
|