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IN THE UNITED STATES DISTRICT COURT
COMPLAINT Plaintiff Securities and Exchange Commission ("Commission"), for its claims against defendants Big Country AGS, Inc. d/b/a AGS, Inc. ("AGS"), Ardis D. Gaither, John R. Temple, Mark Lester Tuley, Africa Gemstone Corporation ("Africa Gemstone"), and Godfried Martin Sarpong (collectively "Defendants"), alleges as follows. Jurisdiction 1. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77t(b)] and Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78u(d)], to enjoin the Defendants from future violations of the federal securities laws. The Commission also seeks disgorgement of ill-gotten gains from the Defendants, plus prejudgment interest, and civil 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)]. 1) The Court has jurisdiction over this action pursuant to Section 22 of the Securities Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. 2) The Defendants, directly or indirectly, made use of the means or instruments of transportation and communication, and the means or instrumentalities of interstate commerce or of the mails, in connection with the transactions, acts, practices and courses of business alleged in this Complaint. Certain of the transactions, acts, practices and courses of business alleged herein took place in the Northern District of Texas. Summary 3) This civil action involves an international gold trading scheme and a fraudulent offering of unregistered corporate promissory notes that caused unwitting investors in the Northern District of Texas and elsewhere to lose over $1 million. 4) Between February 2000 and January 2001, AGS and its principals, Gaither, Temple, and Tuley ("the AGS principals" or "the AGS officers"), along with several unregistered brokers, raised over $1.3 million by offering and selling unregistered AGS promissory notes to investors in several states. 5) In offering and selling the promissory notes, the AGS officers and the brokers made false and misleading claims, and failed to disclose material facts, about the risks of the investment and the results the investors could expect. 6) The AGS principals and the brokers assured investors that they could, whenever they so chose, liquidate their principal upon thirty days notice. 7) The AGS principals and the brokers also promised investors monthly returns of five percent to ten percent. They represented to investors that AGS could earn sufficient profits to be able to pay those returns, because AGS and an "associated" Ghanaian corporation - Africa Gemstone - would use the investors' money to buy gold bullion in Ghana, export it to the United Kingdom, and sell it there at a 12% profit. 8) The AGS principals and the brokers also stated that the risk to investors was minimal, because of "built-in safety factors," such as oversight by the government of Ghana, as well as verification of the investment by AGS, through investigation and through the AGS principals' experience as the venture's seminal investors. 9) In fact, the AGS principals had not truly tested the investment, because they never attempted to liquidate their principal, and they received only a handful of interest payments. They essentially took Sarpong's word that their principal was safe, and that profits from gold trading would be sufficient for AGS to meet its obligations to investors. 10) In fact, the Ghanaian government never monitored Sarpong's handling of investor funds and gold, and the AGS principals took virtually no steps to ensure or verify that Sarpong was using investor funds appropriately and in accordance with his promises to AGS. 11) In fact, although Sarpong agreed to trade gold for AGS on an ongoing basis - continually returning any sale proceeds to Ghana to purchase more gold - he instead diverted more than half of the sale proceeds (over $750,000) to his personal bank account. Sarpong did so without the authorization or knowledge of AGS, because of their failure to oversee his activities. 12) In fact, rather than exporting to England all of the gold that he purchased with investor monies, and selling the gold there at a profit, Sarpong stole two gold shipments valued at approximately $250,000. Because of their failure to monitor Sarpong's activities, AGS and its principals failed to detect Sarpong's theft of the gold. 13) In fact, as a result of Sarpong's thefts, the investment was never profitable, and AGS never earned sufficient profits to be able to pay the investors the returns it had promised them. 14) In fact, as a result of Sarpong's thefts, AGS is now unable to repay the investors' principal, to say nothing of doing so on thirty days notice. 15) By reason of these facts, the defendants have violated Sections 5(a), 5(c) and 17(a) of the Securities Act [15 U.S.C. §§77e(a), 77e(c) and 77q(a)] and 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].
Defendants
16) Big Country AGS, Inc. is a privately held Texas corporation with its principal place of business in Sweetwater, in the Northern District of Texas.
17) Ardis Gaither, age 60, of Sweetwater, Texas, is the president, a 33% shareholder, and a director of AGS.
18) John Temple, age 66, of Sweetwater, Texas, is the secretary-treasurer, a 33% shareholder, and a director of AGS.
19) Mark Tuley, age 34, of Abilene, Texas, is the vice president, a 33% shareholder, and a director of AGS.
20) Godfried Sarpong, age 44, is a citizen of the Republic of Ghana residing in London. Sarpong is the sole owner and chief executive officer of Africa Gemstone Corporation.
21) Africa Gemstone Corporation is a privately held Ghanaian corporation with offices in London and Accra, Ghana.
Statement of Facts
A. The Promissory Note Offering
22) Between February and August 2000, AGS sold $717,000 worth of AGS promissory notes (not counting $144,000 worth of notes purchased by the AGS principals) to twenty investors residing in several states.
23) Each note bore interest at the rate of ten percent per month, and stated that the investor "reserves the right to terminate the loan and demand payment of the principal amount upon thirty (30) days written notice."
24) Some investors chose to receive interest via monthly cash payments, while others chose to reinvest the interest that accrued each month.
25) All three of the AGS principals personally offered and sold the promissory notes through telephone calls and face-to-face meetings with prospective investors, and Sarpong advised the AGS principals about the proper way to pitch the opportunity to the offerees.
26) Gaither, Temple and Tuley provided to each prospective investor a package of offering materials that Gaither, Temple, Tuley and Sarpong reviewed and approved. The offering materials included essentially the same representations that the AGS principals made to investors in person and by telephone.
27) The offering materials explained that AGS would use investor funds to make money in the international gold trade by providing financing to its Ghanaian "associate," Africa Gemstone, which would purchase gold bullion in Ghana and sell it in England at a 12% profit.
28) The offering materials further stated that the gold trading venture had "many built-in safety factors, the most significant being the oversight responsibilities of the Ghanaian government." Specifically, the Ghanaian government had "a mandate to maintain the integrity of every metal transaction," and therefore it ensured "proper and ethical" business conduct according to "the standard protocols of international trade."
29) The AGS principals also represented to investors that they had verified the investment - through investigation and through their experience as the venture's seminal investors - thus proving that the process was successful and that any risk associated with the investment was not only "minimal," but also well rewarded.
30) The AGS principals never provided financial information about AGS to offerees, although financial statements for the company would have revealed that (a) AGS had no assets, and no sources of revenue other than gold trading by Africa Gemstone, with which to pay the returns AGS promised to its investors; and (b) the gold trading business was not actually generating sufficient cash flow to enable AGS to pay the returns it promised to its investors.
31) On September 18, 2000, after selling over $700,000 worth of promissory notes, AGS filed a Form D with the Commission, claiming that its note offering was exempt from registration as a transaction not involving any public offering of securities.
32) Also in September 2000, AGS hired unregistered brokers from Arizona to raise additional money by selling AGS promissory notes bearing monthly interest at the rate of five percent. Except for this lower rate of interest, the notes sold by the unregistered brokers were identical to the ten percent notes sold earlier in the year by AGS.
33) AGS agreed to pay the unregistered brokers a transaction-based commission if they met certain fund-raising goals.
34) The unregistered brokers offered the notes by telephone to more than fifty prospective investors in various states, making essentially the same representations about the investment that the AGS principals had made to potential investors. The brokers enlisted Gaither to mail the company's offering materials to the offerees, but never provided financial information about AGS.
35) The unregistered brokers obtained most of the offerees' names from "lead sheets" that they maintained in connection with other brokerage activities.
36) Seven offerees, living in seven different states, purchased promissory notes worth a total of $440,000 as a result of solicitations by the unregistered brokers.
B. Misappropriation of Money and Gold by Sarpong
37) Sarpong and AGS agreed that Africa Gemstone would purchase gold in Ghana using the investors' funds, then export the gold to the United Kingdom and sell it to Englehard Sales, Ltd. ("Englehard"), an English refinery.
38) AGS and Sarpong further agreed that Sarpong would ordinarily direct the proceeds of each sale back to Ghana to make the next gold purchase. In this way, the gold trading process would continue indefinitely.
39) Sarpong alone had authority to instruct Englehard where to wire the proceeds of each sale, and he designated two bank accounts to receive wire transfers from Englehard - one in Ghana, to be used for further gold purchases; and another (his personal account) in London, from which he purportedly would remit funds to AGS to pay business expenses and returns to investors.
40) The AGS principals did not monitor either Sarpong's disbursement instructions to Englehard, or Englehard's disbursements of sale proceeds. The AGS principals simply trusted Sarpong to direct the funds back to Ghana for additional gold purchases, and never verified Sarpong's disposition of the money.
41) Englehard maintained a detailed record of its disbursements of gold sale proceeds, however, and that record, along with Sarpong's bank records, reflects the actual disposition of the sale proceeds by Sarpong.
42) Between February 2000 and January 2001, Englehard paid Sarpong and Africa Gemstone roughly $1.45 million via twenty-two separate wire transfers. Pursuant to Sarpong's instructions, only four of those wire transfers - worth about $615,000 in all - went to the account in Ghana. The other 18 wire transfers - worth over $850,000 - went to Sarpong's personal account in London.
43) Out of the funds that Sarpong transferred to his personal account, he paid AGS about $100,000. Sarpong withdrew roughly $750,000 from that account (mostly in cash) during 2000 and 2001, and on August 20, 2001 the account had a balance of less than $500.
44) Sarpong did not have authorization from AGS to use the $750,000 described in the preceding paragraph for purposes other than gold trading, and the AGS principals were not aware of Sarpong's diversion of those funds until it came to light during the Commission's investigation.
45) Sarpong therefore misappropriated roughly $750,000 of investor funds without the knowledge or authorization of AGS or its principals.
46) Between March 2000 and January 2001, Sarpong purchased and took delivery of twelve gold shipments in Ghana, according to records maintained by the Ghanaian authorities. Sarpong made all of those gold purchases with funds belonging to AGS and its investors.
47) Englehard's records reflect that only ten of the twelve shipments ever reached Englehard.
48) The disposition of the other two gold shipments - worth about $250,000 total - remains unknown, but the AGS principals did not authorize Sarpong to dispose of any gold shipments other than by selling them to Englehard, and they were not aware that he had done so until those facts came to light during the Commission's investigation.
49) Sarpong therefore misappropriated roughly $250,000 worth of gold without the knowledge or authorization of AGS or its principals.
50) Fund raising and gold trading both ceased in January 2001, after the Pennsylvania Securities Commission ordered AGS, Gaither, Temple and certain unregistered brokers to cease and desist from violating the Pennsylvania securities laws by offering and selling the promissory notes.
51) The Commission commenced a formal investigation in March 2001, and the staff of the Commission's Division of Enforcement served subpoenas on AGS and its principals in April 2001.
C. False and Misleading Statements to Investors
52) At all times during the offering of promissory notes, AGS and its principals and brokers consistently represented to investors and prospective investors that AGS would repay their principal on 30 days written notice.
53) At most, if not all, of those times, however, due to Sarpong's misappropriation of funds and gold, AGS did not have at its disposal the assets it would have needed to repay principal in 30 days, if a substantial number of the investors had chosen to liquidate their investments.
54) AGS and its principals were severely reckless in not knowing that AGS lacked the resources to liquidate investors' principal on 30 days notice, because AGS failed to take reasonable steps to oversee or verify Sarpong's handling of the investors' money and gold.
55) AGS and its principals and brokers also consistently represented to current and prospective investors that AGS could earn enough money through gold trading to be able to pay interest at the rate of five percent or ten percent per month. Indeed, while making those representations, during 2000 and the first quarter of 2001, AGS paid nearly $400,000 in monthly returns to investors, without disclosing to investors that some or all of the returns were not derived from gold trading profits.
56) AGS never actually earned enough money from gold trading to be able to pay those returns, largely because Sarpong's thefts substantially depleted the working capital that should have been used for buying and exporting gold. AGS promissory notes bearing interest at five percent and ten percent per month accrued over $1 million in interest before May 31, 2001, but all of Sarpong's gold trades generated in total only about $150,000 in gross profits, of which Sarpong paid only about $100,000 to AGS.
57) AGS and its principals either knew, or were severely reckless in not knowing, that AGS was not receiving sufficient revenue from gold trading to be able to pay the returns AGS promised its investors, because the company's own bank records reflected the disparity between the amounts AGS paid out to investors (nearly $400,000 total) and the amounts AGS received from Sarpong (approximately $100,000 total).
58) AGS and its principals also knew or were severely reckless in not knowing that a substantial portion of the funds AGS paid to investors must have come from investor principal that AGS retained in the United States, rather than from profits generated by gold trading overseas.
59) AGS and its officers and brokers also repeatedly represented to investors that AGS had tested the investment and found it to be safe and profitable.
60) In fact, however, although Gaither and Temple invested money in the venture, they did not test Sarpong's ability to earn money through gold trading, or his ability or willingness to return invested principal. Neither Temple nor Gaither ever tried to liquidate any part of their principal, and Temple received interest payments on only a handful of occasions, while Gaither never received any interest at all.
61) Neither did AGS or its principals take steps to verify or ensure that Sarpong was handling the investors' money properly.
62) The AGS principals knew that their claims about testing the investment, and about proving its processes to be safe and profitable, were false and misleading.
D. Investor Losses
63) The Defendants are either unable or unwilling to return to investors any of the $1,300,000 that AGS raised, or the $150,000 in gold trading profits that Sarpong earned using investor monies.
64) AGS disbursed approximately $1,200,000 to Sarpong and Africa Gemstone for gold trading, and Sarpong apparently earned about $150,000 in trading profits. Sarpong paid AGS about $100,000, leaving the total investor monies under Sarpong's control at about $1,250,000.
65) Sarpong misappropriated roughly $750,000 in cash and about $250,000 worth of gold. The Commission has not learned the fate of the remaining $250,000 in principal and trading profits that was under Sarpong's control.
66) Sarpong and Africa Gemstone acknowledged, in a letter to AGS dated November 30, 2001, that Africa Gemstone owes AGS $970,000, but stated that Africa Gemstone was not able to pay the money.
67) AGS expended the investor principal that it retained, as well as the funds it received from Sarpong, on a variety of business expenses, including interest payments to investors. The company's balance sheet as of May 31, 2001 reflected a negative cash balance and no assets other than amortized start-up costs and debts owed to the company by Africa Gemstone and Sarpong.
68) AGS paid interest according to the terms of the promissory notes during 2000 and roughly the first quarter of 2001, and repaid principal requested by several investors during that period. Starting at least as early as May 2001, however, AGS began refusing all demands from investors for interest and principal, stating that it would repay the investors once the Commission's investigation ended.
69) On December 4, 2001, counsel for AGS informed the Commission that AGS and its principals will not be able to pay the amounts owed to the investors under the promissory notes, unless and until Africa Gemstone pays its debt to AGS.
CAUSES OF ACTION
COUNT ONE
Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5
70) The Commission restates and incorporates by reference herein the allegations set forth in Paragraphs 1-70 of the Complaint.
71) The defendants AGS, Gaither, Temple, Tuley, Africa Gemstone and Sarpong, directly or indirectly, singly or in concert with others, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails (a) have employed devices, schemes and artifices to defraud, (b) have made untrue statements of material facts and have 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 and (c) have engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
72) As a part of and in furtherance of their scheme to defraud, the defendants, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence and oral presentations which contained untrue statements of material facts and misrepresentations of material facts and which 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, including, but not limited to, those set forth above.
73) The defendants made those misrepresentations and omissions knowingly or with reckless disregard for the truth.
74) By reason of the foregoing, the defendants violated and, unless enjoined, will continue to violate the provisions of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 [17 C.F.R. §240.10b-5].
COUNT TWO
Violations Of Section 17(a) Of The Securities Act
75) The Commission restates and incorporates by reference herein the allegations set forth in Paragraphs 1-70 of the Complaint.
76) The defendants AGS, Gaither, Temple, Tuley, Africa Gemstone and Sarpong, directly or indirectly, singly or in concert with others, in the offer and sale of securities, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, have (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices or courses of business which operate or would operate as a fraud or deceit.
77) As part of and in furtherance of this scheme, the defendants, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence and oral presentations which contained untrue statements of material fact and which 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, including, but not limited to, those statements and omissions set forth above.
78) The defendants made the above-referenced misrepresentations and omissions knowingly or with reckless disregard for the truth.
79) By reason of the foregoing, the defendants violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. §77q(a)].
COUNT THREE
Violations Of Sections 5(a) And 5(c) Of The Securities Act
80) The Commission restates and incorporates by reference herein the allegations set forth in Paragraphs 1-70 of the Complaint.
81) The defendants AGS, Gaither, Temple, Tuley, Africa Gemstone and Sarpong, directly or indirectly, singly or in concert with others, have been offering to sell, selling and delivering after sale, certain securities and have been, directly and indirectly, (a) making use of the means and instruments of transportation and communication in interstate commerce and of the mails to sell securities, through the use of written contracts, offering documents and otherwise, (b) carrying and causing to be carried through the mails and in interstate commerce by the means and instruments of transportation such securities for the purpose of sale and for delivery after sale, and (c) making use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell such securities.
82) No registration statement has been filed with the Commission or is otherwise in effect with respect to the offer and sale of any securities described herein.
83) By reason of the foregoing, the defendants violated and, unless enjoined, will continue to violate Section 5(a) and (c) of the Securities Act [15 U.S.C. §77e(a) and (c)].
PRAYER FOR RELIEF
WHEREFORE, Plaintiff respectfully requests that this Court:
I.
Permanently enjoin the defendants AGS, Gaither, Temple, Tuley, Africa Gemstone and Sarpong, and their agents, servants, employees, attorneys 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 future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act [15 U.S.C. §§77e(a), 77e(c) and 77q(a)] and 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].
II.
Order the defendants AGS, Gaither, Temple, Tuley, Africa Gemstone and Sarpong jointly and severally to disgorge an amount equal to the funds and benefits they obtained as a result of the violations alleged, plus prejudgment interest on that amount.
III.
Appoint a Special Master for the purpose of disbursing, on a pro rata basis, to the bona fide holders of the AGS promissory notes described in the Complaint, the proceeds of disgorgement and prejudgment interest paid by the Defendants, and order the Defendants jointly and severally to pay the costs of such disbursement.
IV.
Order civil penalties against the Defendants pursuant to pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act, for violations of the federal securities laws as alleged herein.
V.
Order such other and further relief as the Court may deem just and proper.
Dated: March 22, 2002
___________________________
Attorneys for Plaintiff
Of Counsel:
VICTORIA F. PRESCOTT
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