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UNITED STATES DISTRICT COURT
COMPLAINT FOR INJUNCTIVE AND OTHER EQUITABLE RELIEF Plaintiff U.S. Securities and Exchange Commission ("SEC") for its Complaint for Injunctive and Other Equitable Relief, states as follows: NATURE OF THE ACTION 1. This matter involves an ongoing, fraudulent and unregistered offering of units of Defendant House Edge, L.P. (the "Hedge Fund") by Defendants House Asset Management, L.L.C. (the "Adviser"), Paul J. House ("House"), and Brandon R. Moore ("Moore"). From at least March 2000 to the present, the Defendants have sold units in the Hedge Fund to at least 60 investors and thereby raised at least $2.9 million. Many of the Hedge Fund investors have used retirement savings accounts to invest in the Hedge Fund. 2. In offering these units to investors, House, Moore, the Adviser, and the Hedge Fund have made numerous false and misleading statements about the use of investor proceeds, the returns earned by the Hedge Fund and the background of House and Moore. Defendants have told Hedge Fund investors that investor proceeds are used to engage in a sophisticated securities trading strategy, when House and Moore have loaned more than $400,000 in investor proceeds to themselves so that they could buy real estate in their own names. Defendants have also fabricated return information for the Hedge Fund, claiming that it has generated cumulative returns of up to 148%, when it has consistently suffered losses, totaling at least $850,000 to date. Defendants have also failed to disclose to Hedge Fund investors that House and Moore each have recently emerged from Chapter 7 bankruptcy proceedings. Further, although Hedge Fund investors are told in offering materials that House had a career as a registered representative working for various broker-dealer firms, they are not told that House was terminated from a brokerage firm and barred by the NASD for misconduct related to his offering of Hedge Fund units to investors. 3. The Defendants raised at least $700,000 in investor proceeds from May 2002 to the present, and are committed to raising another $5 million for the Hedge Fund in the next 30 to 60 days. From May to June 2002, House and Moore have diverted nearly $350,000 in Hedge Fund investor proceeds to themselves so that they could buy real estate in their own names. Further, the amount owed to Hedge Fund investors substantially exceeds the liquid assets of the Hedge Fund. Accordingly, there is an immediate risk that Defendants will defraud additional investors and further dissipate investor funds unless enjoined. 4. By making false and misleading statements to actual and potential investors, the Hedge Fund, the Adviser, House, and Moore, directly and indirectly, have engaged, are engaged and are about to engage in transactions, acts, practices and courses of business which constitute violations of Sections 5(a), 5(c), 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Investment Advisers Act"), and Section 7(a) of the Investment Company Act of 1940 ("Investment Company Act"). There is a reasonable likelihood that the Hedge Fund, the Adviser, House, and Moore will, unless enjoined, continue to engage in the transactions, acts, practices and courses of business set forth in this Complaint, and transactions, acts, practices and courses of business of similar purport and object. 5. The Commission brings this action to restrain and enjoin such transactions, acts, practices, and courses of business pursuant to Section 20(b) of the Securities Act [15 U.S.C. §77t(b)] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§78u(d) and 78u(e)], Section 209(d) of the Investment Advisers Act [15 U.S.C. § 80b-9], and Section 42(d) of the Investment Company Act [15 U.S.C. § 80a-41]. JURISDICTION 6. The Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77v(a)], Section 27 of the Exchange Act [15 U.S.C. §78aa], Section 214 of the Investment Advisers Act [15 U.S.C. § 80b-14], and Section 44 of the Investment Company Act [15 U.S.C. § 80a-43]. 7. The Hedge Fund, the Adviser, House, and Moore directly and indirectly, have made, and are making, use of the mails, and of the means and instrumentalities of interstate commerce, in connection with the transactions, acts, practices and courses of business alleged in this Complaint. THE DEFENDANTS 8. House Asset Management, L.L.C. (the "Adviser") is a Nevada limited liability company headquartered in Mount Zion, Illinois. The Adviser, which was founded in 2000, acts as the manager for the Hedge Fund. 9. House Edge L.P. (the "Hedge Fund") is a Nevada limited partnership headquartered in Mount Zion, Illinois. The Hedge Fund, which was founded in 2000, currently has approximately 60 investors and at least $1.7 million in assets under management. It has raised at least $2.9 million from investors since March 2000. 10. Paul J. House III ("House") is 29 years old and a resident of Decatur, Illinois. House is a managing member of the Adviser, the general partner in the Hedge Fund. House formerly was a registered representative at several different broker-dealer firms registered with the SEC. Equitas America, L.L.C., ("Equitas"), the last such firm for which House worked, terminated House in March 2000 based on his unauthorized sale of House Edge units while he was a registered representative of Equitas. In May 2002, the NASD barred House from association with any member firm based on, among other things, his unauthorized sale of Hedge Fund units while he was a registered representative of Equitas and based on House's providing false information to the NASD in its investigation of him. On June 22, 2000, House's personal debts were discharged pursuant to a Chapter 7 bankruptcy proceeding. 11. Brandon Moore ("Moore") is 27 years old and a resident of Decatur, Illinois. Moore is the Chief Financial Officer of the Adviser and the Hedge Fund. On March 22, 2001, Moore's personal debts were discharged pursuant to a Chapter 7 bankruptcy proceeding. THE FACTS Offer and Sale of Hedge Fund Units 12. House founded the Hedge Fund in March 2000, while he was working at Equitas a registered broker-dealer, as a registered representative. House created the Adviser to act as the General Partner for the Hedge Fund. House is a managing member of the Adviser, and Moore acts as its Chief Financial Officer. Investors in the Hedge Fund buy units of the limited partnership. Hedge Fund investors do not play a role in the operations of the Hedge Fund. Instead, House and Moore decide how the Hedge Fund uses investor proceeds. Neither the Hedge Fund itself, nor its offering of units to investors, has ever been registered with the SEC. 13. From March 2000 until the present, the Defendants have offered and sold units in the Hedge Fund primarily to persons residing in Decatur, Illinois and surrounding communities. Many of the investors who invested in the Hedge Fund have invested retirement savings into the Hedge Fund, through means such as IRA rollovers. House, Moore, the Adviser, and the Hedge Fund have marketed the Hedge Fund to potential investors through offering materials such as a private placement memorandum dated March 20, 2000, several brochures, and the Hedge Fund website. Most, but not all, investors were given a copy of the private placement memorandum at the time they invested in the Hedge Fund. Some investors also received a copy of the Hedge Fund brochure at the time of their investment in the Hedge Fund. 14. Although Hedge Fund offering materials claim that the offering is targeted at sophisticated, accredited investors, Defendants have failed to take steps to so limit the scope of the offering. For example, the Hedge Fund website, which was accessible to the general public beginning in at least April 2002, included application forms for individuals to make investments in the Hedge Fund. The Hedge Fund did not take any measures to limit access to sophisticated, accredited investors. 15. The Defendants have solicited investments in the Hedge Fund through a variety of means, including through personal solicitations and through the Hedge Fund website. House, Moore and other individuals have actively solicited investments in the Hedge Fund through personal solicitations. 16. Defendants send Hedge Fund investors periodic account statements, prepared and signed by House, which show an account balance at the beginning of the period and an account balance at the end of the period. Operation of the Hedge Fund 17. House and Moore exclusively direct the use of Hedge Fund investor proceeds. The Defendants have raised at least $2.9 million since the inception of the Hedge Fund and claim to have at least $1.7 million in investor funds currently under management through the Hedge Fund. Investor proceeds are generally pooled in accounts in the name of the Hedge Fund, the Adviser and House. Investor proceeds have been used in at least three different ways since the inception of the Hedge Fund: to engage in speculative trading activity, to invest in a low-yield money market account in the name of House and the Adviser, and to purchase real estate for House and Moore. 18. Investor proceeds that are used to trade in securities are directed to brokerage accounts in the name of the Hedge Fund and generally used to engage in leveraged trading of stocks and options. House is responsible for the Hedge Fund securities trading activity in these accounts and maintains spreadsheets to monitor the performance of the Hedge Fund's portfolio. The Hedge Fund has consistently suffered significant losses through its trading activities, with a cumulative loss to date for the Hedge Fund of at least $850,000. 19. Additionally, House, Moore, and the Adviser borrowed approximately $425,000 from the Hedge Fund to purchase three parcels of real estate which they hold in their own names. In May 2001, House used approximately $82,500 in investor proceeds to purchase his personal residence located at 30 Colorado in Decatur, Illinois. In May 2002, House and Moore used approximately $227,000 in investor proceeds to purchase an office building located at 1505 W. Main Street in Mt. Zion, Illinois. House and Moore made this purchase in the name of BP Holdings, a partnership that they jointly control. Finally, on June 6, 2002, Moore used $120,000 in investor proceeds to purchase his personal residence located at 1929 Ravina Park in Decatur, Illinois. House and Moore borrowed the funds used to make these real estate purchases from the Hedge Fund in exchange for "5 year balloon" promissory notes at 9% in annual interest payable to the Hedge Fund. Currently, the Hedge Fund has no lien on the real estate. 20. House and Moore have also directed investor proceeds to a money market account in the name of House and the Adviser that offers an annual return of approximately 2%. 21. The Hedge Fund is currently in a precarious financial state. Although the Hedge Fund currently has at least $1.7 million of investor funds under management, its primary brokerage account reflected a balance of approximately $744,000 in cash and securities as of June 11. Approximately $700,000 of that amount was deposited into the Hedge Fund's brokerage account in May 2002. House and Moore have reported that, aside from investor proceeds in the brokerage account and invested in their personal real estate holdings, the Hedge Fund has just one money market account with a balance of approximately $60,000. As a result, the Hedge Fund's liquid assets are significantly less than the amounts invested in the Hedge Fund. Misrepresentations and Omissions of Material Fact 22. From March 2000 through the present, House, Moore, the Adviser, and the Hedge Fund have made false and misleading to investors regarding the use of investor proceeds, returns generated by the Hedge Fund, and House and Moore's background. 23. The private placement memorandum states that the Hedge Fund invests in a variety of different securities. House and Moore, however, arranged for the Hedge Fund to extend personal loans totaling more than $420,000 to themselves so that they could purchase real estate they hold in their own names. The defendants failed to disclose to Hedge Fund investors that the money from the Hedge Fund would be used for this purpose or to disclose the fact that House and Moore had each gone through Chapter 7 bankruptcy proceedings in the last two years. 24. The private placement memorandum also states that House was employed in the securities industry for at least six years. However, it does not tell investors that Equitas terminated House's employment for selling the Hedge Fund units without authorization, or that he was barred by the NASD for his unauthorized sale of Hedge Fund units and for providing false information to the NASD during its investigation. 25. The Defendants also provided Hedge Fund investors with fabricated return information for the Hedge Fund. House, Moore, the Adviser, and the Hedge Fund provided investors and potential investors with at least two different Hedge Fund brochures falsely stating that, from inception through April 2002, the Hedge Fund has generated cumulative returns of 122 to 148 percent, respectively. The Hedge Fund website also falsely states that the Hedge Fund has had two negative months, but had never experienced a negative quarter or year. 26. The Hedge Fund website also touts another hedge fund purportedly run by Defendants named Fixed Edge. Defendants have claimed on the website that the Fixed Edge fund provides a fixed return secured by the Hedge Fund, which maintains a balance of $5 for each $1 invested in Fixed Edge. Defendants further claim on the website that the Fixed Edge fund has never lost money and made all principal and interest payments to investors on time. In reality, the Fixed Edge fund has not produced a return for any investors and is not secured in the manner represented to potential investors. Fixed Edge investor proceeds are commingled with those of the Hedge Fund, which has consistently suffered losses. 27. House, Moore, the Adviser, and the Hedge Fund also provided investors with periodic account statements. The Hedge Fund's periodic account statements have falsely stated that investors have earned significant returns on their investments in the Hedge Fund. 28. The Defendants have intentionally provided investors with fabricated return information to entice both new investors to the Hedge Fund and additional investments in the Hedge Fund by existing investors. The Defendants have also provided false return information to conceal the Hedge Fund's losses from existing investors. Threat of Ongoing Fraud and Dissipation of Investor Proceeds 29. There is a reasonable likelihood that House, Moore, the Adviser, and the Hedge Fund will continue to defraud investors and dissipate investor funds unless enjoined. The Defendants have accelerated their efforts to raise money from investors. In May 2002, the Defendants raised approximately $700,000 from investors. In addition, House and Moore informed the SEC staff that they intend to raise over $5 million within the next thirty to sixty days through the same means described above. Further, House and Moore have used investor proceeds to enrich themselves at a time when the Hedge Fund has suffered significant losses. 30. Because investor funds remain in accounts over which House, Moore, the Adviser, and the Hedge Fund have control, there is a significant risk that the defendants will continue to dissipate investor funds unless prohibited by the Court from doing so. COUNT I Violations of Section 17(a)(1) of the Securities Act [15 U.S.C. §77q(a)(1)]
31. Paragraphs 1 through 30 are hereby realleged and incorporated by reference herein. 32. From at least March 2000 through the present, House, Moore, the Adviser, and the Hedge Fund, in the offer and sale of securities in the form of units in the Hedge Fund, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, have employed and are employing devices, schemes and artifices to defraud. 33. House, Moore, the Adviser, and the Hedge Fund knew or were reckless in not knowing the facts and circumstances described in Paragraphs 1 through 30 above. 34. By reason of the foregoing, House, Moore, the Adviser, and the Hedge Fund have violated and are violating Section 17(a)(1) of the Securities Act. COUNT II Violations of Section 17(a)(2) and 17(a)(3)
35. Paragraphs 1 through 30 are hereby realleged and incorporated by reference herein. 36. From at least March 2000 through the present, House, Moore, the Adviser, and the Hedge Fund, in the offer and sale of securities in the form of units in the Hedge Fund, by the use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, directly and indirectly, have obtained and are obtaining money and property by means of untrue statements of material fact and have omitted and are omitting 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 have engaged and are engaging in transactions, practices and courses of business which have operated and will operate as a fraud and deceit upon purchasers and prospective purchasers of the units of the Hedge Fund. 37. By reason of foregoing, House, Moore, the Adviser, and the Hedge Fund have violated and are violating Sections 17(a)(2) and 17(a)(3) of the Securities Act. COUNT III Violations of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)]
38. Paragraphs 1 through 30 are hereby realleged and incorporated by reference herein. 39. From at least March 2000 through the present, House, Moore, the Adviser, and the Hedge Fund, in connection with the purchase and sale of securities in the form of units in the Hedge Fund, by the use of the means and instrumentalities of interstate commerce and of the mails, directly and indirectly, have employed and are employing devices, schemes and artifices to defraud; have made and are making untrue statements of material fact and have omitted and are omitting 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 have engaged and are engaging in acts, practices and courses of business which operated and will operate as a fraud and deceit upon purchasers and sellers of such securities. 40. House, Moore, the Adviser, and the Hedge Fund knew or were reckless in not knowing of the activities described in Paragraphs 1 through 30 above. 41. By reason of foregoing, House, Moore, the Adviser, and the Hedge Fund have violated and are violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. COUNT IV Violations of Section 5(a) and (c) of the Securities Act [15 U.S.C. § 77e(a) and (c)]
42. Paragraphs 1 through 30 above are realleged and incorporated herein by reference. 43. From at least March 2000 to the present, House, Moore, the Adviser, and the Hedge Fund, directly and indirectly, and notwithstanding that there was no applicable exemption: (i) made use of means or instruments of transportation or communication in interstate commerce or of the mails to sell, through the use or medium of a prospectus or otherwise, securities in the form of units in the Hedge Fund as to which no registration statement was in effect; (ii) for the purpose of sale or delivery after sale, carried and/or caused to be carried through the mails or in interstate commerce, by means or instruments of transportation, securities as to which no registration statement was in effect; and (iii) made use of means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell, through the use or medium of a prospectus or otherwise, securities as to which no registration statement had been filed. 44. No valid registration statement was filed with the Commission in connection with House, Moore, the Adviser, and the Hedge Fund's sales of, and offers to sell, units in the Hedge Fund. 45. By reason of the foregoing, House, Moore, the Adviser, and the Hedge Fund have violated and are violating Sections 5(a) and (c) of the Securities Act [15 U.S.C. § 77e(a) and (c)]. COUNT V Violations of Sections 206(1) and 206(2) of the Investment
46. Paragraphs 1 through 30 above are realleged and incorporated herein by reference. 47. From at least March 2000 to the present Defendants House, Moore, and the Adviser, through the use of the mails or means or instrumentalities of interstate commerce, directly or indirectly, have employed devices, schemes, or artifices to defraud clients and prospective clients; and used the mails or means or instrumentalities of interstate commerce, directly or indirectly, to engage in transactions, practices, or courses of business which operated as a fraud or deceit upon clients or prospective clients. 48. House, Moore, and the Adviser knew or were reckless in not knowing of the activities described in Paragraphs 1 through 30 above. 49. By reason of foregoing, the Adviser has violated and is violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Investment Advisers Act") [15 U.S.C. § 80b-6(1) and §80b-6(2)], and House and Moore have aided and abetted the Adviser's violations by providing knowing and substantial assistance. COUNT VI Violation of Section 7(a) of the Investment Company Act [15 U.S.C. § 80a-7]
50. Paragraphs 1 through 30 above are realleged and incorporated herein by reference. 51. From at least March 2000 to the present, Defendant Hedge Fund has been and held itself out to be, without an applicable exception, an issuer engaged primarily, or proposed to engage primarily, in the business of investing, reinvesting, or trading in securities, which, without an applicable exception, offered for sale, sold, and delivered after sale, by the use of the mails or any means or instrumentality of interstate commerce, securities in the form of Hedge Fund units; offered for sale, sold, and delivered after sale Hedge Fund units, having reason to believe that such security or interest in the form of the units in the Hedge Fund was the subject of a public offering by use of the mails or any means or instrumentality of interstate commerce. 52. By reason of the foregoing, Defendant Hedge Fund violated Section 7(a) of the Investment Company Act [15 U.S.C. § 80a-7]. RELIEF REQUESTED WHEREFORE, the Commission respectfully requests that the Court: A. Grant an Order of Permanent Injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, restraining and enjoining: (1) House, Moore, the Adviser, and the Hedge Fund, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of the Order of Permanent Injunction by personal service or otherwise, from directly or indirectly engaging in acts practices or courses of business described above, or in conduct of a similar purport and object in violation of Sections 5(a) and (c) of the Securities Act [15 U.S.C. § 77e(a) and (c)]; (2) House, Moore, the Adviser, and the Hedge Fund, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of the Order of Permanent Injunction by personal service or otherwise, from directly or indirectly engaging in acts practices or courses of business described above, or in conduct of a similar purport and object, in violation of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]. (3) House, Moore, the Adviser, and the Hedge Fund, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of the Order of Permanent Injunction by personal service or otherwise, from directly or indirectly engaging in acts practices or courses of business described above, or in conduct of a similar purport and object, in violation 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], thereunder; (4) House, Moore, and the Adviser, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of the Order of Permanent Injunction by personal service or otherwise, from directly or indirectly engaging in acts practices or courses of business described above, or in conduct of a similar purport and object, in violation of Sections 206(1) and 206(2) of the Investment Advisers Act [15 U.S.C. § 80b-6(1) and §80b-6(2)]. (5) The Hedge Fund, its officers, agents, servants, employees, attorneys, and those persons in active concert or participation with it who receive actual notice of the Order of Permanent Injunction by personal service or otherwise from directly or indirectly engaging in acts practices or courses of business described above, or in conduct of a similar purport and object, in violation of Section 7(a) of the Investment Company Act [15 U.S.C. § 80a-7]. B. Order House, Moore, the Adviser, and the Hedge Fund to disgorge any and all ill-gotten gains, plus prejudgment interest. C. Issue orders (a) freezing the assets of House, Moore, the Adviser, and the Hedge Fund, their officers, agents, servants, employees, attorneys and those persons in active concert with them who receive actual notice of the Asset Freeze by personal service or otherwise, (b) requiring defendants to identify assets and to provide an accounting; (c) granting expedited discovery; and (d) prohibiting defendants from altering or destroying documents. D. Impose civil penalties against House, Moore, and the Adviser, 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 Investment Advisers Act [15 U.S.C. § 80b-9]. E. Grant such other and further relief as may be necessary and appropriate. F. Retain jurisdiction over this action 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, Dated: June 19, 2002 ___________________________________
Attorneys for Plaintiff
http://www.sec.gov/litigation/complaints/complr17583.htm
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