U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20181 / July 5, 2007
SEC v. Amerifirst Funding, Inc., Amerifirst Acceptance Corporation, Jeffery C. Bruteyn and Dennis W. Bowden (U.S.D.C., Northern District of Texas, Dallas Division, Civil Action No. 3:07-CV-1188-D)
SEC Files Emergency Lawsuit to Halt Fraudulent Securities Offering Targeting Elderly Investors
On July 2, 2007, the Securities and Exchange Commission filed an emergency action in Dallas federal court to halt what the Commission contends is a fraudulent offering of securities, known as Secured Debt Obligations ("SDOs"), by Amerifirst Funding, Inc. and Amerifirst Acceptance Corporation (together, "Amerifirst"). The SDOs are notes purportedly secured by automobile financing receivables created or purchased by the defendants. The district court entered, under seal, a temporary restraining order suspending the offering, as well as orders freezing the defendants' assets and requiring an accounting and repatriation of assets. The court also appointed a receiver to secure assets for investors, and ordered defendants to preserve documents and submit to expedited discovery. On July 3, 2007, the court unsealed all of the orders.
The defendants named in the Commission's Complaint are:
The Commission's Complaint also names two relief defendants, seeking return of investor funds they unjustly received:
The Commission's Complaint alleges that the defendants, directly and through sales agents, have raised at least $35 million since January 2006 from the sale of SDOs to at least 330 investors, many of them senior citizens who, the Commission alleges, were specially targeted by the defendants and their agents as prospective investors. Investors are lured into purchasing SDOs through a series of misrepresentations and omissions that portray SDOs to be as safe as FDIC-backed certificates of deposit. For instance, the defendants' offering materials assert that SDOs are guaranteed by a commercial bank and backed by several layers of insurance supposedly provided by Lloyd's of London, Fireman's Fund and Allianz. As the Commission alleges, the defendants' offering materials assert that this insurance coverage is comparable to or better than FDIC insurance. The Commission also alleges that the defendants have represented that they would use investor funds for limited, specially enumerated purposes, such as creating or purchasing automobile financing receivables or placing the funds in government securities or highest-quality corporate bonds. The Complaint outlines other representations by the defendants, such as defendant Bruteyn's supposed securities licenses and business experience, all of which are intended to bolster the premise that the SDO's are safe and conservative investments.
The Commission alleges, however, that these representations are materially false and misleading. According to the Complaint, the SDOs are fraught with undisclosed risks. For instance, the Commission contends that the SDOs are not guaranteed by any commercial bank and are not insured as represented, if at all. Indeed, according to the Complaint, the Fireman's Fund and Allianz coverage represented in the defendants' offering materials does not exist and the Lloyd's insurance provides only miniscule coverage at best. In addition, the Complaint alleges that the offering materials are wholly silent on Bruteyn's checkered history, such as his two Chapter 7 bankruptcy filings (most recently, a no-asset proceeding he filed in 2003) and the National Association of Securities Dealers' August 2003 action permanently barring him from associating with any NASD member.
Moreover, as detailed in the Complaint, the defendants have misused and misappropriated investor funds. The Complaint alleges, for example, that defendants have used only a relatively small amount of investor funds to create or purchase automobile financing receivables and have almost wholly failed to place any investor money into government securities or highest-quality corporate bonds. Rather, the defendants allegedly have used millions of dollars to make speculative investments in the stock market, including millions invested in high-risk equities options trading and junk-grade corporate bonds. The defendants transferred millions more to Hess Financial, which Bruteyn owns and uses for such personal expenditures as real estate purchases (almost $2.2 million), credit card payments ($160,000), divorce and child support payments ($109,000), luxury cars ($100,000), an airplane ($30,000) and various and sundry other items like country club dues, interior decorating, home improvement, travel, utilities and cash withdrawals (altogether, almost $800,000). Bowden, too, is alleged to have misapplied investor funds, including over $850,000 to purchase and remodel a Dallas home.
The defendants are charged with securities fraud under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and with conducting an unregistered offering under Section 5 of the Securities Act. In addition to the relief granted by the court, the Complaint seeks civil penalties and disgorgement of ill-gotten gains against each defendant.
The Commission acknowledges the assistance of the Texas State Securities Board and the State of Florida Office of Financial Regulation.