U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20267 / September 5, 2007
SEC v. Michael E. Kelly, et al., (U.S.D.C. N.D. Ill., Civil Action Number 07 C 4979, filed September 5, 2007)
SEC Charges Twenty-Six Defendants in $428 Million Securities Fraud That Targeted Senior Citizens and Retirement Savings
Continuing its crackdown on fraud against senior citizens, the Securities and Exchange Commission today filed charges stemming from a $428 million securities fraud that victimized thousands of seniors and other investors throughout the United States. The SEC's action, filed in federal district court in Chicago, Illinois, charges 26 defendants and alleges that they participated in a massive fraud on U.S. investors that involved the sale of securities in the form of "Universal Leases." The Universal Lease investments were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The Universal Lease scheme has now collapsed and investor losses exceed $300 million.
The SEC alleges that Michael E. Kelly ("Kelly") and those working with him defrauded thousands of U.S. investors into using their retirement savings to buy Universal Leases on the false promise of safe and guaranteed returns. The SEC alleges that from 1999 until 2005, Kelly and others raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges, the leasing agent was a small Panamanian travel agency controlled by Kelly, and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and the other defendants failed to disclose key facts about the Universal Lease investment, including the risks of the investment and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers.
The SEC's complaint names the following individuals and entities as defendants: Kelly, Michael P. Kelly, Donald L. Kelly, John Corwin, Corporativo Nola, S.A. de C.V., Resort Holding International (RHI) S.A., Panorama Communities, S.A., World Phantasy Tours, Inc. (Viajes Fantasia Por El Mundo, S.A.), also d/b/a Majesty Travel, Galaxy Properties Management, S.A., Yucatan Resorts, S.A. de C.V., Resort Holdings International, S.A. de C.V. The complaint also names as defendants a number of the unregistered brokers who sold the Universal Leases to the investing public. They are: Mark Ruttenberg, Ruttenberg and Associates Financial Marketing, Inc., Mark G. Meyer, Mark Meyer and Associates, Inc., Richard E. Riner, Southwest Income Marketing, Inc., George Phelps, also d/b/a Safe Estate Plans, John E. Tencza, also d/b/a American Investment Management Group, Inc., American Elder Group, L.L.C., Carl Q. Lee, Carl Lee and Associates, Inc., Roy D. Higgs, Warren T. Chambers, William K. Boston, Jr. and Century Estate Planning, Inc. Finally, the complaint names Avanti Motor Corp. and DMK Properties, L.L.C., two entities affiliated with Kelly, as relief defendants, alleging that they received ill-gotten gains from the scheme.
The SEC's complaint, as set forth more fully in the complaint linked to this release, charges violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 10b-10 thereunder. Further, Kelly is charged as a control person under Section 20(a) of the Exchange Act and certain defendants are charged with aiding and abetting others' violations under Section 20(e) of the Exchange Act. The complaint seeks permanent injunctions against the defendants, disgorgement of ill-gotten gains, and civil penalties.