U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21311 / November 23, 2009
Securities and Exchange Commission v. Capital Mountain Holding Corporation, et al., Civ. Action No. 3:09-CV-02222-F (United States District Court for the Northern District of Texas, Dallas Division).
SEC Sues Dallas Company for Conducting Fraudulent $25 Million Promissory-Note Offering and Obtains the Appointment of a Receiver
On November 20, 2009, the Commission filed suit in the United States District Court for the Northern District of Texas against Dallas-based company Capital Mountain Holding Corporation, its president Derek A. Nelson, and two other Nelson-controlled entities known as Systems XXI, Act I, LLC ("Act I") and Systems XXI, Act II, LLC ("Act II"). The Commission also named two other entities owned by Nelson, Plouteo, Inc. and Homaide Real Estate Services, Inc. as Relief Defendants.
The Commission alleges that beginning in 2008 Nelson offered and sold promissory notes issued by CMHC, Act I, and Act II. The notes were marketed through a website and by a Canada-based investment club. The proceeds were to be used to buy distressed properties. Nelson told investors that after acquiring the properties at a discount, he would improve, rent, and resell them at prices closer to the properties' true value, thereby generating the returns promised to investors. The CMHC notes promised 10% per month interest for three months. The Act I and Act II notes that paid 18% per annum for two years (Act I) and 21% per annum for five years (Act II). Nelson promised that 90% of Act I and Act II funds would be used to acquire real estate and to rehabilitate the properties for rental or resale. Nelson further represented that Act I and Act II would loan money to CMHC in exchange for first lien positions on CMHC's properties. Nelson persuaded many of the CMHC noteholders to rollover their CMHC note principal into the Act I and Act II notes because they would be "more secure."
In fact, the Commission alleges, the proceeds from the notes were not used as promised. Instead, Nelson used a substantial amount of investor funds to pay other investors their interest payments and principal redemptions. In addition, Nelson took more than $3.6 million of investor funds for his personal use, including a million dollars to purchase his home. Although CMHC bought some properties, they typically were subject to existing mortgages; Act I and Act II had, at best, second lien positions. Ultimately, as the flow of new investor funds slowed, Nelson was unable to pay investors, and many of CMHC's properties were foreclosed on.
The complaint alleges that CMHC, Nelson, Act I, and Act II offered and sold securities in violation of registration and antifraud provisions of the federal securities laws. The complaint requests permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against the Defendants. In addition, the Commission has filed motions asking the Court to freeze CMHC's and Nelson's assets and to appoint a receiver to collect, marshal, manage, and distribute these assets for the benefit of investors. The Complaint also seeks disgorgement from the Relief Defendants.
Without admitting or denying the Commission's allegations, CMHC, Nelson, Act I, and Act II have consented to permanent injunctions against future violations of the registration and antifraud provisions. They and the Relief Defendants have also consented to the freeze order and order appointing a receiver. The court entered the injunctions, freeze order and order appointing receiver on November 20.