United States Securities and Exchange Commission
LITIGATION RELEASE NO. 16863 / January 19, 2001
Securities and Exchange Commission v. Benjamin Franklin Cook et al., #3-99CV05701-R, USDC, NDTX (Dallas Division)
The Securities and Exchange Commission announced that on January 10, 2001, the Honorable Jerry Buchmeyer, U.S. District Judge, Northern District of Texas, entered summary judgments against Ellsworth Wayne McLaws ("McLaws") and Alan Clagg ("Clagg"). The Court entered final judgments against both defendants ordering them, among other things, to pay disgorgement and prejudgment interest of $12,065,566 and $1,623,479, respectively, and to each pay a civil penalty of $110,000.
In its Complaint, filed March 16, 1999, the Commission alleged that McLaws and Clagg violated the antifraud and registration provisions of the federal securities laws based on their conduct as Regional Managers of Dennel Finance Limited ("Dennel"), a fraudulent investment scheme developed and operated by Benjamin Franklin Cook ("Cook"). The Dennel scheme raised more than $45 million from approximately 300 investors throughout the United States.
In granting the Commission's summary judgment motion against McLaws and Clagg, Judge Buchmeyer concluded that the Dennel program operated as a Ponzi scheme involving the offer and sale of nonexistent "prime bank" securities. McLaws and Clagg, the Court declared, violated the federal securities laws by luring investors to the Dennel program through false and misleading information. In addition, the Court found, McLaws and Clagg recruited and trained other sales people, or "facilitators," to raise funds for Dennel.
According to Judge Buchmeyer's Order, McLaws, Clagg and their recruits falsely represented that investor funds would be place in a program earning substantial returns, while promising that the funds would be secured from loss by a bank guarantee, safe keeping receipt or certificate of deposit. In fact, the Court concluded:
"All of the material representations made to Dennel investors were false. Dennel did not receive any income other than investor funds and, thus, the commissions paid by Dennel to its facilitators represented a percentage of each investment made to Dennel by investors, and all payments made to investors represented Ponzi payments derived from newly invested funds."
The final judgments entered by the Court enjoin McLaws and Clagg from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act and Rule 10b-5 thereunder. The Court also ordered McLaws to pay disgorgement $10,336,994 plus prejudgment interest of $1,728,572 and Clagg to pay disgorgement of $1,376,082 plus prejudgment interest of $247,397. These sums represent the amounts by which the Defendants were unjustly enriched by their participation in the Dennel fraud. In addition, each Defendant was ordered to pay a civil penalty of $110,000.
In December, Judge Buchmeyer entered a final judgment against Cook enjoining him from further violations of the federal securities laws, ordering him to pay disgorgement of $36,724,494 plus prejudgment interest of $5,616,807, and imposing a civil penalty of $110,000 on him. Cook, who remained in federal prison for more than a year while defying orders issued by the Court in the Commission's action, has now been transferred to a jail in Arizona where he awaits trial on 37 counts of racketeering, fraud and theft in connection with the Dennel scheme.
The Commission acknowledges the assistance and cooperation of several other government agencies in this matter, including the United State Customs Department, the Arizona Attorney General's Office, the Arizona Corporations Commission and the Office of the United States Attorney. By working cooperatively, over $12,000,000 have been recovered for the benefit of investors. Asset recovery efforts are on-going.
Unscrupulous promoters continue to victimize the public with Prime Bank schemes. Accordingly, investors are advised to access the Commission's "Prime Bank" Investor Alert which provides tips on how to avoid being a victim of these scams The investor alert can be found on the Commission's web site, at www.sec.gov/investor/alerts.shtml.