U.S. Securities and Exchange Commission
Litigation Rel. No. 17848 / November 19, 2002
Appeals Court Upholds Preliminary Injunctions and Asset Freezes Against Martin Fife and Farouk Khan in Securities Fraud Case
SEC v. Dennis Herula et al. (United States District Court for the District of Rhode Island, C.A. No. 02 154 ML)
The Commission announced that on November 6, 2002, a federal appeals court upheld a district court order imposing preliminary injunctions and asset freezes against Martin Fife, a former Dreyfus fund independent director, and Farouk Khan, Fife's business associate, in a securities fraud case.
In its complaint, filed in federal district court in Rhode Island on April 1, 2002, the Commission alleged that Fife, Khan, and others defrauded investors of over $50 million in a prime bank-type scheme that promised returns as high as 300% in twelve business days, and that over $20 million had not been returned to investors. On May 1, 2002, after a two-day hearing in April, the district court issued an order finding that the Commission is likely to succeed in proving that Fife, Khan, and certain other defendants violated the securities laws, and that there is a strong likelihood that violations may occur in the future if these defendants are not enjoined. The order further stated that there is a high risk that any remaining investor funds may be further depleted. On May 8, 2002, the court issued written preliminary injunctions and asset freezes against Fife, Khan and certain other defendants, based on its findings in the May 1 order. Defendants Fife and Khan appealed the district court's decision to the U.S. Court of Appeals for the First Circuit.
After a hearing on September 13, 2002, the First Circuit issued a written opinion on November 6, 2002 affirming the entry of preliminary injunctions and asset freezes against Fife and Khan. The First Circuit found that the Commission made a sufficient showing that Fife and Khan made material misrepresentations in connection with the purchase or sale of securities in violation of 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 that it was reasonably likely they may commit such violations again. The First Circuit further upheld the district court's finding that the Commission had established a substantial likelihood that Fife violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Among other things, the First Circuit found that Fife repeatedly made false representations to one investor concerning the management of its funds, and that Fife and Khan had both misrepresented to investors the risk of loss associated with a purported "balance sheet enhancement program."