U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19005 / December 17, 2004
Securities and Exchange Commission v. Jack A. Brown, Jules Fleder, Roger Sherman, Bernard Ware et al., Civil Action No. 6:04cv537, United States District Court for the Eastern District of Texas (Tyler Division).
SEC FILES FRAUD CHARGES AGAINST PERPETRATORS OF REAL ESTATE SCAM
On December 8, 2004, in coordination with state regulators, the Commission filed an emergency action in United States district court in Tyler, Texas, alleging that four individuals, through a number of entities, fraudulently raised approximately $6 million by selling bogus securities, primarily to investors in the Tyler area. In its complaint, the Commission alleged that the defendants deceived investors, promising to generate investment returns through the development of real estate in Texas, Virginia and South Carolina. In fact, according to the Commission, the defendants spent little, if any, of the investors' money to develop land, and instead used it to make ponzi payments to investors, support their own extravagant lifestyles and funnel money to companies that they controlled. Further, the complaint alleges that Fleder failed to disclose to investors a cease and desist order that the Commissioner of the Texas State Securities Board entered against him in October 2002 in response to a previous fraudulent offering. On December 8th, U.S. District Judge Michael H. Schneider granted the Commission's motion for the appointment of a receiver to collect and preserve investors' assets.
In its action, the Commission charged the following individual defendants:
In its complaint, the Commission alleges that, beginning in May 2002, Brown, who was previously licensed as a securities broker, offered investors in the Tyler, Texas area the opportunity to invest in three purported real estate developments - Tyler Real Estate, Smith Mountain Lake, and Prairie Lake Estates (the "Issuers") - each of which was created by Fleder, Ware and Sherman. According to the complaint, Brown solicited investors using offering documents, which, among other things, falsely claimed that: investor monies would be used to develop tracts of real estate in South Carolina, Virginia and Texas; that investors would share in the profits realized from sale of the developed land; and that specific entities owned the land, and would convey the land to one of the Issuers. The Commission further alleges that investors were told the investments were safe and were secured by the real estate being developed with their money. Further, in each instance, the entity that allegedly "owned" the real estate, and was supposed to convey it to one of the Issuers, was controlled by Fleder, Sherman, and Ware, and did not own the real estate.
According to the complaint, investor funds were used for virtually everything but the development of real estate - including making ponzi payments to investors and purchasing a house and a sailboat for Fleder. In all, the complaint alleges, the Defendants raised $5,971,300 from investors in the Tyler, Texas area in connection with the three offerings, and, of this amount, more than $450,000 was used to make ponzi payments to investors, while at least $3.5 million was diverted to companies controlled by Fleder, Ware, Sherman and Brown. The Commission charged those companies as relief defendants in its complaint.
Finally, the complaint alleges that Fleder failed to disclose to investors that he was the subject of a cease and desist order issued by the Texas State Securities Board. Specifically, in October 2002, Fleder agreed to the entry of a cease and desist order that found he had engaged in fraud in the offering of an investment called Sunshine Real Estate Development, Inc. As an undertaking, Fleder agreed, and was ordered by the Texas State Securities Board, to disclose the cease and desist order "to potential investors in all future offerings." The cease and desist order was entered on October 23, 2002, after which Fleder, through Brown, solicited an additional $3,986,600 in investor funds without disclosing the existence of the order to the investors.
The Commission alleges in its complaint that the defendants violated 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. In addition to seeking the appointment of a receiver, the Commission is seeking orders of permanent injunction, disgorgement plus prejudgment interest, and civil money penalties. The Commission is also seeking disgorgement against numerous entities as relief defendants, because they hold title to, or received proceeds from the sale of, assets allegedly acquired with investor funds.
On December 13th, at the Commission's request, the Court conducted a hearing on the Commission's request for a preliminary injunction against the defendants. Brown, Sherman and Ware consented, without admitting or denying the allegations in the Commission's complaint, to the entry of the preliminary injunction, which the Court entered. Since Fleder could not be located prior to the hearing, the Court continued the preliminary injunction hearing until February 7, 2005, to allow the Commission additional time to serve him with the papers in the case. The Court further granted the Commission's motion to enter an order freezing Fleder's personal assets and entered an agreed order modifying the receivership order and freezing certain assets belonging to Brown and entities he controls.
The Commission gratefully acknowledges the assistance and cooperation of the Federal Bureau of Investigation, the Texas State Securities Board, and the California Department of Corporations.