United States Securities and Exchange Commission
Securities Act of 1933
Release No. 8012 / September 26, 2001
Securities Exchange Act of 1934
Release No. 44855 / September 26, 2001
File No. 3-10587
Administrative and Cease-and-desist Proceedings Instituted Against John F. Smart
The Securities and Exchange Commission ("Commission") announced that it has instituted public administrative and cease-and-desist proceedings against John F. Smart, of Lederach, Pennsylvania. Smart was the branch manager and sole employee of a branch of a broker-dealer registered with the Commission, which was located in his home.
In the Order Instituting Public Administrative and Cease-and-Desist Proceedings ("Order"), the Division of Enforcement alleges that during several months in mid-1999, Smart engaged in a fraudulent offering scheme targeted against three nonprofit and/or charitable institutions (the "charities"), including a church, a religious-based family crisis center and a substance abuse center. Essentially, Smart offered these charities an opportunity to obtain between $5 million and $9 million each by jointly participating in an alleged $15 million bond offering. This offering possessed many of the indicia of a prime bank scheme, which is widely recognized as a fraudulent scheme characterized by claims of fantastic profits which can be obtained from trading non-existent banking instruments on the international market. In order to participate in this program, each charity had to submit a business plan and pay a $50,000 application fee if accepted into the program. However, Smart was unable to raise any funds from these charities.
The Division of Enforcement further alleges that Smart told the charities that a European charitable trust, with $3 billion in assets, raised money for charities worldwide through the issuance of "5 year, AA rated" bonds, which were guaranteed by a top 200 World Bank. Smart told the charities that the proceeds from the bond offering would be placed into a trading account maintained by or on behalf of a European bank. This European bank could then leverage these funds at 10 times their face value in credit facilities, overnight trading and short-term loans in much the same way that United States banks can leverage money obtained from the Federal Reserve. By leveraging these funds, the banks could purportedly earn interest on a principal amount 10 times greater than the funds actually possessed. Smart claimed that the banks, through this leveraging and trading, could generate enough profits: (i) to pay the principal amount (i.e. the face value of the bonds) to the charities; (ii) to repay the bond investors their entire investment plus a reasonable rate of return; and (iii) to pay the promoters of the program a fee equal to 10 percent of the offering.
Based on the foregoing, the staff allege that Smart willfully violated and committed or caused violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 15(a)(1) of the Securities Exchange Act of 1934.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Smart an opportunity to dispute these allegations, and to determine what sanctions, if any, are appropriate and in the public interest.