UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Securities Act of 1933
Release No.7679 / May 11, 1999
File No. 3-9895
: ORDER INSTITUTING PUBLIC
In the Matter of : PROCEEDINGS PURSUANT TO
: SECTION 8A OF THE SECURITIES
David V. Francis, II : ACT OF 1933, MAKING FINDINGS
: AND IMPOSING REMEDIAL SANCTIONS
The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") against David V. Francis, II (hereinafter, "Francis" or "Respondent").
In anticipation of the institution of this proceeding, Francis has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except that he admits that the Commission has jurisdiction over him and over the subject matter of this proceeding, Respondent consents to the issuance of this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing Remedial Sanctions ("Order").
Accordingly, IT IS ORDERED that proceedings against Respondent be, and hereby are, instituted.
The Commission makes the following findings: 1
A. From June through July 1998, David V. Francis, II, 34, lived in Bowling Green, Kentucky, and operated a business called "World Export and Trade."
B. In October 1993, a group of U.S. regulatory agencies, including the Commission and various federal banking agencies, jointly issued an investor alert warning of fraudulent offerings involving non-existent prime bank instruments. At various times from May 1997 through July 1998, Francis and others offered to members of the public a series of putative investment programs that claimed to generate incredibly high rates of return -- up to 200% a month -- on multi-million dollar investments through the trading on overseas markets of mysterious bank financial instruments issued by or through certain "world prime banks." These offerings were made to an undercover investigator (the "Arizona investigator") working for the Arizona Corporation Commission (the "ACC"), first through a website offering prime-bank-guaranteed "investment options," then later through personal solicitations by Francis and others. Ultimately, no investor funds were raised through these solicitations. In fact, the programs offered were bogus. Neither prime bank guarantees, the secret market for bank debenture trading, nor the debentures themselves, existed. Each and every material aspect of these offerings was false and misleading and, consequently, Francis violated the antifraud provisions of the Securities Act by soliciting investments in one of these offerings.
C. At the conclusion of its investigation, on July 15, 1998, the ACC issued a temporary cease-and-desist order against Francis barring him from, among other things, offering or selling unregistered securities within or from the state of Arizona and engaging in the fraudulent offering or sale of securities within or from the state of Arizona. The order was made permanent with respect to Francis by consent, effective November 23, 1998. Under the terms of the settlement, Francis was required to pay a penalty of $2,500.
D. The Arizona investigator was put in touch by Robert J. Stahl, the creator of the website offering the prime bank investments, with an individual who passed him on to Elizabeth A. Boyd, a business associate of Franciss. On June 10, 1998, Boyd offered the Arizona investigator the opportunity to participate in a "blocked funds" program. This program would require the investor to maintain funds in a specific account for at least 90 days and would allegedly pay to the investor an 80% net return every ten banking days. In furtherance of this offering, Boyd referred the Arizona investigator to Francis. Francis relayed to the Arizona investigator documents and information on the blocked funds program that had been provided by the programs "facilitator," retired clothing store manager Bobby L. Rodgers. Between mid-June and early-July 1998, the Arizona investigator spoke with Francis and/or Boyd on several occasions about the blocked funds program. Francis informed the investigator that the gross returns of up to 200% every ten banking days would be generated on invested funds through the trading of "medium term bank debentures" in London, England. All descriptions of the blocked funds program, including its structure and rates of return, were based on information received by Francis from Rodgers, who was to receive half of all gross returns generated from the purported trading of the bank instruments.
E. The program offered by Francis did not exist, nor were there markets for the trading of the type of illusory debt instruments it described. Francis did not have access to any program similar to the type he offered to the Arizona investigator in direct solicitations. Moreover, Francis did not have the ability to generate the returns he promised. Francis had no reasonable basis for the information contained in his solicitations or for the high rates of return he offered. Francis failed to make any significant efforts to verify any of the information he disseminated about the existence of the prime bank program, its structure or legality, or the achievability of the projected rates of return.
F. Section 17(a) of the Securities Act prohibits fraud in the offer or sale of securities. Prime bank instruments are securities; Francis offered a prime bank program that was an investment contract under the three-part test set out in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), and was, therefore, a security. SEC v. Lauer, 864 F. Supp. 784, 794 (N.D. Ill. 1994), affd, 52 F.3d 667 (7th Cir. 1995). Furthermore, Francis cannot escape liability under the securities laws by arguing that the security did not exist. See id. at 792.
G. Francis violated Section 17(a)(1) of the Securities Act by acting with scienter in misrepresenting or omitting material facts in connection with the offer of securities. Aaron v. SEC, 446 U.S. 690, 695-97 (1980). Scienter is not required for violations of Section 17(a)(3). Francis knew, or was reckless in not knowing, that the so-called bank debentures and "blocked funds program" did not exist and could not have yielded the high, riskless rates of return promised by him. Francis failed to verify whether any factual basis existed for his representations concerning the existence, viability or profitability of a program based on transactions involving bank debenture trading.
Based on the foregoing, the Commission finds that Respondent violated Sections 17(a)(1) and 17(a)(3) of the Securities Act.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by the Respondent and to impose the sanctions specified therein.
IT IS HEREBY ORDERED THAT Francis shall cease and desist from committing or causing any violation and any future violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act.
By the Commission.
Jonathan G. Katz
-- The findings herein are made pursuant to the Respondentís Offer and are not binding on any other person or entity in this or any other proceeding.