IN THE UNITED STATES DISTRICT COURT
COMPLAINT FOR PERMANENT INJUNCTION
Plaintiff, United States Securities and Exchange Commission ("Commission"), alleges as follows:
1. Between 1997 and 2000, Defendants Thomas M. Durkin ("Durkin") and John E. Orin, Jr. ("Orin"), president and vice president, respectively, of Cashel Management Co. Inc. ("Cashel"), an investment adviser, defrauded their clients by investing almost all of their clients' money -- $90 million -- in RxRemedy, Inc., a failing internet company. Durkin and Orin made material misrepresentations to their clients about the nature of the investments and, in many cases, made the investments against their clients' wishes and express instructions. In December 2000, RxRemedy declared bankruptcy, resulting in an almost complete loss for Durkin and Orin's clients.
2. Durkin and Orin, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute and will constitute violations of Section 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers Act") [15 U.S.C. § 80b-6(1) and (2)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder. Durkin has also engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute and will constitute violations of Section 204 of the Advisers Act [15 U.S.C. § 80b-4] and Rule 204-1(b)(1) thereunder [17 C.F.R. § 275.204-1(b)(1)], which has been amended and recodified as Rule 204-1(a)(2) [17 C.F.R. § 275.204-1(a)(2)].
3. The Commission brings this action to enjoin such acts, practices and courses of business pursuant to the authority conferred on it by Section 209(d) of the Advisers Act [15 U.S.C. § 80b-9(d)] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)].
4. The Court has jurisdiction over this action under Section 209 of the Advisers Act [15 U.S.C. § 80b-9] and Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa].
5. The Defendants, directly and indirectly, have made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business alleged herein.
6. Durkin, 55 years old, resides in Westlake, Ohio and was president of Cashel from 1981 to 2001. Orin, 62 years old, resides in Rocky River, Ohio and was vice president of Cashel from 1992 to 2001.
7. Cashel was an investment adviser registered with the Commission under Section 203 of the Advisers Act [15 U.S.C. §80b-3] until July 31, 2001. Cashel's offices were in Cleveland, Ohio. Cashel was controlled by Durkin, its founder and sole owner. Between late 1998 and early 2001, Cashel paid Durkin approximately $280,000 in management fees.
8. Durkin's primary role at Cashel was managing clients' portfolios. Orin's primary role was recruiting new clients. In 2000, Cashel had approximately 65 clients and managed approximately $125 million in assets.
9. RxRemedy, Inc. was based in Westport, Connecticut and published health-related information in a magazine and on the internet. RxRemedy sold millions of dollars of stock and notes to Cashel clients and went bankrupt in December 2000.
10. Durkin and Orin attracted clients to Cashel by representing to them that Cashel offered a conservative investment philosophy and personalized service that would provide them with a safe and diversified portfolio in line with their investment goals. Most Cashel clients were from the Cleveland area and, at the time of the conduct alleged herein, were retired or approaching retirement. Most clients had conservative investment goals, including capital preservation and a balanced portfolio.
11. When clients opened Cashel accounts, Durkin and Orin instructed them to open a trust account at a local bank or brokerage to hold their investments. The clients signed investment advisory agreements with Cashel pursuant to which Cashel was given discretionary authority to make trades in and withdraw money from the trust accounts.
12. Cashel filed annual reports with the SEC on Form ADV that were signed by Durkin. Between 1993 and 2000, Cashel represented in its Forms ADV that "[t]he client has the ultimate authority and veto power regarding any of the discretionary decisions made by [Cashel] with regard to which securities are to be bought or sold . . ." Cashel's Forms ADV during those years also disclose that Susan Durkin, Thomas Durkin's wife, on occasion invests in securities bought or held by Cashel clients. The forms, however, state that Susan Durkin's "trades are never co-mingled (sic) with trades of [Cashel clients]."
13. Cashel was compensated by fees for managing customer accounts. The fees were based on a percentage of assets in each customer account.
Investments in RxRemedy
14. In the mid-1990s, Durkin and Orin began recommending to their clients that they invest in RxRemedy. As a result, many clients bought common and preferred shares in RxRemedy.
15. In or around 1997, Durkin began exercising his discretionary authority to use clients' funds to buy RxRemedy promissory notes. Most RxRemedy notes purchased by Cashel customers paid 12 percent interest and could be held for an indefinite period of time, but were payable within 30 days of a demand for payment. Durkin and Orin discussed the RxRemedy notes with some of their clients at the time. Durkin and Orin told those clients that the bond market was weak and that the RxRemedy notes were safe, liquid, and a good substitute for municipal bonds.
16. Durkin's and Orin's representations were false because RxRemedy was thinly capitalized, was losing increasingly large amounts of money throughout the 1990s, and was experiencing cash flow problems by the late 1990s. Thus, its notes were not safe and liquid and were not a good substitute for municipal bonds, which, generally, are safer and more liquid. Durkin and Orin knew or recklessly disregarded the fact that their representations were false.
17. In 1999 and 2000, Durkin significantly increased the amount of client money invested in RxRemedy notes. Many clients told Durkin and Orin that they were uncomfortable with large investments in RxRemedy. Durkin and Orin convinced many of these clients to keep their money in RxRemedy by again falsely assuring them that the notes were highly liquid and safe.
18. Other clients specifically instructed Durkin and Orin not to buy any additional RxRemedy notes in their accounts, or to divest all or part of the RxRemedy notes in their accounts. Durkin and Orin told the clients that their instructions would be carried out. Durkin, however, continued to purchase RxRemedy notes against the clients' express instructions and failed to divest accounts according to client instructions. Durkin and Orin knew or recklessly disregarded the fact that their representations were false. Furthermore, Durkin's and Orin's numerous misrepresentations were material because they concerned facts that a reasonable investor would consider important in making an investment decision.
19. For example, the trustee of a trust opened a Cashel account in 1996 with the agreement that Cashel would not invest the trust's assets in non-marketable securities. In 1998, Durkin and Orin sought the trustee's approval to purchase a $200,000 note from RxRemedy. The trustee approved the purchase and later approved the purchase of another $100,000 note, but told Orin that the trust should purchase no more.
20. In November 1999, the trustee examined the trust's bank statements and noticed that Durkin had purchased three additional RxRemedy notes without his approval. The trustee called Orin to complain and Orin told him that the money would be paid back.
21. The trustee later examined the trust's bank statements and found that Durkin had purchased four additional notes in December 1999 and January 2000 without his approval and that not all of the money Orin had promised had been paid back. As a result, the trust's note balance stood at $755,000 by the end of February 2000. In or around March 2000, the trustee called Orin again and demanded that the balance be reduced to the $300,000 he had authorized. Orin again told him that the money would be paid back.
22. In May or June 2000, the trustee discovered that, contrary to Orin's representations, Durkin had not reduced the note balance. Instead, the balance had increased to $2,165,000. The trustee called Durkin. Durkin admitted that it had been wrong to invest additional funds, but insisted that it was a good investment. The trustee confirmed his conversation with Durkin in a June 5, 2000 letter. In the letter, the trustee demanded that Durkin reduce the RxRemedy note balance to $755,000 and purchase no additional notes from RxRemedy without written approval from the trustee. On June 29, 2000, Durkin responded in a letter confirming that "[t]he RxRemedy Notes in excess of $755,000 [would] be paid down over the next few weeks" and that no additional notes would be purchased.
23. Contrary to Durkin's representation, Durkin again began purchasing RxRemedy notes for the trust in September 2000. During September and October 2000, Durkin purchased an additional $7 million in RxRemedy notes. During the week of November 13, 2000, the trustee met with Durkin and Orin. They assured him all the money would be put back in the trust's account. On November 14, 2000, the trustee sent Cashel a letter terminating its services. Even after the meeting and termination, however, Durkin continued diverting the trust's funds. Between November 15 and 17, 2000, Durkin diverted an additional $210,000 of the trust's funds to RxRemedy. Contrary to Durkin's and Orin's promises, the money was never paid back. The trust lost approximately $10.3 million, almost the entire amount invested by the trust through Cashel.
24. Durkin and Orin knew or recklessly disregarded the fact that all of their representations concerning the redemption of notes and their plan to purchase no additional notes were false. Their representations were material because a reasonable investor would consider them important in making decisions about his investment account.
25. On December 20, 2000, RxRemedy filed for bankruptcy. RxRemedy was left with virtually no assets with which to reimburse creditors. As a result, Cashel clients lost approximately $90 million in RxRemedy investments.
Durkin Made Unauthorized Trades With Client Funds
26. From 1998 through 2000, Durkin diverted approximately $3.5 million from his brother's Cashel account and $4 million from his sister-in-law's Cashel account. Durkin diverted the funds by instructing RxRemedy to make checks, intended as repayment of notes bought by his brother and sister-in-law, payable to Durkin and then deposited the money in Susan Durkin's account at the S.G. Cowen brokerage. Durkin used the funds he diverted to his wife's account to trade options. Durkin eventually lost all the money through his option trading.
27. Durkin represented in Cashel's Forms ADV that client funds were not commingled with Susan Durkin's funds and he had earlier promised his brother that he would put his sister-in-law's money into safe investments. Nevertheless, Durkin did not disclose to his brother or sister-in-law that he removed money from their accounts, that he had placed the money in Susan Durkin's account, or that he was using it to trade in options, which were risky investments inconsistent with their investment objectives as retired persons.
28. Durkin had a duty to disclose those facts to his brother and sister-in-law because of his relationship to them as their investment adviser. Durkin knew or recklessly disregarded the fact that he had a duty to make such disclosures. Durkin's omissions were material because they concerned facts that a reasonable investor would consider important in making investment decisions.
29. In January 2001, Durkin admitted to his brother that he took the money and traded options in order to generate cash he could use to keep RxRemedy afloat longer.
Durkin Failed To Amend Cashel's Form ADV
30. In 1999 and 2000, the statements in Cashel's Forms ADV referred to in paragraph 12 above were false. Durkin, however, never filed any amendments to Cashel's Forms ADV correcting these statements.
Violation of Section 10(b) of the
31. Paragraphs 1 through 30 are hereby realleged and incorporated by reference herein.
32. Between 1997 and 2000, Durkin and Orin, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and of the mails, directly and indirectly: employed devices, schemes and artifices to defraud; made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and engaged in acts, practices and courses of business which operated or would have operated as a fraud and deceit upon purchasers and sellers of such securities.
33. Durkin knew or was reckless in not knowing the facts and circumstances described in paragraphs 1-30 above. Orin knew or was reckless in not knowing the facts and circumstances described in paragraphs 1-25 above.
34. By reason of the activities described in paragraphs 31 - 33 above, Durkin and Orin violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
Aiding and Abetting Violations of Section 206 (1) and (2) of the
35. Paragraphs 1 through 30 are hereby realleged and incorporated by reference herein.
36. Between 1997 and 2000, Durkin and Orin, persons associated with an investment adviser, by use of the means and instrumentalities of interstate commerce and of the mails, directly and indirectly: employed devices, schemes and artifices to defraud clients or prospective clients; and engaged in transactions, practices and courses of business which operated as a fraud or deceit upon clients or prospective clients.
37. Durkin knew or was reckless in not knowing the facts and circumstances described in paragraphs 1-30 above. Orin knew or was reckless in not knowing the facts and circumstances described in paragraphs 1-25 above.
38. By reason of the activities described in paragraphs 35 - 37 above, Durkin and Orin aided and abetted violations of Section 206(1) and (2) of the Investment Advisers Act of 1940 [15 U.S.C. § 80b-6(1) and (2)].
Aiding and Abetting Violations of Section 204 of the
39. Paragraphs 1 through 30 are hereby realleged and incorporated by reference herein.
40. Between 1997 and 2000, Durkin, a person associated with an investment adviser and responsible for filing Cashel's registration as an investment adviser, failed promptly to file an amendment on Form ADV when information in Cashel's application for registration became inaccurate in a material manner.
41. By reason of the activities described in paragraphs 39 and 40 above, Durkin aided and abetted violations of Section 204 of the Investment Advisers Act of 1940 [15 U.S.C. § 80b-4] and Rule 204-1(b)(1) promulgated thereunder [17 CFR § 275.204-1(b)(1)].
WHEREFORE, the Commission requests that the Court:
Find that Durkin and Orin committed the violations alleged above.
Issue orders of permanent injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining Durkin and Orin, their agents, servants, employees, attorneys and those persons in active concert or participation with them who receive actual notice of the order of permanent injunction by personal service or otherwise, and each of them, from directly or indirectly:
1. In connection with the purchase or sale of the securities of any issuer, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any national securities exchange, employing any device, scheme or artifice to defraud; making any untrue statement of a material fact or omitting to state a material fact necessary in order to make statements made, in the light of the circumstances under which they were made, not misleading; or engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person in violation of Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder; and
2. As a principal or as an aider and abettor, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, (1) employing any device, scheme or artifice to defraud any client or prospective client, and (2) engaging in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client in violation of Section 206(1) and 206(2) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6(1) and (2)).
Issue an order of permanent injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining Durkin, his agents, servants, employees, attorneys and those persons in active concert or participation with him who receive actual notice of the order of permanent injunction by personal service or otherwise, and each of them, from directly or indirectly: as a principal or as an aider and abettor, failing to make and keep for prescribed periods such records (as defined in section 3(a)(37) of the Securities Exchange Act of 1934), furnish such copies thereof and make and disseminate such reports as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors in violation of Section 204 of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-4) and Rule 204-1(a)(2) thereunder (17 C.F.R. § 275.204-1(a)(2)).
Grant an order requiring Durkin to disgorge his ill-gotten gains from his violative conduct, including prejudgment interest on such disgorgement.
Grant orders requiring Durkin and Orin to pay appropriate civil penalties pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1] and Section 209(e) of the Investment Advisers Act of 1940 [15 U.S.C. § 80b-9(e)].
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
Grant an Order for such further relief as the Court may deem appropriate.
Linda Ieleja Gerstman
Attorneys for Plaintiff
DATED: August 1, 2002