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UNITED STATES DISTRICT COURT
COMPLAINT Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint, alleges the following against defendants Asset Recovery and Management Trust, S.A. ("ARM"), Frank R. Johnson ("Johnson"), Milton E. Vaughn ("Vaughn"), and Carlos Fernandez Alfaro ("Alfaro"): SUMMARY 1. This enforcement action involves securities fraud and registration violations resulting from a fraudulent "prime bank" scheme through which more than $900,000 was raised, and then stolen, from hundreds of United States investors. The fraudulent scheme was developed by defendants Johnson, Vaughn and Alfaro, and was operated through defendant ARM. 2. The fraudulent conduct alleged here had its genesis in a prior "prime bank" fraud scheme carried out by Johnson through the International Benevolent Fund Trust ("IBFT"). The IBFT scheme targeted more than 9000 investors, who collectively lost millions of dollars between 1996 and 1999. In 1999, the Office of the United States Attorney for the Middle District of Alabama prosecuted Johnson for the IBFT fraud scheme, in the process effectively shutting down IBFT and the fraudulent conduct related to it. Johnson, Vaughn and Alfaro then developed the ARM scheme to replace and exploit the earlier fraudulent scheme. 3. The ARM scheme targeted investors who were victims of prior fraudulent schemes, including the IBFT victims. The defendants represented to these investors that ARM would assist in recovering funds they had lost as a result of those earlier schemes to defraud. In addition to these "recovery services," ARM also offered investments in its own supposed high yield, offshore trading programs, through unregistered securities which the defendants called "joint venture contracts." The defendants promised exorbitant returns on investments in these trading programs, claiming that they would have access to international trading banks, the mythical "prime banks," which they represented typically were available only to a select few with millions of dollars to invest. In fact, the "prime banks" and the trading programs were wholly fictitious, and the joint venture contracts were valueless. After luring investors with the promise of recovering lost funds, and thereby earning their trust, the defendants then enticed them into investing in ARM's trading programs. From November 1999 through July 2000 and beyond, the ARM scheme raised at least $900,000 from hundreds of investors throughout the United States. After the defendants received investors' monies they transferred it to their own use and control. At least four banks in Costa Rica were used by the defendants to receive these transfers of funds. 4. In the course of offering and selling ARM's unregistered prime bank securities, defendants engaged in numerous misrepresentations and omissions of material fact concerning, among other things, the use and safety of investor funds, as well as promised returns on their investments. Defendants represented, for example, that investors' funds would be used to trade debt instruments known as "bank debentures" and "standby letters of credit" through "world trading banks." Investors were told that this trading activity conformed to practices set forth by the International Chamber of Commerce, and would provide returns of between eight to 15 times the principal invested, with complete safety of principal. In reality, ARM's trading programs did not exist and the defendants stole the investors' monies. 5. By engaging in the conduct described in this Complaint, defendants, directly or indirectly, singly or in concert, have engaged, and unless enjoined and restrained, again will engage in transactions, acts, practices, and courses of business that constitute violations of sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act")[15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)] 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. 6. Accordingly, the Commission seeks: (i) entry of a permanent injunction prohibiting defendants from further violations of the relevant provisions of the federal securities laws; (ii) disgorgement of defendants' ill-gotten gains and unjust enrichment, plus pre-judgment interest; and (iii) the imposition of a civil monetary penalty against each defendant due to the egregious nature of their violations. In addition, because of the danger that investor funds will be dissipated or concealed before entry of a final judgment, and in light of the prior criminal activity of at least one of the defendants, and the defendants attempts to obstruct the Commission'sinvestigation of this matter, the Commission seeks preliminary equitable relief to: (a) freeze the defendants' assets and otherwise maintain the status quo as to defendants' assets pending final resolution of this action, as follows: (i) all assets held for the direct or indirect benefit, or subject to the direct or indirect control, of the defendants; and (ii) funds and assets equal to the amount of investor funds received by the defendants; (b) require the defendants to submit an accounting of investor funds and other assets in their possession; (c) require defendants to repatriate funds obtained from U.S. investors and transferred overseas; and, (d) prohibit the defendants from altering or destroying any relevant documents. JURISDICTION AND VENUE 7. The Commission seeks a permanent injunction and disgorgement of ill-gotten gains pursuant to Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Section 21(d)(1) of the Exchange Act [15 U.S.C. § 78u(d)(1)]. The Commission seeks the imposition of civil monetary penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. 8. This Court has jurisdiction over this action pursuant to Sections 20(d) and 22(a) of the Securities Act [15 U.S.C. §§ 77t(d), 77v(a)] and Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), 78aa]. In addition, Johnson and Vaughn reside in this District. 9. In connection with the conduct described in this Complaint, ARM, Johnson, Vaughn and Alfaro directly or indirectly made use of the mails or the means or instruments of transportation or communication in interstate commerce. DEFENDANTS 10. ARM is a Costa Rican corporation operated out of San Jose, Costa Rica and Montgomery, Alabama. ARM was formed by Vaughn and Alfaro on or about December 23, 1999. During the times relevant to this Complaint, ARM was controlled and operated by Johnson, Vaughn, and Alfaro. 11. Johnson, age 63, is a resident of Montgomery, Alabama. In October 1999, Johnson pled guilty to defrauding investors in connection with the IBFT scam. Johnson was ARM's Treasurer from at least May 2001 to August 2001 and was a member of ARM's Board of Directors during this same period. Among other things, he referred investors to ARM's trading programs. 12. Vaughn, age 68, is a resident of Montgomery, Alabama. Vaughn, with Alfaro, was the co-founder of ARM. He was ARM's Secretary from at least December 1999 to March 2000, and its Chairman from March 2000 to August 2001. He also appears to have functioned as IBFT's accountant during the period when Johnson perpetrated a fraud scheme through that company. 13. Alfaro, age 45, is a resident of Costa Rica. He was a co-founder of ARM and served as its Chairman from at least December 1999 to March 2000. He also participated in IBFT with Johnson. STATEMENT OF FACTS Background 14. Between 1996 and 1999, Johnson and others, carried out a fraudulent "prime bank" scheme through IBFT. The scheme defrauded IBFT investors, of which there were morethan 9,000, of several million dollars. IBFT operated out of Johnson's employment address in Montgomery, Alabama and an address used by Alfaro in Costa Rica. Johnson was a promoter of IBFT who, along with others, solicited investors to participate in IBFT's trading programs. The trading programs, for which exorbitant returns on investments were promised, were a sham. After obtaining investors' funds, Johnson transferred the funds to Client Management Services, a company that Vaughn operated. 15. Johnson and others, acting through IBFT, solicited investments in what were called "Private Party Loans." Johnson and others represented that these Private Party Loans would be pooled together and invested in trading programs operated by the top twenty five world trading banks, that the trading programs involved no risk of loss, and that the investments would result in immense profits. In fact, these trading programs did not exist and most of the investor funds were taken by Johnson and others involved with IBFT for their own personal use and gain. 16. In 1999, the criminal authorities shut down IBFT and prosecuted Johnson for his roles in the scam. In October 1999, Johnson entered into a plea agreement with the U.S. Attorney's Office for the Middle District of Alabama in connection with the IBFT fraud. While the criminal prosecution brought a halt to the IBFT scam, it did not stop Johnson's fraudulent schemes. Instead, in concert with Vaughn and Alfaro, he turned to ARM as a vehicle for continuing to defraud investors. The Genesis of ARM and Johnson's Introduction of ARM to his IBFT Victims 17. In November 1999 - approximately one month after entering into a plea agreement with federal authorities in Alabama, but still eight months before being incarcerated - Johnson informed IBFT investors by a signed letter that the IBFT trading program had earned profits, butthat those funds were being illegally withheld by certain individuals and/or companies that administered IBFT's trading. As a way to solve this problem, Johnson stated that he had contracted with ARM, which he termed "a renowned international organization," to recover these supposed profits. Johnson represented that IBFT had "carefully studied and considered every aspect of [ARM's] services and elected to retain them to represent IBFT." Johnson directed IBFT investors to ARM's website, and stated that they would be receiving an informational package from ARM shortly. Johnson also referred investors to ARM's website through a voice recorded messaging service that he periodically used to update IBFT investors regarding their investments. 18. On or about December 23, 1999, Vaughn and Alfaro registered ARM as a Costa Rican corporation. In January 2000, ARM sent IBFT investors a letter stating that it had been retained to recover IBFT's profits. In the same letter, ARM offered IBFT investors the opportunity to join ARM's own high yield, offshore trading programs, which were similar to IBFT's supposed programs. ARM's trading programs offered investments in unregistered securities which the defendants called "joint venture contracts." However, ARM claimed its programs were safer than the programs offered by IBFT because investors' funds remained in ARM's account during the trading period and could be withdrawn by investors at any time. According to ARM, this factor eliminated the risk of middlemen absconding with investor funds, which ARM claimed was what happened to the IBFT funds. ARM encouraged IBFT members to participate in ARM's own programs, stating that such participation would "expedite the payment of your IBF[T] profits." ARM's Fictitious and Fraudulent Trading Programs 19. Between November 1999 and July 2000, defendants Johnson, Vaughn and Alfaro, acting through ARM, lured hundreds of U.S. investors to join ARM's purported trading programs, raising at least $900,000. These programs, which were described in documents provided to investors and on ARM's website, purportedly involved trading debt instruments known as "bank debentures" and "standby letters of credit" through "world trading banks." ARM's website stated that these instruments were traded in 40-week cycles, conformed to the practices set forth by the International Chamber of Commerce, and were fully secured by a bank endorsed guarantee. All of those representations were false. ARM's website further stated that these programs were not generally known and were typically available only to select investors with millions of dollars. ARM stated, however, that by pooling funds together, investors could participate in its programs for as little as $100 per person. 20. ARM offered investors the opportunity to participate in two trading programs; the first beginning in February 2000 and the second in June 2000. To participate in the trading programs, investors entered into "joint venture contracts" with ARM. Under the contracts, ARM claimed it would pool investor funds and trade them through world banks, with expected returns of between eight and 15 times the principal invested within three to ten months. ARM repeatedly assured investors that their principal was always secure and could be withdrawn at any time, and actively encouraged them to solicit others to join ARM's trading programs. 21. After completing the joint venture contract, investors were told to send cashiers checks or money orders payable to ARM to ARM's Costa Rican address. The defendants deposited these funds in various Costa Rican banks, including Banco Bantec, BantecInternacional, Banco BanCrecen, and Banco Cathay. In at least one instance, investor funds were moved from Bantec Internacional and deposited temporarily in an ARM account at The Reserve Fund, a New York based investment adviser. Vaughn and Alfaro, who were signatories on the New York account, used some of these funds to pay for ARM's phone/fax services. ARM also deposited about $20,000 in investor funds directly into an account held in the name of AAA Management Services, Inc., a company Vaughn controlled. 22. By contacting a phone number listed on ARM's website, investors could leave messages for ARM, and hear updates on the status of ARM's trading programs, as well as its "progress" in the effort to recover their IBFT funds. From the outset, through its recorded updates and in emails, ARM informed investors that its trading programs were producing the expected profits. As the joint venture contracts supposedly matured, ARM offered investors the opportunity to roll the funds into new programs or withdraw their principal and profits. When some investors requested their funds, however, ARM either failed to pay out the purported profits, or provided investors with a nominal "partial payouts." In other instances, ARM provided several varying and false explanations for delaying payments. 23. Some time after the Commission instituted its investigation of ARM and its principals, the defendants attempted to obstruct the Commission's investigation by telling investors that the Commission did not have jurisdiction over ARM, and that anyone who assisted the Commission would lose the principal they invested as well as their purported profits, specifically stating: Any member found to be assisting this agency [the Commission] or any other government agency in any way will be automatically removed from ARM Trust and will receive absolutely no funds including principal. 24. All of the material representations made to investors about the ARM trading programs were false. In fact, the trading programs described to investors did not exist. Investors' funds were not used to trade financial instruments among the promised world or international trading banks; rather, the funds were stolen by the defendants. The Roles of Johnson, Vaughn, and Alfaro with ARM 25. Johnson, Vaughn and Alfaro were principals of ARM and controlled its operations. ARM's primary function was to contact United States investors through the internet and telephonically, to use misrepresentations to fraudulently obtain investors' funds, and to cause the transfer of those funds from the United States to financial institutions primarily located in Costa Rica. 26. Shortly after pleading guilty to wire fraud in connection with the IBFT fraud, Johnson, both by letter and via voicemail recordings, directed IBFT investors to ARM's website, claiming that he had retained ARM to recover IBFT's funds. Johnson encouraged investors to support ARM and vouched for ARM's integrity. On or about May 27, 2001, Johnson was appointed to ARM's Board of Directors and named its Treasurer. 27. Johnson also was directly responsible for sending a critical ARM e-mail to investors. On January 12, 2002, ARM sent its investors an e-mail stating that its trading programs were progressing and earning profits, despite the delays in payments. The e-mail further stated that ARM had discovered another money-making opportunity that would help investors meet their immediate financial needs. 28. Vaughn was a co-founder of ARM and served as its Secretary from at least December 1999 to March 2000, and as its Chairman from at least March 2000 to August 2001.He also administered ARM's finances in the U.S. Vaughn was a signatory on one of ARM's accounts at The Reserve Fund, and made payments from that account for ARM's telephone and fax services. ARM also deposited about $20,000 directly into an account of an entity Vaughn controlled. 29. Alfaro was a co-founder of ARM and served as the Chairman of ARM from at least December 1999 to March 2000. He administered ARM's finances in Costa Rica, including receipt of the funds from United States investors, and, with Vaughn, was a signatory on one of ARM's accounts at The Reserve Fund. Alfaro also was identified as ARM's representative with respect to other bank accounts. FIRST CAUSE OF ACTION (Defendants ARM, Johnson, Vaughn and Alfaro Violated Sections 5(a) and 5(c) of the Securities Act) 30. The Commission repeats and incorporates by reference the allegations in paragraphs 1-29 of the Complaint as if set forth fully herein. 31. ARM's joint venture contracts are "securities" within the meaning of Section 2(1) of the Securities Act [15 U.S.C. § 77b(1)] and Section 3(a)(10) of the Exchange Act [15 U.S.C. § 78c(a)(10)]. No registration statement was filed with respect to these securities, and no exemption from registration was available. 32. By reason of the foregoing, defendants ARM, Johnson, Vaughn and Alfaro, directly or indirectly: (a) have made use of the means or instruments of transportation or communication in interstate commerce or of the mails to sell, through the use or medium of a prospectus or otherwise, securities as to which no registration statement has been in effect andfor which no exemption from registration has been available; and/or (b) have made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell, through the use or medium of a prospectus or otherwise, securities as to which no registration statement has been filed and for which no exemption from registration has been available. 33. As a result, defendants ARM, Johnson, Vaughn and Alfaro have violated and, unless enjoined, will continue to violate Sections 5(a) and (c) of the Securities Act [15 U.S.C. §§ 77e(a), (c)]. 34. Defendants' violations of Sections 5(a) and (c) of the Securities Act have involved fraud, deceit or deliberate or reckless disregard of regulatory requirements and have resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)]. SECOND CAUSE OF ACTION (Defendants ARM, Johnson, Vaughn and Alfaro Violated Section 17(a) of the Securities Act) 35. The Commission repeats and incorporates by reference the allegations in paragraphs 1-34 of the Complaint as if set forth fully herein. 36. By reason of the foregoing, defendants ARM, Johnson, Vaughn and Alfaro, directly and indirectly, acting intentionally, knowingly or recklessly, in the offer or sale of securities by the use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails: (a) have employed or are employing devices, schemes or artifices to defraud; (b) have obtained or are obtaining money or property by means of untruestatements of material fact or omissions to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) have engaged or are engaging in transactions, practices or courses of business which operate as a fraud or deceit upon purchasers of the securities. 37. As a result, defendants ARM, Johnson, Vaughn and Alfaro have violated, are violating and, unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]. 38. Defendants' violations of Section 17(a) of the Securities Act have involved fraud, deceit or deliberate or reckless disregard of regulatory requirements and have resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)]. THIRD CAUSE OF ACTION (ARM, Johnson, Vaughn and Alfaro Violated Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder) 39. The Commission repeats and incorporates by reference the allegations in paragraphs 1-38 of the Complaint as if set forth fully herein. 40. By reason of the foregoing, defendants ARM, Johnson, Vaughn and Alfaro, directly or indirectly, acting intentionally, knowingly or recklessly, by the use of means or instrumentalities of interstate commerce or of the mails, in connection with the purchase or sale of securities: (a) have employed or are employing devices, schemes or artifices to defraud; (b) have made or are making untrue statements of material fact or have omitted or are omitting to state a material fact necessary to make the statements made, in the light of the circumstancesunder which they were made, not misleading; or (c) have engaged or are engaging in acts, practices or courses of business which operate as a fraud or deceit upon certain persons. 41. As a result, defendants ARM, Johnson, Vaughn and Alfaro have violated and, unless enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5]. 42. Defendants' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder have involved fraud, deceit or deliberate or reckless disregard of regulatory requirements and have resulted in substantial losses or significant risk of substantial losses to other persons, within the meaning of Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)]. FOURTH CAUSE OF ACTION (Johnson, Vaughn and Alfaro Aided and Abetted ARM's Violations of Section 10(b) of the Exchange Act and Rule 10b-5) 43. The Commission repeats and incorporates by reference the allegations in paragraphs 1-42 of the Complaint as if set forth fully herein. 44. As set forth above, ARM violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 45. By reason of the foregoing, Johnson, Vaughn and Alfaro provided knowing and substantial assistance to ARM's violations of Section 10(b) of the Exchange Act and Rule 10b-5 for the reasons set forth in paragraph 42. 46. As a result, Johnson, Vaughn and Alfaro aided and abetted and, unless enjoined, will continue to aid and abet, ARM's violations of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5]. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court issue a Final Judgment of Permanent Injunction and Other Relief as follows: A. Enter an order freezing assets of ARM, Johnson, Vaughn and Alfaro, and granting other equitable relief in the proposed form of order submitted with the Commission's ex parte motion for such relief; B. Enter a permanent injunction restraining defendants ARM, Johnson, Vaughn and Alfaro and each of their officers, agents, servants, employees and attorneys and those persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, including facsimile transmission or overnight delivery service, from directly or indirectly engaging in the conduct described above, or in conduct of similar purpose and effect, in violation of: 1. Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§77e(a), (c)]; 2. Section 17(a) of the Securities Act [15 U.S.C. §77q(a)]; 3. Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5]; C. Enter an Order requiring defendants ARM, Johnson, Vaughn and Alfaro to disgorge their ill-gotten gains, plus pre-judgment interest, with said monies to be distributed in accordance with a plan of distribution to be ordered by the Court; D. Order defendants ARM, Johnson, Vaughn and Alfaro to pay appropriate civil monetary penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)]. E. Retain jurisdiction over this action to implement and carry out the terms of all orders and decrees that may be entered; and F. Award such other and further relief as the Court deems just and proper. Respectfully submitted, Juan Marcel Marcelino
_______________________________
Philip C. Koski
Asita Obeyesekere
Attorneys for Plaintiff
Dated: December __, 2002 http://www.sec.gov/litigation/complaints/comp17920.htm
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