IN THE UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
ACI, INC., and CLARENCE E. LONG,
JON G. ERVIN, SR.,
Defendant Solely for Purposes
Civil Action No.
Plaintiff Securities and Exchange Commission alleges as follows:
1. This action involves a fraudulent scheme perpetrated by Clarence E. Long ("Long") and ACI, Inc. ("ACI"), a Nevada corporation controlled by Long, to fraudulently offer and sell unregistered investments in non-existent high-yield trading programs. ACI, Long, and other persons directed by Long, attracted investors through numerous misrepresentations and omissions relating to, among other things, the investment risk, the prospects for return on the investment, the use of investor proceeds, and Defendant Long's background.
2. From October 2000 through September 2001, Defendants raised over $7.7 million in a general solicitation from at least 586 investors. Defendants, however, failed to file a registration statement with the Commission prior to offering ACI's securities to the public.
3. By engaging in such conduct, as described in this Complaint, Defendants ACI and Long, directly or indirectly, singly or in concert, have engaged, and unless enjoined and restrained, will again engage in transactions, acts, practices, and courses of conduct 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.
4. The Commission, in the interest of protecting the public from any further unscrupulous activity by the defendants, brings this action against ACI and Long seeking injunctive relief, disgorgement and a civil monetary penalty against both Defendants.
5. The investments offered and sold by the defendants are "securities" under 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)].
6. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)], and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], to permanently enjoin Defendants from future violations of the federal securities laws.
7. This Court has jurisdiction over this action, and venue is proper, pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)], and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
8. Defendants, directly or indirectly, made use of the means or instruments of transportation and communication, and the means or instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of conduct alleged herein. Certain of the transactions, acts, practices and courses of conduct alleged herein took place in the District of Kansas, Wichita Division.
9. ACI, Inc., is a Nevada corporation headquartered in Spring Valley, California. ACI was incorporated in the state of Nevada on January 31, 2001. ACI was owned and controlled by Long. Although the State of Nevada revoked ACI's corporate charter on February 1, 2003, for failure to file its annual report of officers and directors, ACI may reinstate its corporate charter by submitting its annual report along with a fee.
10. Clarence E. Long, age 73, currently resides in Woodstock, Georgia. Long controlled all aspects of ACI. Long signed investor contracts, controlled bank accounts, and drafted investor correspondence. Long asserted his Fifth Amendment privilege against self-incrimination and refused to testify during the investigation of this matter. Long was previously enjoined from violating the federal securities laws in an action brought by the Commission. SEC v. Clarence E. Long et al., No. CA 89-4075-S (D. Kan. May 23, 1990). Additionally, in a related criminal action, Defendant Long was sentenced to 21 months in federal prison for wire fraud, after which he remained on probation until May 1999. U.S. v. Clarence Long, No. CR 92-40040-01 (D. Kan. December 3, 1993).
11. Jon G. Ervin, Sr., age 56, is a resident of Mission Viejo, California. At Long's direction, Ervin opened two bank accounts for ACI. From March through July 2001, also at Long's direction, Ervin deposited and disbursed investors' funds. For these services, ACI paid Ervin $245,000, all of which derived from investors' funds.
12. In October and December 2000, ACI and Long established two websites touting what purported to be membership programs. Long was the sole source of the content disseminated on these ACI websites. Each website solicited the public to buy a club membership that would afford them access to various offshore banking and debit cards. Prospective members were directed to mail their funds to ACI's post office box in Belize City, Belize, or to wire funds to an offshore bank. On information and belief, ACI and Long used these websites to gather names for the high-yield trading programs.
13. On or about the same time as Defendants established ACI's websites, Long enlisted the assistance of marketers to solicit investors on behalf of ACI. Based on information provided by Long and at Long's direction, these marketers orally solicited prospective investors for high-yield trading programs.
14. Long and the marketers told investors that ACI's trading programs produced profits from trading debentures in a "secret process" through European banks. They further claimed that the debentures were traded over 30 to 90 day periods to enable European banks and insurance companies to "reflect" the debentures on their books. Defendants represented that ACI, through the use of "leveraging" techniques, could magnify the investor returns tenfold, creating weekly returns of up to 45 percent. Defendants also sought to appeal to the altruistic impulses of potential investors by representing that funds from these trading programs provided financial assistance to the United Nations.
15. Long and the marketers also touted Long's past success and experience. They described Long as a retired businessman who had earned a six-figure income in the telecommunications industry. Potential investors were also told that Long had conducted successful trading programs for 30 years.
16. Long prepared and, directly and indirectly, provided prospective investors with offering documents consisting of a one-page Memorandum of Understanding ("MOU"), a promissory note, and a Trust and Fiduciary Agreement ("Agreement").
17. Each ACI investor signed the MOU, which set forth the terms and the principal amount of their ACI investment. The MOU claimed that:
a. investors' funds would be pooled until a minimum of $3 million had been reached;
b. the returns could be as much as 45 percent per week;
c. profit distributions would begin within 15 days after confirmation from the bank that the trade was completed; and
d. ACI would disburse the principal plus accrued interest at the end of "one year and one month."
Additionally, the MOU included other terms typical of fraudulent high-yield trading programs, such as a representation that the investors' principal was "good, clean, and clear funds of non-criminal origin" and references to the "rules of Non-Disclosure and Non-Circumvention."
18. ACI issued each investor a promissory note in which ACI promised a 6½ percent return at the end of the note's 13-month term. In referencing the promissory note in the MOU, ACI expressly "guaranteed" a minimum 6½ percent return on each ACI investment.
19. Each ACI investor executed an Agreement, which placed their funds in a trust, purportedly administered by ACI as trustee. In the Agreement, ACI "guarantees" the safety of the investor's principal.
20. Defendants' oral presentations as well as the documents distributed to investors in connection with the ACI programs contained false and misleading representations and omissions. The debenture trading programs described by Long and the marketers did not, in fact, exist. Further, the claim that Defendants could place investor funds in a program that could potentially earn a return of 45 percent per week was entirely false. Moreover, ACI's guarantee of a minimum return of 6 ½ percent was a sham, as this promise was not supported by any collateral or assets. Indeed, as set forth more fully below, investor funds were not invested in any trading programs, but rather were misappropriated and used for unauthorized purposes, such as the personal benefit of Long and "promoters" and to make Ponzi payments to earlier investors in the ACI scheme.
21. Defendants also failed to disclose to investors Long's previous injunction for securities fraud or his related criminal conviction. Accordingly, Defendants' positive description of Long's experience and track record was extremely misleading.
22. From October 2000 through September 2001, Long and ACI raised over $7.7 million from at least 586 investors located throughout the United States.
23. From the outset, Long used ACI's investors' funds to pay personal expenses. Approximately $2.7 million was transferred to accounts in Canada, Costa Rica, Panama, Mexico, and Taiwan held in the name of ACI and other entities. Additionally, Long purchased $141,700 for personal automobiles, spent $100,000 on personal travel and paid friends and family members approximately $223,000. Long also paid Relief Defendant Ervin $245,000 for opening checking accounts, issuing checks and making deposits. Additionally, Long paid approximately $530,000 in Ponzi-type payments to approximately two dozen investors. Finally, Long transferred approximately $2.42 million of ACI investor funds to other promoters, ostensibly for investment purposes.
24. Long engaged in lulling activities to quell potential concerns about ACI's legitimacy and to induce investors to provide additional funds. First, Long posted fictitious "account" statements in password-protected "member only" pages of ACI's website. These statements reflect the date and amount of the investor's initial investment, an administrative fee, purported returns from "the trades" and the investor's account balance after each transaction.
25. In July 2001, ACI notified its investors that its "trading group" was unable to locate programs that would generate the returns it had promised. Defendants claimed, however, that ACI had hired a new trading group and offered its investors an opportunity to transfer their previous investment into a new program that would earn returns of 60 percent monthly for 10 months. Nearly all of ACI's investors transferred their investments into the "new" trading program. Additionally, 10 previous investors invested an additional $485,000 into ACI's new trading program.
26. Even though ACI and Long had systematically misappropriated the investors' funds, the defendants allayed investors' concerns by falsely insisting that profit payments were imminent. They also invented numerous excuses about the delays in paying trading profits, such as: "The funds are tied up with lawyers"; "The money is in the bank"; and "Additional documents need to be signed."
27. In e-mail messages to investors, Long shamelessly exploited the September 11, 2001, terrorist attacks, blaming this tragedy for further delays, yet proclaiming that "ACI's principal is complete and intact." Even after ACI closed its website in October 2001, Long continued to falsely claim that payments were imminent. Indeed, Defendants' perpetuated this charade through further communications with investors on a website not controlled by ACI, promising in a posting as late as September 4, 2002, that ACI would be distributing investor returns without further delay. Needless to say, Defendants' repeated assurances were never followed by remuneration to ACI investors.
28. Plaintiff Commission repeats and realleges paragraphs 1 through 27 of this Complaint and incorporates them herein by reference as if set forth verbatim.
29. Defendants, directly or indirectly, singly or in concert with others, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails have: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
30. As a part of and in furtherance of their scheme, Defendants, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material facts and misrepresentations of material facts, and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those set forth in Paragraphs 1 through 27 above.
31. Defendants made the above-referenced misrepresentations and omissions knowingly or grossly recklessly disregarding the truth.
32. By reason of the foregoing, Defendants have violated and, unless enjoined, will continue to violate the provisions 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].
33. Plaintiff Commission repeats and realleges paragraphs 1 through 27 of this Complaint and incorporates them herein by reference as if set forth verbatim.
34. Defendants, directly or indirectly, singly, in concert with others, in the offer and sale of securities, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, have: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices or courses of business which operate or would operate as a fraud or deceit.
35. As part of and in furtherance of this scheme, Defendants, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material fact and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those statements and omissions set forth in paragraph 1 through 27 above.
36. Defendants made the above-referenced misrepresentations and omissions knowingly or grossly recklessly disregarding the truth.
37. By reason of the foregoing, Defendants have violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
38. Plaintiff Commission repeats and realleges paragraphs 1 through 27 of this Complaint and incorporates them herein by reference as if set forth verbatim.
39. Defendants, directly or indirectly, singly and in concert with others, have been offering to sell, selling and delivering after sale, certain securities, and have been, directly and indirectly: (a) making use of the means and instruments of transportation and communication in interstate commerce and of the mails to sell securities, through the use of written contracts, offering documents and otherwise; (b) carrying and causing to be carried through the mails and in interstate commerce by the means and instruments of transportation, such securities for the purpose of sale and for delivery after sale; and (c) making use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell such securities.
40. As described in paragraphs 12 through 22, the purported ACI high-yield trading program was offered and sold to the public through a general solicitation of investors. No registration statements have been filed with the Commission or are otherwise in effect with respect to these securities.
41. By reason of the foregoing, Defendants have violated and, unless enjoined, will continue to violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
42. Plaintiff Commission repeats and realleges paragraphs 1 through 27 of this Complaint and incorporates them herein by reference as if set forth verbatim.
43. As set forth in paragraph 23 of this Complaint, the Relief Defendant Ervin received funds from the Defendants, which are the proceeds, or are traceable to the proceeds, of the unlawful activities of Defendants, as alleged in paragraphs 1 through 27, above.
44. Ervin has obtained the funds alleged above under circumstances in which it is not just, equitable or conscionable for him to retain the funds. As a consequence, Ervin has been unjustly enriched and should disgorge these funds.
WHEREFORE, Plaintiff respectfully requests that this Court:
Permanently enjoin Defendants from violating Sections 5(a), 5(c), and 17(a) of the Securities Act [15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)], and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder.
Permanently enjoin Long from participating in any sale or offer to sell any security in an unregistered transaction while acting in association with an issuer, underwriter, broker, or dealer involved in such transaction.
Order Defendants and Relief Defendant to file with the Court and serve upon Plaintiff Commission and the Court an accounting, under oath, detailing all of their assets and all funds or other assets received from investors and from one another.
Order Defendants to disgorge an amount equal to the funds and benefits they obtained as a result of the violations alleged herein, plus prejudgment interest on that amount, and order Relief Defendant to disgorge an amount equal to funds and benefits he derived from Defendants' unlawful activities as described in this Complaint, plus prejudgment interest on that amount.
Order civil penalties against Defendants pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], for the violations alleged herein.
Order such further relief as this Court may deem just and proper.
For the Commission, by its attorneys:
DATED and electronically filed this 25th day of September, 2003.
s/ Jeffrey B. Norris
JEFFREY B. NORRIS
Washington D.C. Bar No. 424258
s/ Timothy P. Davis
TIMOTHY P. DAVIS
Kansas Bar No. 18647
Texas Bar No. 00798134
U.S. Securities and Exchange Commission
Burnett Plaza, Suite 1900
801 Cherry Street, Unit #18
Fort Worth, TX 76102-6882
(817) 978-4927 (fax)
SPENCER C. BARASCH
Washington, D.C. Bar No. 388886
Texas Bar No. 16255300
Nebraska Bar No. 19010
U.S. Securities and Exchange Commission
Fort Worth District Office
801 Cherry Street, Suite 1900
Fort Worth, Texas 76102
(817) 978-2700 (facsimile)
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