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UNITED STATES DISTRICT COURT
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Securities and Exchange Commission, Plaintiff, v. DARREN SILVERMAN and MATTHEW BRENNER, Defendants. |
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CASE NO. |
Plaintiff, Securities and Exchange Commission ("SEC" or "Commission") alleges that:
1. The Commission brings this action to permanently enjoin Defendants Darren Silverman ("Silverman") and Matthew Brenner ("Brenner") from violating the federal securities laws based on their fraudulent offering and sale of unregistered securities issued by IDT Funds and IDT Group, Inc. ("IDT Group") From August 1999 through May 2002, Silverman and Brenner defrauded hundreds of investors out of approximately $33 million through the offer and sale of securities issued by five individual affiliated hedge funds (collectively, "IDT Funds") and, beginning in 2001, shares in IDT Group. Silverman and Brenner used deceptive offering materials and fictitious statements, among other things, to entice persons to invest in the hedge funds. They then lulled investors into keeping their funds invested - and making additional investments - by sending account statements falsely stating the IDT Funds were profitable and outperforming major market indicators. They also misrepresented the safety of investments in IDT Funds while lying to investors about the compensation IDT Funds paid their day traders. Silverman and Brenner also misled investors by paying investors what they claimed were "dividends" but, in truth, were new investor funds paid to earlier investors, in a Ponzi-like fashion. At their direction, both IDT Funds, and its successor IDT Group, employed unlicensed sales representatives who raised millions of dollars from investors, including more than $3 million from religious non-profit organizations. Unless permanently enjoined, Silverman and Brenner will continue to violate the federal securities laws in the future.
2. Silverman, 31, resides in Boca Raton, Florida. Silverman was fund manager of IDT Funds beginning in approximately October 2000. He became president, chairman, and CEO of IDT Group, managing the day-to-day operations of IDT Group and making investment decisions, after IDT Funds' merged into IDT Group during the period of April through July 2001. Silverman received a substantial salary and other benefits while managing IDT Funds and, later, IDT Group.
3. Brenner, 36, resides in Boca Raton, Florida. Brenner was fund manager of IDT Funds from roughly August 1999 until approximately May 2001, and served as the "manager of the general partner" from the IDT Funds' inception. According to the IDT Funds' private placement memoranda ("PPM"), Brenner "[supervised] all the Partnership's trading and administrative functions, including ultimate investment decisions" while managing the day-to-day operations of the IDT Funds. The IDT Funds' PPM also represented that Brenner was responsible for monitoring IDT Funds' trading and brokerage accounts. Brenner received substantial salary and other benefits while managing the IDT Funds and, later, overseeing the merger of IDT Funds into IDT Group.
4. Silverman and Brenner directly participated in the management of the IDT Funds. They also both directed and oversaw the IDT Funds' merger into IDT Group, and were directly involved in IDT Group's operations at the highest levels. By reason of their positions with the IDT Funds and IDT Group, Silverman and Brenner had significant decision-making authority in those entities and controlled, or had the power to control their sales representatives' conduct, and the content of the IDT Funds and IDT Group's marketing materials, PPMs, and website.
5. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t, 77t(d) and 77v(a); Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d), 78u(e) and 78aa; and Section 214 of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. §80b-14.
6. This Court has personal jurisdiction over Silverman and Brenner, and venue is proper in the Southern District of Florida, because many of the acts and transactions constituting violations of the Securities Act, the Exchange Act, and the Advisers Act occurred in the Southern District of Florida. In addition, the principal offices of IDT Funds and IDT Group were located in the Southern District of Florida, and Silverman and Brenner reside in the Southern District of Florida.
7. Silverman and Brenner, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, the means and instruments of transportation and communication in interstate commerce, and the mails, in connection with the acts, practices, and courses of business set forth in this Complaint.
8. Beginning in approximately 1999, IDT Funds sold interests in five individual, affiliated hedge funds: IDT Fund A. Ltd., IDT Fund B Ltd., IDT Fund C Ltd., the Millennium IDT Fund Ltd., and IDT Venture (collectively "IDT Funds"). Beginning on or about March 2001, they also sold interests in IDT Group, Inc., the successor entity ultimately formed by the IDT Funds' merger. Four of the funds, IDT Fund A Ltd., IDT Fund B Ltd., IDT Fund C Ltd., the Millennium IDT Fund Ltd., were structured as limited partnerships, and one, IDT Venture, as a corporation. Each of these funds' near-identical PPMs stated they were "organized for the purpose of investing in, and trading all types of securities, including but not limited to, equity, debt or convertible securities, and foreign securities," and that each fund was managed in a similar manner.
9. The IDT Funds offered and sold their investments to the public through a network of sales representatives directed by Silverman and Brenner. Silverman and Brenner, and sales representatives at their direction, pitched investments through "cold-calling" prospective investors, often using high-pressure sales tactics. Silverman and Brenner, and sales representatives at their direction, also sold investments to individuals who had heard about the IDT Funds' purported outstanding performance by word of mouth.
10. IDT Funds offered investments in the form of units in the four IDT Funds' limited partnerships at $25,000 each, or shares of common stock in IDT Venture at $3.50 to $6.00 per share. The Commission believes, based on available evidence, that the IDT Funds raised approximately $26,284,575.
11. The IDT Funds have never registered under the Investment Company Act or with the Commission in any capacity. Silverman and Brenner have never registered as investment advisers.
12. Silverman and Brenner, and the IDT Funds sales representatives at their direction, made numerous material misrepresentations and omissions to convince investors to invest, or continue investing, in IDT Funds and, eventually, its successor, IDT Group. They misled investors about, among other things, the growth and rates of return on the touted investments, the safety of the investments, the compensation structure for the IDT Funds and IDT Group traders, as well as the experience and abilities of Silverman, Brenner, and others involved in running the IDT Funds, and its successor, IDT Group.
13. IDT Funds, at the direction of Brenner, and later Silverman, sent investors account statements falsely representing that IDT Funds were profitable and outperforming all major market indicators, when the funds actually were losing money. Silverman and Brenner used this information to convince earlier investors to increase their investments in IDT Funds.
14. IDT Funds, at the direction of Brenner, and, later, Silverman, also sent investors numerous other documents that falsely described IDT Funds' purported growth, including, for example,
15. The returns Silverman and Brenner claimed for IDT Funds were blatantly false. Unaudited financial statements for the life of four of the hedge funds reveal that IDT Funds A, B, C, and IDT Venture reported accumulated losses of $4,153,646, $1,378,796, $494,938, and $213,850, respectively. The Millennium Fund, which was only operational for seven months, may have realized a miniscule $7,787 profit.
16. Silverman and Brenner, and IDT Funds representatives they directed, falsely represented IDT Funds as a safe and better alternative to traditional mutual funds. Brenner told investors the funds were "very conservative" and would "profit in all market conditions." He declared to at least one investor that the IDT Funds would "go to cash" at the end of each day, so the funds could "never lose money" if the market opened down.
17. Silverman and Brenner, and IDT Funds' sales representatives at their direction, told investors IDT Funds engaged in low-risk trading activities, even though they knew this to be false. In fact, IDT Funds engaged in highly risky, speculative day-trading, and lost a substantial portion of investor funds investing in companies that traded on the OTC Bulletin Board.
18. Silverman and Brenner, and IDT Funds sales representatives at their direction, added to this false image of safety and security by telling investors that IDT Funds' crew of day traders would make money only if the IDT Funds were profitable, giving investors the false understanding that this was a "built-in incentive" for the traders to be successful. In reality, Silverman and Brenner knew IDT Funds paid millions to its day traders - sometimes through commissions of up to 90% of profits made on individual trades - even though the funds were operating at a loss. Silverman and Brenner did not include this information on account statements they sent, or directed to be sent, to investors.
19. Silverman and Brenner oversaw the creation of the marketing and offering materials of the IDT Funds, and, later, of its successor, IDT Group. These materials touted their successful operations and presented the appearance of a well-run and highly-experienced investment firm.
20. Brenner directed IDT Funds to send a letter to investors falsely describing its top managers as having an "extensive range and depth of experience" with more than a quarter century of experience at companies such as Merrill Lynch, Deutsche Bank, Alex Brown, Shearson Lehman Brothers, and Prudential Securities. That same letter falsely described Brenner as having over a "decade of investment experience," even though he was only 28, and was employed as a waiter before 1998. Brenner told investors that IDT Funds employed the "best day traders in the business," many of whom left "prestigious Wall Street firms" to work for IDT Funds, when he knew that many of IDT Funds' and IDT Group's principals and traders had adverse disciplinary, criminal, and regulatory histories.
21. Similarly, IDT Group, in its PPM and in letters to investors, touted Silverman's experience with Credit Lyonnaise in New York City. However, Silverman was merely employed with Credit Lyonnaise as a summer intern doing "computer input."
22. Silverman and Brenner and other management personnel they hired displayed virtually non-existent management skills. The IDT Group management failed to implement even the most rudimentary internal controls, permitting Silverman to mismanage the company's books and records to such an extent that neither Silverman nor IDT Group can determine the exact amount that company has in investor assets.
23. In March 2001, Silverman and Brenner, and IDT Funds or IDT Group sales representatives at their direction, began telling investors that they were merging the IDT Funds to form another, single entity called IDT Group. Silverman and Brenner told investors, or directed IDT Fund sales representatives to tell investors, that IDT Group was expanding its offices and staff (including hiring additional day-traders), as well as offering additional services even though Silverman and Brenner knew, with one very minor exception, that the IDT Funds had been losing money.
24. Silverman signed and directed IDT Funds or IDT Group to send investors a document entitled IDT Group, Inc. Confidential Documentation Regarding Merger Plan, ("Merger Plan"), requesting investors to sign an agreement supporting the merger. The Merger Plan ostensibly allowed each limited partner to convert his or her limited partnership interest, or shares of IDT Venture stock into shares in IDT Group stock, with the same valuation.
25. Silverman, Brenner, and sales representatives at their direction, told unwilling investors they had "no choice" regarding the merger, falsely stating that "over 50% of the investors already signed." Brenner falsely told at least one investor that 80% to 85% of investors had agreed to the Merger Plan, and none had dissented. Some investors were not informed of the merger until after the fact. Brenner falsely told at least one investor that the IDT Group would become a public company within 6-18 months of the merger. Silverman and Brenner orchestrated the merger of IDT Funds' five individual hedge funds into IDT Group between April 24 and July 31, 2001. During the merger process, they failed to disclose to investors that the IDT Funds were not profitable and had, in fact, sustained serious trading losses. Once the IDT Funds merged into IDT Group, over $18 million of the $26,284,575 the IDT Funds had raised transferred to IDT Group, with the difference comprising over $6 million in losses and over $1.2 million in redemptions.
26. After the merger, Silverman had IDT Group declare false dividends to mislead investors into believing it was profitable. Specifically, IDT Group's general ledger for the eight-month period ending December 31, 2001 and the three-month period ending March 31, 2002, showed that it declared or paid out dividends of $847,052 and $516,543, respectively. At Silverman's direction, IDT Group encouraged investors to reinvest their dividends in additional IDT Group stock.
27. In fact, Silverman knew, or was reckless in not knowing, that IDT Group had no source of income besides investor funds that could be used to make dividend payments. Declaring a dividend under these conditions was improper because IDT Group's PPM stated that it would declare dividends only when the company showed a profit, and it had not shown a profit.
28. Silverman also misrepresented IDT Group's financial health by how he directed IDT Group to report the value of stock shares the company had received. For example, IDT Group owned three shares of preferred stock in a company called Salient, the former name of BrandAid Marketing Corporation ("BrandAid"). BrandAid had transferred these shares to IDT Group in return for IDT Group's financial support. Each of these shares of preferred stock was convertible to 1.5 million shares of BrandAid common stock. Silverman directed IDT Group to include these three shares of preferred stock in reporting IDT Group's net income on its December 31, 2001 and March 31, 2002 financial statements, which reported total net income as $17,516,384 and $7,832,155 for those periods, respectively.
29. The net income reported by IDT Group, at Silverman's direction, was false and misleading because it was comprised of almost exclusively the unrealized gain of BrandAid stock. Nor did IDT Group disclose to investors that unrealized gains accounted for almost IDT Group's entire income. These numbers also were misleading because one of the four shares included in these calculations already had been converted to 1.5 million shares of BrandAid common stock and registered to CTI Tobacco Industries, Inc. ("CTI"), a company IDT Group jointly owns with CTI's president. Without improperly posting the unrealized BrandAid gains, IDT Group's December 2001 and March 2002 income statements would have reflected net losses of approximately $5 million and $360,000, respectively.
30. Silverman directed IDT Group to misrepresent to investors that it was actively preparing to conduct an IPO, and that investors' profits would "skyrocket." In reality, as Silverman knew, IDT Group did not have the financial capability to conduct an IPO, and never prepared the necessary audited financial statements or Commission filings for such a venture. Additionally, as discussed above, Silverman lacked the experience to conduct any IPO, much less a successful one.
31. Brenner left IDT Group in May 2001, but Silverman continued to defraud investors. On May 1, 2001, Silverman directed IDT Group to commence its own private placement, offering 3 million shares of its common stock at $10 per share to investors. IDT Group raised approximately $6.8 million in this offering. Maintaining the illusion of profitability and successful management of the investments and the IDT companies, Silverman sent correspondence to investors acknowledging their investments and signed all IDT Group stock certificates.
32. Silverman directed IDT Group to mail and fax investors financial projections reflecting that IDT Group expected net earnings of approximately $7.5 million, $27.1 million, $55 million and $90 million for the years 2002, 2003, 2004, and 2005, respectively. As alleged above, Silverman knew IDT Funds had had a dismal investment record and that IDT Group had no basis for these projections.
33. The projections were unreasonably also because IDT Group based them largely on IDT Group's purported plan to establish its own broker-dealer to be called "Worldwide Trading, LLC" ("Worldwide"). This strategy was at the heart of IDT Group's business plan, and Silverman, and IDT Group sales representatives at his direction, touted Worldwide to investors. Silverman further misrepresented IDT Group's status in its PPM by falsely claiming that Worldwide had applied in April 2000 for NASD and Philadelphia Stock Exchange memberships. Silverman knew, or was reckless in not knowing, that Worldwide had not applied for either membership. In fact, Worldwide never applied for those memberships.
34. Beginning in April 2002, Silverman presided over IDT Group's distribution to investors of a "stock purchase agreement" asking them to exchange all their outstanding IDT Group stock for stock in a company called BrandAid. Silverman, or IDT Group sales representatives at his direction, told investors that they were receiving an "incredible deal," getting BrandAid stock at a "huge discount." When investors balked at approving the stock exchange, Silverman, or IDT Group sales representatives at his direction, lied and told them more than 50% of IDT Group's current shareholders had already agreed to the exchange, and if they held out, they would have only "worthless" stock in a "shell company." Silverman directed IDT Group even to avoid presenting some other investors with the opportunity to exchange their stock. Silverman, or IDT Group sales representatives at his direction, merely told those investors BrandAid was one of numerous companies in which its venture capital division was interested.
35. IDT Group also lied to investors by telling them that if they agreed to the exchange they could "immediately" sell their BrandAid shares at the then-current market price. However, IDT Group's investors received restricted shares they could not sell immediately. Less than six months later, BrandAid revealed it was facing a "critical cash shortage," and was in danger of defaulting on its contractual obligations to outside vendors.
36. The Commission repeats and realleges paragraphs 1 through 35 of this Complaint.
37. No registration statement was filed or in effect with the Commission pursuant to the Securities Act, and no exemption from registration existed with respect to the securities and transactions described in this Complaint.
38. From at least August 1999 through May 2001 as to Brenner, and October 2000 to May 2002 as to Silverman, Silverman and Brenner, directly and indirectly have: (a) made use of the means or instruments of transportation or communication in interstate commerce or of the mails to sell securities as described herein, through the use or medium of a prospectus or otherwise; (b) carried securities or causing such securities, as described in this Complaint, to be carried through the mails or in interstate commerce, by any means or instruments of transportation, for the purpose of sale or delivery after sale; and/or (c) made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise, as described in this Complaint, without a registration statement having been filed or being in effect with the Commission as to such securities.
39. By reason of the foregoing, Silverman and Brenner directly and indirectly, 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).
40. The Commission repeats and re-alleges paragraphs 1 through 35 of this Complaint.
41. From at least August 1999 through May 2001 as to Brenner, and October 2000 to May 2002 as to Silverman, Silverman and Brenner, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by use of the mails, in the offer or sale of securities, as described in this Complaint, have knowingly, willfully or recklessly employed devices, schemes or artifices to defraud.
42. By reason of the foregoing, Silverman and Brenner, directly and indirectly, have violated and, unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a).
43. The Commission repeats and re-alleges paragraphs 1 through 35 of this Complaint.
44. From at least August 1999 through May 2001 as to Brenner, and October 2000 to May 2002 as to Silverman, Silverman and Brenner, directly and indirectly, by use of the means and instrumentalities of interstate commerce, and of the mails in connection with the purchase or sale of the securities, as described in this Complaint, have knowingly, willfully or recklessly: (a) employed devices, schemes or 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 the light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices and courses of business which have operated as a fraud upon the purchasers of such securities.
45. By reason of the foregoing, Silverman and Brenner, directly or indirectly, 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, 17 C.F.R. § 240.10b-5, thereunder.
46. The Commission repeats and re-alleges paragraphs 1 through 35 of this Complaint.
47. From at least August 1999 through May 2001 as to Brenner, and October 2000 to May 2002 as to Silverman, Silverman and Brenner, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by the use of the mails, in the offer or sale of securities, as described in this Complaint, have: (a) obtained money or property by means of untrue statements of material facts and omissions to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (b) engaged in transactions, practices and courses of business which are now operating and will operate as a fraud or deceit upon purchasers and prospective purchasers of such securities.
48. By reason of the foregoing, Silverman and Brenner, directly and indirectly, have violated and, unless enjoined, will continue to violate Sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(2) and 77q(a)(3).
49. The Commission repeats and re-alleges paragraphs 1 through 35 of this Complaint.
50. From at least August 1999 through May 2001 as to Brenner, and October 2000 to May 2002 as to Silverman, Silverman and Brenner, by use of the mails, and the means and instrumentality of interstate commerce, directly or indirectly, have knowingly, willfully or recklessly: (i) employed devices, schemes or artifices to defraud their clients or prospective clients; and (ii) engaged in transactions, practices and courses of business which have operated as a fraud or deceit upon their clients or prospective clients.
51. By reason of the foregoing, Silverman and Brenner, have violated, and unless enjoined, will continue to violate Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-6(1) and 80b-6(2).
WHEREFORE, the Commission respectfully requests that the Court:
Declare, determine and find that Silverman and Brenner committed the violations of the federal securities laws alleged in this Complaint.
Issue a permanent injunction, restraining and enjoining Silverman and Brenner, their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them, and each of them, from violating: (i) Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c); (ii) Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(1), 77q(a)(2) and 77q(a)(3); (iii) Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder; and Sections 206(1) and 206(2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and 80b-6(2).
Issue an Order requiring Silverman and Brenner to disgorge all ill-gotten profits or proceeds they have received as a result of the acts and/or courses of conduct complained of herein, with prejudgment interest, and provide an accounting of those proceeds to the Court.
Issue an Order directing Silverman and Brenner to pay civil money penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d)(3), and Section 209(e) of the Advisers Act, 15 U.S.C. §§ 80b-9.
Issue an order barring Silverman and Brenner from serving as an officer or director of any public company, pursuant to Section 21(d)(2) of the Exchange Act, as amended by the Sarbanes-Oxley Act of 2002.
Grant such other and further relief as may be necessary and appropriate.
Further, the Commission respectfully requests that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be entered, or to entertain any suitable application or motion by the Commission for additional relief within the jurisdiction of this Court.
February ____, 2004
Respectfully submitted,
By: _____________________________
Scott A. Masel
Senior Trial Counsel
Florida Bar No. 0007110
Direct Dial: (305) 982-6398
e-mail: masels@sec.gov
Walter J. Mathews
Senior Counsel
Florida Bar No. 0174319
Direct Dial: (305) 982-6335
mathewsw@sec.gov
Attorneys for Plaintiff
SECURITIES AND EXCHANGE
COMMISSION
801 Brickell Avenue, Suite 1800
Miami, Florida 33131
Telephone: (305) 982-6300
Facsimile: (305) 536-4154
http://www.sec.gov/litigation/complaints/comp18500.htm
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