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COUNSEL FOR PLAINTIFF: JAMES A. DAVIDSON
As of February 3, 2002:
Local Counsel:
COUNSEL FOR DEFENDANTS: STEPHEN A. MANSFIELD
UNITED STATES DISTRICT COURT
I. Plaintiff, the United States Securities and Exchange Commission (Commission), for its Complaint states as follows: SUMMARY 1. Since at least 1999, Defendants J.T. Wallenbrock & Associates ("Wallenbrock"), through its managing general partner, Larry Toshio Osaki ("Osaki"), its employee, Van Y. Ichinotsubo ("Ichinotsubo") and Citadel Capital Management Group, Inc. ("Citadel"), an unregistered investment banking entity, have been offering and selling securities to the public, raising at least $170 million from at least 1,000 investors throughout the United States. 2. Wallenbrock's offering consists of securities in the form of three-month promissory notes promising a 20% return (for each three-month period) upon maturity, purportedly secured by the accounts receivable of Wallenbrock. In offering these investments, Osaki and Ichinotsubo tell investors that Wallenbrock purchases receivables of Malaysian latex glove manufacturers every three months with the investors' funds, grants investors an undivided security interest in these receivables of Wallenbrock, the investor always receives a 20% return, and that the investment has little or no risk. 3. As alleged in more detail in this Complaint, Osaki and Ichinotsubo, individually and on behalf of Wallenbrock and Citadel, have made material misrepresentations to investors in the offer and sale of the Wallenbrock notes. These include: 1) the claim that the Wallenbrock notes are secured by an undivided interest in the accounts receivable of Wallenbrock; 2) the material understatement of risks associated with the investments; and 3) the assurance of profits. 4. The Defendants knowingly or recklessly misrepresented to investors that Wallenbrock purchases receivables owned by major U.S. companies and grants a security interest to the investors in the accounts receivable purchased with investors' funds. Contrary to these representations, Wallenbrock does not purchase accounts receivable or obtain security interests in receivables with investors' funds. Wallenbrock has no documentation showing any ownership interest in accounts receivable. 5. Defendants have no documentation confirming the use of investor funds, such as schedules reflecting the purchase of receivables, dates payments were expected or received on receivables and information on defaults. Without such information, Defendants have knowingly or recklessly misrepresented the risks and assumed profits of the investments as they had no evidence confirming that funds were being invested as represented or confirming the source of funds returned as profit or repayment of principal to investors. 6. Defendants Osaki, Ichinotsubo, Wallenbrock and Citadel, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the registration and antifraud provisions of the federal securities laws, 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)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)], and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5]]. Further, Defendants Osaki, Ichinotsubo, and Citadel, directly and indirectly, have engaged, and unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the broker-dealer registration and broker-dealer antifraud provisions of the federal securities laws, Sections 15(a) and 15(c)(1) of the Exchange Act [15 U.S.C. §§78o(a) and 78o(c)(1)] and Rule 15c1-2 thereunder [17 C.F.R. §240.15c1-2]. JURISDICTION AND VENUE 7. This Court has jurisdiction over this action 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] and 28 U.S.C. §1331. 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. The acts, practices and courses of business alleged in this Complaint occurred and are continuing to occur in the Central District of California. 9. Defendants, directly and indirectly, have made, and are making, use of the means and instrumentalities of interstate commerce and of the mails in connection with the acts, practices, and courses of business alleged herein in the Central District of California and elsewhere. DEFENDANTS 10. J.T. Wallenbrock & Associates is a California general partnership. Wallenbrock claims that it is engaged in the business of accounts receivable factoring for latex glove manufacturers. From at least 1999 to the present, Wallenbrock has raised approximately $170 million from investors by issuing three-month promissory notes promising 20% returns. Wallenbrock's securities have never been registered with the Commission. 11. Larry T. Osaki, age 53, is a resident of Upland, California. Osaki is the managing general partner of Wallenbrock and owns 99.5% of the company. Osaki signs the promissory notes issued by Wallenbrock. He is a joint account holder, with his wife, Mary E. Osaki, on the Wallenbrock account at Wells Fargo Bank where investor funds are deposited. 12. Van Y. Ichinotsubo, age 50, is a resident of Cerritos, California. Ichinotsubo is an employee of Wallenbrock and Citadel. Ichinotsubo has solicited investors for Wallenbrock, and investors deal with Ichinotsubo in setting up and managing their promissory notes. Ichinotsubo is also a dentist. 13. Citadel Capital Management Group, Inc. is a Nevada corporation owned solely by Osaki. Citadel claims to be engaged in the investment banking business. Citadel lists Wallenbrock's address in Pasadena, California as its own address. The employees of Citadel and Wallenbrock overlap. Citadel is not registered with the Commission in any capacity. Wallenbrock's Promissory Note Offering 14. From at least 1999 through the present, Osaki, Ichinotsubo, Wallenbrock and Citadel have raised at least $170 million in investor funds through the offer and sale of securities in the form of three-month promissory notes promising a 20% return (for each three-month period) upon maturity to at least 1,000 investors residing in at least 25 states. Unless investors otherwise elect, these notes are continuously and automatically rolled over upon maturity into new three-month notes, promising another 20% return. Investors receive a one-page promissory note signed by Osaki on behalf of Wallenbrock. Currently, Wallenbrock owes approximately $700 million to investors. Wallenbrock is continuing to sell promissory notes to investors. 15. Wallenbrock had approximately $4 million in a Wells Fargo bank account, as of December 7, 2001. Counsel for Wallenbrock told the Commission that this is the only account into which investor funds are deposited and that Wallenbrock keeps a balance of approximately $3 million in the account. Approximately $45 million flowed through the account during the three months ended December 7, 2001. 16. Investments in Wallenbrock are offered and sold to the general public (at least 1000 investors residing throughout the United States). Investors are not required to provide any financial information about themselves to the company. Finder's fees were paid to any investors that made referrals of new investors to Wallenbrock until at least June 2001. 17. Many investors hold the Wallenbrock notes in Individual Retirement Accounts ("IRAs") through IRA custodians suggested by Wallenbrock. 18. Based on the attractive and reported consistent 20% return every three months, many investors decide to continuously roll over their notes, along with the purported interest earned at maturity. REPRESENTATIONS ABOUT THE WALLENBROCK NOTES 19. Some investors receive only the promissory notes from Wallenbrock. Other investors receive, in addition to notes, offering letters describing Wallenbrock's promissory note program. Wallenbrock notes and offering letters say "in care of" Citadel below Wallenbrock's return address. 20. Osaki, Ichinotsubo, Wallenbrock and Citadel do not provide financial statements or other financial disclosures to Wallenbrock's investors. Counsel for Wallenbrock told the Commission that Wallenbrock does not have financial statements. 21. Osaki, Ichinotsubo, Wallenbrock and Citadel are telling investors that they are raising funds for Wallenbrock to engage in the business of factoring accounts receivable. 22. In oral communications and in offering letters, Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors about the purchases of accounts receivable. 23. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors that Wallenbrock purchases accounts receivable from Malaysian manufacturers of latex gloves for 75 to 80 percent of balances due on the receivables with the proceeds from the investors' promissory notes. 24. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors that Wallenbrock provides half of the funds used to purchase the receivables and the investors provide the other half. 25. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investor that the investors are granted a security interest in the accounts receivable of Wallenbrock. They also provide investors with the Wallenbrock notes. The notes state that they are secured by an undivided interest, together with security interests granted to other noteholders, in the underlying accounts receivable of Wallenbrock, pursuant to Article 9 of the California Uniform Commercial Code ("UCC") 26. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors that when the accounts receivable are collected by Wallenbrock at the end of 90 days, the investors and Wallenbrock each earn a 20% return. 27. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors that the Wallenbrock promissory notes are secured by underlying receivables from large American companies in the food industry that purchase latex gloves, such as OceanSpray and Coca-Cola. 28. In oral communications and in offering letters, Osaki, Ichinotsubo, Wallenbrock and Citadel tell the investors that there is little or no risk in the Wallenbrock investments and emphasize the safety of profits. They also tell investors that Wallenbrock does not make any payments to manufacturers for a specific shipment (to purchase receivables) until the receivables are assigned to Wallenbrock. 29. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors that Wallenbrock has never lost any investors' money. 30. Osaki, Ichinotsubo, Wallenbrock and Citadel emphasize the safety of the 20% return. 31. Osaki, Ichinotsubo, Wallenbrock and Citadel tell investors that the only risk is that the promissory note program will end at any point upon Osaki's retirement. 32. Ichinotsubo also tells investors that he has made 30 times more money by investing in Wallenbrock than he has as a dentist. THE LACK OF SECURITY IN RECEIVABLES AND PURPORTED OFFSHORE TRUST 33. Contrary to the representations made to investors, Wallenbrock does not purchase or own any receivables. 34. Contrary to the representations made to investors, Wallenbrock does not grant any security interest in its receivables to investors, or make any Uniform Commercial Code filings with the State of California perfecting any security interests. 35. According to an attorney for Wallenbrock, investors' funds are pooled in a checking account at Wells Fargo Bank and purportedly transferred to an irrevocable offshore trust, based in Singapore, established by Osaki. Osaki is both the settlor and beneficiary of the trust. Osaki claims that the government of Singapore appointed a trustee for Osaki's trust and Osaki has given power of attorney to an unnamed individual outside of the U.S. 36. Osaki and Wallenbrock claim that receivables are purchased by the offshore trust and payments on the receivables are collected by the offshore trust. 37. Even if the offshore trust exists, Osaki and Wallenbrock have no control over the trust, they have no written documents describing the trust's obligations to Wallenbrock, they do not receive any bank statements or other financial information from the trust and they have no way of confirming the assets of the trust. 38. Osaki and Wallenbrock do not have any documents evidencing the trust's obligation to Wallenbrock and have no documents reflecting the trust's granting an interest in the receivables to Wallenbrock. 39. Osaki and Wallenbrock do not have any documents confirming or accounting for the purchases or payments on the receivables. 40. Osaki and Wallenbrock claim that the offshore trust contains $1.4 billion in assets, of which $700 million is owed to U.S. investors, but there is no documentation supporting this claim. 41. Even if the purported offshore trust exists, Wallenbrock's lack of knowledge of and control over the trust renders investments in the notes extremely risky. MISREPRESENTATIONS IN THE OFFER
42. Defendant Osaki, individually and on behalf of Wallenbrock and Citadel, made material misrepresentations and omitted to state material facts regarding the investors' security interest in the receivables. Osaki represented to investors that Wallenbrock purchased receivables and granted a security interest in receivables to its investors, and knew that such information was false. 43. Defendant Osaki also knowingly or recklessly misrepresented the risks and assurance of 20% profits associated with the Wallenbrock investments. Osaki purportedly sent investors' funds to an irrevocable offshore trust that purchased receivables and collected the receivables payments. However, Osaki knew that Wallenbrock had no control over, or agreement with, the offshore trust (if one exists) assuring that investors would receive their principal back or the promised return on those funds. Osaki also knew that Wallenbrock did not receive documentation of the status of the offshore trust or of the purchases of, or payments on, receivables owned by the offshore trust. Absent such information, the representations made by Osaki, individually and on behalf of Wallenbrock and Citadel, concerning the profits and risk were reckless. 44. Defendant Ichinotsubo, individually and on behalf of Wallenbrock and Citadel, also made material misrepresentations and omitted to state material facts in the offer and sale of the Wallenbrock promissory notes. Ichinotsubo knowingly or recklessly misrepresented Wallenbrock's purchases of receivables, Wallenbrock's granting of interests in the receivables to its investors, the risks associated with the investments and the assurance of 20% profits. Ichinotsubo either knew his representations were not true because he knew that Wallenbrock had no interest in receivables and lacked records from the offshore trust, or had no basis to make the representations because he did not conduct due diligence to determine whether Wallenbrock had any ownership of receivables, the actual risks associated with the investments and Wallenbrock's ability to pay its liabilities. OZAKI, ICHINOTSUBO AND CITADEL ACTED
45. Osaki, Ichinotsubo and Citadel offered and sold the Wallenbrock notes to investors, as described above. 46. Osaki, Ichinotsubo and Citadel engaged in the business of effecting transactions in securities for the accounts of other by soliciting investors, making representations about the investment to investors, processing documents needed to effect the purchase of the investments and possessing investor funds, as described above. 47. At the time Osaki, Ichinotsubo and Citadel offered and sold the Wallenbrock notes they were not registered with the Commission as broker-dealers and had not obtained the necessary regulatory approval to sell securities as properly licensed associated persons of registered broker-dealers. CLAIM ONE Violations of Sections 5(a) and 5(c) of
48. Paragraphs 1 through 47 are realleged and incorporated by reference. 49. The investments described herein, namely Wallenbrock notes, constitute "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)]. 50. The securities offered and sold by Defendants Wallenbrock, Osaki, Ichinotsubo, and Citadel were not registered in accordance with the provisions of the Securities Act, and no exemption from registration is available for these securities. 51. At all times alleged in this Complaint, Defendants, directly and indirectly, made and are making use of the means and instruments of transportation and communication in interstate commerce and of the mails, to sell and offer to sell securities in the form of Wallenbrock notes through the use and medium of a prospectus or otherwise, and carried and are carrying such securities and caused and are causing them to be carried through the mails and in interstate commerce by the means and instruments of transportation for the purpose of sale and delivery after the sale. 52. By reason of the activities described in Paragraphs 48 through 51, Defendants Wallenbrock, Osaki, Ichinotsubo and Citadel have violated and are violating Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)]. CLAIM TWO Violations of Section 17(a)(1)of the Securities Act
53. Paragraphs 1 through 47 are realleged and incorporated by reference herein. 54. At the times alleged in this Complaint, Defendants Wallenbrock, Osaki, Ichinotsubo and Citadel, in the offer and sale of securities, including securities in the form of Wallenbrock's promissory notes, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, have employed and are employing devices, schemes and artifices to defraud, all as more fully described in paragraphs 1 through 47 above. 55. In the offer and sale of securities described above in paragraphs 1 through 47 and as part of the scheme to defraud, Defendants have made and are making false and misleading statements of material fact and have omitted and are omitting to state material facts to investors and prospective investors regarding, among other things: 1) the claim that the Wallenbrock notes are secured by an undivided interest in the accounts receivable of Wallenbrock; 2) the risks associated with the investments; and 3) the assurance of profits, all as more fully described above in paragraphs 1 through 47 above. 56. Defendants knew or were reckless in not knowing of the facts and circumstances described in paragraphs 54 and 55 above. 57. By reason of the activities described in paragraphs 53 through 56 above, Defendants Wallenbrock, Osaki, Ichinotsubo and Citadel have violated and are violating Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)]. CLAIM THREE Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act
58. Paragraphs 1 through 47 are realleged and incorporated by reference herein. 59. At the times alleged in this Complaint, Defendants Wallenbrock, Osaki, Ichinotsubo and Citadel, in the offer and sale of securities described above in paragraphs 1 through 47, by the use of the means or instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, have obtained and are obtaining money and property by means of untrue statements of material facts and have omitted and are omitting 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 have engaged and are engaging in transactions, practices or courses of business which operated and will operate as a fraud and deceit upon purchasers and prospective purchasers as more fully described in paragraph 55 above. 60. By reason of the activities described in paragraphs 58 and 59 above, Defendants Wallenbrock, Osaki, Ichinotsubo and Citadel have violated and are violating Section 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(2) and 77q(a)(3)]. CLAIM FOUR Violations of Section 10(b) of the Exchange Act
61. Paragraphs 1 through 47 are realleged and incorporated by reference as if set forth fully herein. 62. At the times alleged in the Complaint, Defendants Wallenbrock, Osaki, Ichinotsubo and Citadel, in connection with the purchase and sale of securities described above in paragraphs 1 through 47, by the use of the means and instrumentalities of interstate commerce and of the mails, directly and indirectly, have employed and are employing devices, schemes and artifices to defraud; have made and are making untrue statements of material fact and have and are omitting 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 have engaged and are engaging in acts, practices and courses of business which have operated and will operate as a fraud and deceit upon purchasers and sellers of such securities as more fully described in paragraph 55 above. 63. Defendants knew or were reckless in not knowing of the activities described in paragraphs 61 and 62 above. 64. By reason of the activities described in paragraphs 61 through 63 above, Defendants 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. CLAIM FIVE Violations of Section 15(a)(1) of the Exchange Act
65. Paragraphs 1 through 47 are realleged and incorporated by reference herein. 66. At the times alleged in this Complaint, Defendants Osaki, Ichinotsubo and Citadel have made and are in the business of effecting transactions in securities for the accounts of others, as more fully described in paragraphs 45 through 47 above. 67. Osaki, Ichinotsubo and Citadel have made and are making use of the mails and the means and instrumentalities of interstate commerce to effect transactions in and to induce or attempt to induce the purchase of securities, as more fully described in paragraphs 65 and 66 above. 68. At all times alleged in this Complaint, Osaki, Ichinotsubo and Citadel were not registered with the Commission as a broker-dealer, as required by Section 15(b) of the Exchange Act [15 U.S.C. §78o(b)] as more fully described in paragraphs 66 and 67 above. 69. By reason of the activities described in paragraphs 65 through 68 above, Osaki, Ichinotsubo and Citadel have violated and are violating Section 15(a)(1) of the Exchange Act [15 U.S.C. §78o(a)(1)]. CLAIM SIX Violations of Section 15(c)(1) of the Exchange Act
70. Paragraphs 1 through 47 are realleged and incorporated by reference herein. 71. At all times alleged in this Complaint, Defendants Osaki, Ichinotsubo and Citadel were not registered with the Commission as a broker or dealer, as more fully described in paragraphs 45 through 47 above. 72. At all times alleged in the Complaint, Osaki, Ichinotsubo and Citadel, acting as brokers, have used and are making use of the mails and instrumentalities of interstate commerce, and have induced and are attempting to induce the purchase and sale of securities, otherwise than on a national securities exchange of which they were members, by means of manipulative, deceptive and fraudulent devices and contrivances, as more fully described in paragraphs 1 through 47 above. 73. Osaki, Ichinotsubo and Citadel knew, or were reckless in not knowing, of the activities described in paragraphs 71 and 72 above. 74. By reason of the activities described in paragraphs 70 through 73 above, Osaki, Ichinotsubo and Citadel have violated and are violating Section 15(c)(1) of the Exchange Act [15 U.S.C. § 78o(c)(1)] and Rule 15c1-2 [17 C.F.R. § 240.15c1-2]. II. RELIEF REQUESTED WHEREFORE, the Commission respectfully requests that this Court: I. Find that Osaki, Ichinotsubo, Wallenbrock and Citadel committed the violations charged and alleged herein; II. Grant a Temporary Restraining Order and Orders of Preliminary and Permanent Injunction, in forms consistent with Rule 65(d) of the Federal Rules of Civil Procedure, restraining and enjoining Osaki, Ichinotsubo, Wallenbrock and Citadel and their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of the Temporary Restraining Order, the Order of Preliminary Injunction and the Order of Permanent Injunction by personal service or otherwise, and each of them, from directly or indirectly, engaging in the acts, practices or courses of business described above, or in conduct of similar purport and object, in violation of Sections 5(a), 5(c), 17(a)(1),(2) and (3) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and restraining and enjoining, Osaki, Ichinotsubo, and Citadel and their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of the Temporary Restraining Order, the Order of Preliminary Injunction and the Order of Permanent Injunction by personal service or otherwise, and each of them, from directly or indirectly, engaging in the acts, practices or courses of business described above, or in conduct of similar purport and object, in violation of Sections 15(a)(1) and 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder; III. Issue Orders: (a) freezing the assets of Osaki, Ichinotsubo, Wallenbrock and Citadel, their officers, agents, servants, employees, attorneys and those persons in active concert with them who receive actual notice of the Asset Freeze by personal service or otherwise (b) requiring Defendants to identify assets, to repatriate assets and to provide an accounting; (c) granting expedited discovery; and (d) prohibiting Defendants from destroying documents; IV. Grant an order requiring Osaki, Ichinotsubo, Wallenbrock and Citadel, jointly and severally, to disgorge any and all ill-gotten gains (including prejudgment interest); V. Impose civil penalties against Osaki, Ichinotsubo, Wallenbrock and Citadel in accordance with Section 20(d) of the Securities Act and 21(d)(3) of the Exchange Act; VI. 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; VII. Grant Orders for such further relief as this Court may deem appropriate.
http://www.sec.gov/litigation/complaints/complr17343.htm
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