HELANE L. MORRISON (CA BAR NO. 127752)
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff, the U.S. Securities and Exchange Commission, alleges:
1. This action concerns a senior vice president at Lehman Brothers, Inc. and PaineWebber, Inc., defendant Enrique E. Perusquia ("Perusquia"), who defrauded a wealthy client and caused him to lose more than $68 million. From January 1992 through March 1998, Perusquia funneled tens of millions of dollars of client funds into speculative gold mining firms from which Perusquia was secretly receving millions of dollars in kickback commissions and stock. Perusquia forged client signatures on private placement documents, powers of attorney, and other documents in order to make these investments without his client's knowledge. Perusquia also misappropriated money from the client's accounts and engaged in unauthorized margin trading. In an effort to avoid detection, Perusquia held his kickback commissions and securities in British Virgin Island corporations that Perusquia beneficially owned and controlled.
2. In order to hide these investments and related losses from the client, Perusquia created false account statements to misrepresent the nature and value of his client's investments. For example, Perusquia sent the client account statements for January 31, 1998 that showed investments worth more than $157 million. In reality, after accounting for the true value of the worthless securities that Perusquia had caused his client to purchase, as well as the unauthorized margin debt that Perusquia caused the client to incur, the client's accounts had about $7 million.
II. JURISDICTION AND VENUE
3. The Court has jurisdiction over the subject matter of this action pursuant to Sections 20 and 22(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. §§ 77t, 77v(a)], and Sections 21(d), (e) and 27 of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 77u(e) and 78aa].
4. Venue in this district is proper under 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]. A substantial part of the events or omissions which give rise to the claims occurred in San Francisco, California.
5. Assignment of this action to the San Francisco Division is proper under Local Rule 3-2(c) and (d) because a substantial part of the events or omissions which give rise to the claim occurred in San Francisco, California.
III. THE DEFENDANT
6. From January 5, 1987 until June 1994, Perusquia was a registered representative associated with Lehman Brothers Inc. ("Lehman" or "Lehman Brothers") and was based in New York and Switzerland. He later became a Senior Vice President and Financial Consultant at Lehman Brothers in Zurich, Switzerland. Perusquia specialized in handling the accounts of high net worth individuals and families, primarily clients in Mexico.
7. Later, from June 1994 to March 31, 1998, Perusquia was a registered representative employed by PaineWebber, Inc. ("PaineWebber"), where he was a senior vice president in PaineWebber's international private accounts group. Perusquia was in PaineWebber's New York offices from June 1994 until 1996, and in its San Francisco offices until 1998. Perusquia's last known residence is in Wilson, Wyoming.
IV. THE FRAUD
A. Perusquia's Theft of Client Funds
8. From 1989 through 1991, a client entrusted $76 million to Perusquia. The assets were held at Lehman Brothers Bank-Geneva and at Union Bank of Switzerland ("UBS"). The client directed Perusquia to invest the funds in low risk investments, specifying "income" as the primary investment objective and "growth" as a secondary objective. The client also forbade Perusquia from withdrawing funds from his account, or from trading on margin, which involves borrowing funds to purchase securities by using the investments in the portfolio as collateral. Margin loans increase risk. If the portfolio loses value, the client may lose not only his investment, but would have to repay the margin loan as well.
9. Perusquia recommended that the client hold his funds in Swiss bank accounts for security reasons. He also recommended that they not be held in the client's name, but rather in the names of offshore companies established for that purpose. The client agreed, and Perusquia arranged for a series of companies to be created in the British Virgin Islands to hold the client's securities. As a result, the account records identified the offshore companies, rather than the client himself, as the account holder. This use of corporate names allowed Perusquia to try to hide his client's identity and investment objectives.
10. Preusquia also had the client funds held in a Swiss bank account. Perusquia had Lehman Brothers - and then, later, PaineWebber - establish an institutional (omnibus) account to handle all of the securities transactions for the client accounts. By holding the client funds in an omnibus account, Perusquia was able to conduct securities transactions without customer monitoring.
11. Beginning in 1992, while Perusquia was employed at Lehman Brothers, and at various times until late 1997, when he worked for PaineWebber in San Francisco, Perusquia misappropriated over $1.6 million in client funds and converted them to his personal use. Perusquia forged, or caused to be forged, documents purporting to authorize the transfer of client funds from the omnibus account to an off-shore entity under Perusquia's control or to Perusquia's personal assistant in Mexico City. Perusquia knew when he submitted these authorizations that the client did not know of or authorize said misappropriations, and the funds that he misappropriated had been entrusted to him to purchase securities for the client.
B. Perusquia's Illegal Use of Client Funds to Purchase Speculative Gold Mining Firms' Securities
12. The client's investment objectives were income and growth. But, beginning in late 1992 and continuing until at least March 1998, Perusquia used his client's funds to buy large blocks of stock and convertible notes in American Resource Corporation ("American Resource") and its subsidiary, American Pacific Minerals, Ltd. ("American Pacific"), and Northern Orion Explorations, Ltd. ("Northern Orion"). Many of these purchases were through private placements that Perusquia negotiated with the issuer. Perusquia made other purchases via open market purchases, by causing the omnibus account to purchase the securities through the exchange or market in which the security was trading.
13. The private placement investments were made by means of forgeries that purported to authorize the Swiss banks holding the client's funds to pay for these securities. Perusquia personally prepared some of those unauthorized letters. Others were prepared by his administrative assistants at his direction. Between 1992 and his departure from Lehman in June of 1994, Perusquia invested over $27 million of the client's funds in American Resource.
14. Perusquia received kickback commissions payable in cash and securities from these issuers. Although the full extent of these commissions is not yet known, Perusquia received at least $1.3 million in cash and over 600,000 shares of American Resource and American Pacific Minerals stock as a result of these transactions. Perusquia caused most of these commissions to be paid to Enzora Investments Corporation ("Enzora"), a British Virgin Islands corporation that Perusquia established, controlled and beneficially owned, and opened bank and brokerage accounts in Enzora's name to hold these commissions. Perusquia's client did not know of, nor authorize, Perusquia to receive any such commissions, and, indeed, the client was unaware that his accounts had purchased these speculative securities, which were contrary to the client's stated investment objectives.
C. Perusquia's Unlawful Margin Trading of the Client's Accounts
15. Without the knowledge or approval of the client, defendant Perusquia also bought certain of the above described securities on margin. Perusquia forged, or caused to be forged, documents purporting to authorize these loans. In fact, as Perusquia well knew, the client did not know of, and had forbid him from engaging in, any margin trading. As of March 1998, Perusquia had fraudulently incurred over $7.7 million in margin debt in the client's accounts.
16. In 1996, officials at Chase Manhattan Private Bank-Switzerland ("Chase-Switzerland") began questioning Perusquia's handling of the ominibus account at the institution, and advised Perusquia and PaineWebber that they wanted to meet with Perusquia's clients. Perusquia resisted Chase-Switzerland's attempts to meet with the clients, and, during the Summer of 1996, sought to have PaineWebber replace Chase-Switzerland with another bank that would act as custodian of his clients' investments. In November 1996, PaineWebber transferred custody of Perusquia's clients' investments from Chase-Switzerland to Swiss Bank Corporation ("SBC"), and SBC opened an omnibus trading account at PaineWebber for trades with respect to these clients' investments. To continue trading on margin, Perusquia forged the clients' signatures on the powers of attorney that he sent to SBC.
D. Perusquia's Use of Phony Account Statements
17. At Perusquia's request, the Swiss banks did not send customer statements and correspondence directly to the client, but rather delivered them to Lehman and PaineWebber. From 1994 until he left PaineWebber in March 1998, Perusquia prepared, or caused to be prepared, and sent, false account statements to his client's representatives to conceal his fraud and to lull the client into a false sense of security.
18. These account statements were materially false and misleading in that: a) they inflated the cash balance; b) they inflated the value of some of the securities in the accounts; c) they omitted to list some of the securities in the accounts; d) they listed some securities that were not actually held in the accounts; e) they omitted to disclose the unauthorized margin trading and margin debt owed by the client; and f) they omitted the commissions that Perusquia was secretly receiving from the gold mining firms in the private placements that he arranged.
Violations of Section 10(b) of the
19. The allegations in paragraphs 1 through 18 above are incorporated by reference.
20. Perusquia, directly or indirectly, by use of the means or instruments of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact or 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, transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchasers of securities and upon other persons, in connection with the purchase or sale of a security.
21. By reason of the foregoing, Perusquia violated Section 10(b) of the Exchange Act and Rule 10b-5.
Violations of Section 17(a) of
22. The allegations in paragraphs 1 through 18 above are incorporated by reference.
23. Perusquia in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly: (a) with scienter, employed devices, schemes, or artifices to defraud; (b) obtained money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, not misleading; or (c) engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities.
24. By reason of the foregoing, Perusquia violated Section 17(a) of the Securities Act.
V. PRAYER FOR RELIEF
25. WHEREFORE, the Commission respectfully requests a judgment:
(A) permanently enjoining Perusquia from further violations of Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act;
(B) ordering Perusquia to disgorge his ill-gotten gains, plus prejudgment interest;
(C) ordering Perusquia to pay civil 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)]; and
(D) granting such other relief as the Court deems just and proper.