IN THE UNITED STATES DISTRICT COURT
The United States Securities and Exchange Commission ("Commission") files this complaint against Defendants Larry W. Tyler ("Tyler") and Advanced Financial Services, Inc. ("AFS") and, solely for the purpose of obtaining equitable relief, against Relief Defendants Granbury Plaza, Ltd. ("Granbury Plaza"), Benbrook Lake, L.P. ("Benbrook Lake"), and FWLT Holding Company ("FWLT"), and would respectfully show the Court as follows:
1. Since May 1998, Tyler has raised at least $30 million, and personally reaped over $5.2 million in undisclosed commissions, by fraudulently enticing more than 480 mostly elderly investors into purchasing investments issued by his company, AFS. Tyler deceives the investors with false guarantees about the AFS investment's liquidity, above market interest rates (payable monthly if desired) and "fixed" maturity dates. Tyler has actually used the investors' money (typically, pension funds, IRAs, proceeds from liquidated annuities and certificates of deposit ("CDs")) to buy fractional interests in viatical settlement agreements ("viaticals"). In stark contrast to Tyler's guarantees, viaticals do not provide the investors what they bargained for, and were assured by Tyler, they were receiving. The reason is stunningly simple: viaticals are not liquid, they do not have fixed maturity dates and have uncertain rates of return.
2. In newspaper advertisements, Tyler compared the investments he was offering to CDs - but with a higher rate of return than CDs. In person, Tyler claimed the AFS's investments were fully liquid, relatively short-term, and paid interest rates as high as 14% per year. In reality, Tyler used the investors' funds to purchase viaticals on their behalf through an entity known as Trade Partners, Inc. ("TPI"), a company based in Grand Rapids, Michigan. For each of the viaticals Tyler purchased, he received a commission from TPI, which he never disclosed to the investors. Later in his scheme, Tyler obtained from TPI viatical contracts in exchange for real estate. Enlarging the scope of his already successful fraudulent scheme, Tyler then sold his own fractionalized interests in these viatical contracts, again promising a liquid, relatively short-term investment with an above average investment return. Instead of receiving commissions on the sale of these interests, Tyler, through his company AFS, just pocketed the investors' funds and assigned fractional interests in the viaticals to the investors.
3. After three years of this unscrupulous activity, the inevitable happened. Some of the investments Tyler sold to his clients have matured, and now, many more are about to mature. Investors demanding that Tyler honor his promises are met with lulling activity, like Tyler's efforts to locate buyers for their viatical interests and buy himself more time. Other investors' demands are simply ignored.
4. Tyler's activities since 1998 are a continuation of his prior pattern of fraud and abuse of the elderly. Acting as a registered representative of Sunpoint Securities, Inc. from 1995 through 1997, Tyler sold to his brokerage customers, most of whom were also senior citizens, investments that were inconsistent with their investment needs and objectives. The Commission charged Tyler with violating the registration and antifraud provisions of the federal securities laws in In the Matter of Larry W. Tyler, Administrative Proceeding File No. 3-10487. As a result of this action, Tyler consented to the entry of a cease-and-desist order, which the Commission issued on May 17, 2001, barring him from the securities industry, and prohibiting him from such further fraudulent activities and ordering him to pay $240,000 in the form of disgorgement and a civil monetary penalty. Despite the Commission's order, Tyler has continued to target the elderly as victims of his ongoing fraudulent securities offerings.
5. The Commission, in the interest of protecting the public from any further unscrupulous and illegal activity, brings this action against Tyler and AFS seeking temporary, preliminary and permanent injunctive relief, disgorgement of all illicit profits and benefits Defendants received, plus accrued prejudgment interest and a civil monetary penalty. The Commission also seeks an asset freeze against Tyler and AFS and against Relief Defendants Granbury Plaza, Benbrook Lake and FWLT Holding Company, entities into which Tyler transferred commissions earned as well as investor funds raised from his fraudulent offerings. The Commission further seeks an accounting from Defendants and Relief Defendants and other incidental relief, as well as the appointment of a receiver to take possession, custody and control over the assets of the Defendants and Relief Defendants so that assets will not be dissipated and investors will be protected.
JURISDICTION AND VENUE
6. This Court has jurisdiction over this action pursuant to § 22(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. §77v(a)], § 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78(aa)] and Title 28 U.S.C. § 1331. Defendants, directly and indirectly, made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business described in this Complaint.
7. Venue is proper because many of the transactions, acts, practices and courses of business described below occurred within the jurisdiction of the Dallas Division of the Northern District of Texas.
8. Larry W. Tyler, age 47 and a resident of Aledo, Texas, worked in the securities industry as a registered representative from 1992 until November 1999. Tyler is the president and CEO of AFS.
9. Advanced Financial Services, Inc., incorporated in 1987 pursuant to Texas law, maintains offices in Fort Worth, Texas.
10. Granbury Plaza, Ltd. is a Texas limited partnership formed in April 2000 with its principal address at AFS's Fort Worth offices. Tyler is Granbury Plaza's registered agent and controls the partnership through its general partner, Advanced Financial Services, Inc. Granbury received at least $116,000 of funds related to the transactions at issue in this suit.
11. Benbrook Lake, L.P. is a Texas limited partnership formed in July 2001, with its principal address at AFS's Fort Worth offices. Tyler is Benbrook Lake's registered agent and controls the partnership. Benbrook Lake received approximately $1 million of funds related to the transactions at issue in this suit.
12. FWLT Holding Company is a Texas corporation incorporated on July 20, 1999. Tyler is president and sole director of FWLT, which received at least $325,000 of funds related to the transactions at issue in this suit.
13. Since May 1998, Tyler has raised at least $30 million from approximately 480 predominantly elderly investors in ten states, by selling them investments he equates with a certificate of deposit or fixed annuity, and which he guarantees will provide traditionally conservative investment features: a fixed (above market) annual rate of return, fixed maturity, liquidity and, in some cases, monthly income payments. Tyler's sales campaign is sweeping in breadth; it includes advertisements in local newspapers, seminars, a national cold-call campaign conducted by in-house telemarketers, and mass mailings. Tyler also solicits his former brokerage customers, the majority of whom are invested in annuities, certificates of deposit and mutual funds. Some AFS's investors use IRA funds to invest in the AFS securities.
14. In these advertisements, mass telephone solicitations and in meetings at AFS' offices, Tyler is careful to make no mention to the investors of the viaticals' actual features: their illiquidity, the contingent nature of their rates of return -- hinging upon the date of death of the viator -- or viaticals' indefinite term, pursuant to which the viatical purchaser cannot realize any of its value, principal or accrued interest, until the viator's death.
15. The investors are pointedly aware, at the time of purchase, of the terms of their AFS investment. Tyler orally guarantees those terms in the meeting he conducts with each investor at AFS's offices. In contrast, many investors are unaware that AFS will use their investment funds to purchase viaticals - for the simple reason that Tyler routinely makes no mention of viaticals in his sales pitch. Instead, Tyler leads the investors to believe that AFS will purchase some form of tangible, commercially marketable instrument (such as a CD or annuity) to make good on Tyler's guarantees regarding the safety, rate of return, fixed maturity and income-generating capacity of their AFS investments. If Tyler happens to mention that he will purchase viaticals with an investor's AFS investment proceeds, Tyler does not explain to the investor the true nature of viaticals or the profound dissimilarity between viaticals and the AFS investment. Nor does Tyler provide to the investor, in lieu of an oral explanation of these critical facts, a prospectus or other written explanatory material. What investors do receive -- confirmations after the purchase of the underlying viatical -- only reinforces their belief that Tyler has insured his attractive guarantees by means of the viatical. Unfortunately, the confirmations do not contain clear, easily understood information about the properties of viaticals - not, at any rate, the kind of information that would apprise investors of the incongruity between their guaranteed AFS investment and the underlying viaticals bought with their AFS investment proceeds.
16. After Tyler induces investors to buy the AFS securities with unfounded guarantees and artful omissions about the viaticals "backing" their investments, Tyler takes affirmative steps to ensure they do not learn the truth. For example, Tyler discourages AFS's investors from reviewing TPI informational documents, or minimizes the importance of reviewing them. Tyler has even gone so far as to place a template over the TPI documents, concealing TPI's disclosures, and directing the investor to sign on the exposed signature lines - while reiterating his guarantees about their investments. In other cases, Tyler substituted his own post office box as the address of record to prevent the AFS's investors from receiving documents from TPI.
17. In meetings with Tyler, investors discuss with him their investment objectives: how much they are willing to invest; the rate of return they are seeking; when they want their AFS investment to mature; and the return of their principal with appreciation. Tyler then purports to tailor the AFS investment to accommodate those objectives. For example, he offers monthly interest payments to investors requesting income. Tyler accomplishes this investment objective by siphoning a portion of the investor's principal into a money market account. He then arranges for an automatic payment from the money market account to the investor on a periodic basis in an amount consistent with monthly payments he guaranteed the investor. Tyler calculates the total amount of "interest" he needs to pay the investor over the term of the investment, and sets aside that amount of the investor's principal in the money market account. In effect, the investors are funding their own interest payments. In other cases, he also offers liquidity to investors. Tyler creates this liquidity by reselling the viaticals of AFS's investors in need of cash to other AFS's investors, or by purchasing the viaticals himself.
18. Using investors' proceeds, Tyler purchases viaticals exclusively from TPI, which offers rates of return of between 12% and 14% on its viatical interests, depending upon the life expectancy of the viator. The investor realizes those interest rates only if the viator dies on the projected date. The investor, however, receives nothing until the viator dies.
19. Tyler receives large commissions from TPI upon the purchase of viaticals: a 7% to 13% "primary" commission at the time of purchase, and a "secondary" commission in the form of the spread between the "interest" TPI pays, upon the death of the particular viator, and the interest Tyler offers the AFS's investors at the inception of their AFS investment. As an inducement to its sellers, such as AFS and Tyler, TPI allows them to offer lower interest to their clients than TPI offers, and retain the difference. By agreement between Tyler and TPI, TPI advances this secondary commission to Tyler, and records it in its books, upon purchase of the viatical. Tyler usually retains several points (usually between 4% and 7%) of interest on each viatical purchased. Although, according to TPI, Tyler has received at least $5.2 million in total (primary plus secondary) commissions, Tyler discloses neither the fact that he receives commissions nor the amount of these commissions to AFS's investors.
20. Before April 2001, Tyler instructed the AFS's investors to wire funds or mail checks directly to TPI. In turn, TPI sent the investors confirmation letters as well as supplemental information concerning their viatical. After April 2001, Tyler stopped using AFS investor proceeds to purchase viaticals from TPI in the investors' names; rather, Tyler reassigned interests in a group of viaticals acquired from TPI to "back" the AFS investments. The investors were directed to either wire funds or mail checks to AFS directly, or to wire funds to a money market account that Tyler established for each investor. Upon receiving investor funds, Tyler fractionalized the viaticals, placing portions of them in the names of the AFS's investors. Tyler then notified TPI of the portion sold to the particular investor, and requested that TPI note the fractionalized interest in its records.
21. In the event the viator died during the term of an AFS investment, the investor would receive the death benefit payment directly from TPI. In the event an AFS investment matured prior to the maturity of the "backing" viatical, the date of death of the viator, Tyler would have to liquidate the matured AFS investment by either selling the underlying viatical interest to another AFS investor or by purchasing the viatical interest himself. Tyler had to employ similar methods when investors sought to liquidate their AFS investments prior to the end of the AFS investment's term. In this fashion, Tyler created apparent liquidity for the investors on an "as needed" basis. Tyler orchestrated these inter-investor transactions on a large scale, creating interdependence among the investors for the fulfillment of Tyler and AFS' investment guarantees.
22. Tyler did not always succeed in liquidating matured AFS interests. Tyler has still not paid at least one investor whose AFS interest matured in September 2001-- despite the investor's numerous requests. This problem is likely to get worse, as many of the AFS investments will begin to mature in the next few months.
23. Tyler failed to disclose to many investors that their funds would be used to purchase viatical interests from TPI. Nor did Tyler disclose that the investment was illiquid and uncertain as to term and investment return. Tyler further failed to disclose to his victims that in those instances where the investment matured prior to the death of the viator, he and AFS were solely responsible for providing the liquidity and the investment return he had promised to the investor. And, Tyler equally failed to: 1) disclose to these investors the financial condition of AFS or Tyler; 2) that the investments were not registered with the Commission; and 3) provide any form of written offering materials describing the true nature of the investment he was offering.
24. Tyler used funds he received from AFS's investors to purchase real property held in the name of limited partnerships he controls, Granbury Plaza and Benbrook Lake, and a corporation he controls, FWLT. Tyler transferred over $1 million to a Fort Worth title company in connection with a closing on property by Benbrook Lake in July 2001. Tyler also transferred at least $116,000 to Granbury Plaza in July 2001. In October 2001, Tyler applied $325,000 of investor funds obtained from transactions at issue in this suit toward closing on real estate in the name of FWLT.
25. Tyler, aware that his scheme was about to be exposed because of his inability to continue to carry through on his promises, began to plunder AFS and place his personal assets out of the reach of potential claimants.
26. Tyler is a Trustee of the Myrika S. Tyler Family Trust, which owns a life insurance policy on Tyler's life issued by The Travelers Insurance Company in Hartford, Connecticut ("Travelers"). On December 12, 2001, Tyler caused AFS to wire to Travelers $500,000 from an AFS account as a premium payment against the Travelers policy. Tyler also personally wired $250,000 to Travelers, as an additional premium payment against the same policy. The lump sum of $750,000 greatly exceeded the planned annual premium under the policy, which was only $60,000 per year. Immediately after Travelers received these payments, Tyler contacted Travelers with the intent of borrowing the maximum amount under the policy, which in light of the December 12th wires, would have been $600,000. Travelers refused and reversed the wire transactions on December 26, 2001. One month later, on January 28, 2002, and after extensive negotiations with the Commission about his conduct, which included the Commission's request for the appointment of a receiver over the business of AFS, Tyler and AFS both filed for bankruptcy protection, both stating that each had less than $50,000 in assets.
27. Despite the Commission's insistence that Tyler halt his fraudulent activities, he and AFS continue to engage in the ongoing fraudulent scheme.
Violation of Section 10(b) of the Exchange Act and Rule 10b-5
28. Plaintiff Commission repeats and incorporates paragraphs 1 through 27 of this Complaint by reference as if set forth verbatim.
29. Tyler and AFS, 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 his scheme, Tyler and AFS, 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. Tyler and AFS made the above-referenced misrepresentations and omissions knowingly or with recklessness regarding the truth.
32. By reason of the foregoing, Tyler and AFS 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].
Violations of Section 17(a) of the Securities Act
33. Plaintiff Commission repeats and incorporates paragraphs 1 through 27 of this Complaint by reference as if set forth verbatim.
34. Tyler and AFS, directly or indirectly, singly or 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, Tyler and AFS 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 paragraphs 1 through 27 above.
36. Tyler and AFS made the above-referenced misrepresentations and omissions knowingly or with recklessness regarding the truth. Defendants were also negligent in their actions regarding the representations and omissions alleged herein.
37. By reason of the foregoing, Tyler and AFS have violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. 77q(a)].
Violations of Sections 5(a) and 5(c) of the Securities Act
38. Plaintiff Commission repeats and incorporates paragraphs 1 through 27 of this Complaint by reference as if set forth verbatim.
39. Tyler and AFS, directly or indirectly, singly or 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 1 through 27, Defendants' securities were offered and sold to the public through a general solicitation of investors. No registration statements were ever filed with the Commission or otherwise in effect with respect to these securities.
41. By reason of the foregoing, Tyler and AFS 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)].
Claims Against the Relief Defendant as Custodian of Investor Funds
42. Plaintiff Commission repeats and incorporates paragraphs 1 through 27 of this Complaint by reference as if set forth verbatim.
43. Relief Defendants received funds and property from one or more of 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. Relief Defendants obtained the funds and property alleged above as part of and in furtherance of the securities violations alleged in paragraphs 1 through 27 and under circumstances in which it is not just, equitable or conscionable for them to retain the funds and property. As a consequence, Relief Defendants were unjustly enriched.
Claim for an Order under Section 21(e) of the Exchange Act
45. Plaintiff Commission repeats and incorporates paragraphs 1 through 27 of this Complaint by reference as if set forth verbatim.
46. Defendant Tyler has failed to comply with the terms of the Commission's May 17, 2001, Order Instituting Public Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and Order to Cease and Desist entered in In the Matter of Larry W. Tyler, Administrative Proceeding, File No. 3-10487.
47. Based upon the Offer of Settlement of Defendant Tyler, the Commission made findings of fact that:
A. Tyler is a resident of Fort Worth, Texas and, from 1992 until December 1999, was a registered representative associated with various broker-dealers registered with the Commission. From June 1995 to December 1999, Tyler was a registered representative employed by Sunpoint Securities, Inc. ("Sunpoint"), a broker-dealer registered with the Commission during that period.
B. During the period from at least August 1995 until June 1997, Tyler willfully violated, and committed and caused violations of, Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aided and abetted, and caused, violations by Sunpoint of Sections 15(b)(7) and 17(a) of the Exchange Act and Rules 15b7-1 and 17a-3 thereunder, as more fully described in paragraphs C, D and E below.
C. From at least August 1995 through June 1997, Tyler offered and sold to certain of his customers high-risk, illiquid private placement investments. These unregistered securities did not meet many of his customers' investment needs and/or objectives. In these offers and sales, Tyler failed to disclose the high-risk, illiquid nature of these investments; he also failed to provide offering memoranda to customers, which would have disclosed the risk. Tyler also evaded the financial suitability requirements of the offerings by submitting false statements of net worth for customers who may not have otherwise qualified financially to purchase these securities. In many instances, Tyler recommended multiple purchases of these securities, which caused an over-concentration of high-risk, illiquid securities in his customers' accounts.
D. During his employment at Sunpoint, Tyler offered and sold these private placements to his customers even though he was not licensed to sell private placements. Tyler had other properly licensed registered representatives in Sunpoint's Fort Worth office, who had not participated in the offer and sale, sign the subscription agreements and other paperwork for the sale, and forward them to Sunpoint, which approved these improper sales.
E. As a result of Tyler's conduct described in paragraphs C and D above, Sunpoint failed to keep accurate books and records.
F. The securities Tyler sold were not registered with the Commission. With respect to one of the private placement offerings, his sales of these securities did not meet any of the exemptions to registration set forth in the federal securities laws.
48. Based on the foregoing findings, the Commission: 1) ordered Tyler to cease and desist from committing or causing any violation of, and any future violation of, Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b), 15(b)(7) and 17(a) of the Exchange Act and Rules 10b-5, 15b7-1 and 17a-3 thereunder; and, 2) barred Tyler from association with any broker or dealer.
49. By virtue of the conduct alleged herein, much of which occurred after May 17, 2001, Tyler has violated the Commission's cease-and-desist order, and unless restrained and enjoined will continue to engage in conduct violating the order.
The Commission seeks the following relief:
50. On an interim basis, the Commission requests that a Receiver be appointed to take control of the assets of Defendants and Relief Defendants, to marshal and preserve their assets for the benefit of Tyler's defrauded investors.
51. A Temporary Restraining Order restraining Tyler and AFS from continuing violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
52. A Preliminary Injunction against Tyler and AFS enjoining them from further violations of the federal securities laws and specifically enjoining Tyler and AFS from continuing violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
53. A Permanent Injunction against Tyler and AFS enjoining them from further violations of the federal securities laws and specifically enjoining Tyler and AFS from continuing violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder.
54. A full and accurate accounting and an interim asset freeze of all assets of Defendants until a full and accurate accounting can be made of all investor monies raised in this scheme and a determination made as to the disposition of those assets.
55. A full and accurate accounting and an interim asset freeze of all accounts of Relief Defendants and all assets held by Relief Defendants.
56. Disgorgement of all illicit profits and benefits, plus prejudgment interest, realized by Defendants and all investor monies obtained by Relief Defendants, plus prejudgment interest, as a result of participation in or attributable to the scheme alleged herein.
57. A civil monetary penalty against Tyler and AFS as provided by statute and determined by the Court to be just and proper.
58. Such other and further relief as the Commission may show itself entitled.