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Thomas M. Melton (4999)
IN THE UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against 4NExchange, LLC, Paul R. Grant ("Grant") and Ronald K. Bassett ("Bassett"), alleges, as follows: 1. The Defendants have engaged in a massive Ponzi scheme since approximately 1999. During the last six months alone, the defendants have taken more than $17,500,000, the vast majority of which comes from investors. The defendants have promised investors that their funds would be transferred to secret currency "traders" to be used for foreign exchange trading. No such trading exists. Instead, investor funds have been used to pay the personal expenses of Grant and Bassett and to repay earlier investors. 2. Defendants, 4NExchange, Grant, and Bassett have engaged, are now engaged, and unless restrained and enjoined, will continue to engage, directly or indirectly, in transactions, acts, practices, and courses of business which constitute violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77e(a), 77e(c) and 77q] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act")[15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5]. AUTHORITY TO BRING THIS ACTION 3. Plaintiff Commission brings this action pursuant to Sections 20(b) and 20(d) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77t(b) and 77t(d)] and Sections 21(d) and 21(e) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78u(d) and 78u(e)], to restrain and enjoin the defendants from engaging in the transactions, acts, practices and courses of business described herein, and transactions, acts, practices and courses of business of similar purport and object and for other relief, including civil penalties, accountings and disgorgement. 4. Plaintiff Commission, pursuant to authority granted to it by Section 10(b) of the Exchange Act, has promulgated Rule 10b-5. This rule was in effect at all times relevant herein and is still in effect. JURISDICTION AND VENUE 5. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act ") [15 U.S.C. §§ 77t(b), 77t(d) and 77v(a)] and Sections 21(d)(3), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d)(3), 78u(e) and 78aa]. 6. The defendants, directly or indirectly, have made use of the mails, means or instruments of transportation or communication in interstate commerce, or means or instrumentalities of interstate commerce in connection with the transactions, acts, practices and courses of business described in this Complaint. 7. Venue over this action is proper pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa]. 8. The transactions, acts, practices and courses of business constituting the violations alleged herein have occurred and are occurring within the District of Utah, Central Division, and all defendants reside or may be found within the District of Utah. THE DEFENDANTS 9. Paul R. Grant, age 35, is a resident of Alpine, Utah. Since at least 1999, he has been operating a Ponzi scheme. He is a member of 4NExchange, the entity that is receiving investor funds. 10. Ronald K. Bassett, age 42, is a resident of Lindon, Utah. Since at least 1999, he has been operating a Ponzi scheme. He is a member of 4NExchange, the entity that is receiving investor funds. 11. 4NExchange, LLC is a Utah limited liability company through which Grant and Basset operate. 4NExchange claims to be a vehicle through which investors can deposit funds which are then transferred to "traders" who putatively engage in foreign currency trading. THE NATURE OF THE OFFERING 12. Beginning in 1999 the defendants have offered and sold securities in the form of investment contracts to investors. Returns on these investments were to be generated through a currency trading program. Since September 2001, a period analyzed by the Commission, the defendants have sold approximately $17 million in securities to at least 140 investors. 13. Investors have been promised that they will receive regular monthly returns of between 5 and 10 percent. Investors supposedly have the option of receiving regular payment of returns, reinvestment of the returns into the 4NExchange program, or receive payment of the returns together with a return of a portion of the principal. 14. The Defendants tell investors that their funds will be pooled in a common account located in Provo, Utah, and then will be forwarded to four traders who will use the funds to engage in trading foreign currencies. Profits generated by the traders through their trading in foreign currencies are then supposed to be returned to 4NExchange investors. 15. Investors are told that the identity of the traders is confidential. 16. Investors receive statements from 4Nexchange. The statements reflect the amount invested, the amount "earned" and the amount paid to the investor. 17. Investors have been receiving the promised returns through the filing of this action. Those payments have been made from funds invested by later investors. USE OF INVESTOR PROCEEDS 18. The Defendants are not investing the funds in any legitimate investment security or in any foreign exchange trading program. Instead, Grant and Barrett are diverting the investor funds for other uses, using the invested funds for their personal benefit and using investor funds from later investors to pay earlier investors. Other than a transfer of $200,000 to an account with a registered commodities dealer, there is no evidence of any funds being used for the trading of foreign currencies. 19. The Defendants have used a substantial portion of the investor funds to repay earlier investors. For the period from September 13, 2001 through April 16, 2002, approximately $8,181,264 was returned to investors in the form of profits from the putative foreign currency trading. 20. The Defendants have used a portion of the investor funds to pay personal expenses, expenses of 4NExchange and other payments not related to the operation of 4NExchange. Grant has received at least $326,340 from the operation of 4NExchange and Bassett has received at least $216,720 from the operation of 4NExchange. MISREPRESENTATIONS AND OMISSIONS MADE TO INVESTORS
21. The Defendants have misrepresented that investor funds would be invested in the trading of foreign currencies. 22. The Defendants have not informed investors that their funds would be used to pay personal expenses of Grant and Bassett or for the operation of 4NExchange's business. 23. The Defendants have not informed investors that the returns on their investments would be paid from funds raised from subsequent investors. Later investors were not told that their investment would be used to pay returns to earlier investors. 24. The misrepresentations are material to the investors' decision to invest with 4NExchange. It is likely that investors would not invest with 4NExchange if they knew that the source of return would be investments from future investors. Further, no investor would invest with 4NExchange if he knew that his funds were to be used to pay earlier investors and Grant and Bassett's personal expenses. 25. The defendants acted with scienter in this matter, and knew, or were reckless in not knowing, that investor funds were not being invested as promised, but instead were being used for 4NExchange or the individual defendants' personal and business expenses, and to repay earlier investors. FIRST CAUSE OF ACTION
Violations of Sections 17(a)(1) of the
26. Paragraphs 1 through 25 are realleged and incorporated herein by reference. 27. Defendants, and each of them. by engaging in the conduct described in paragraphs 1 through 25 above, directly or indirectly, in the offer or sale of securities in the form of investment contracts, by the use of means or instruments of transportation or communication in interstate commerce or of the mails, with scienter, employed devices, schemes or artifices to defraud. 28. By reason of the foregoing, defendants, directly or indirectly, violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a). SECOND CAUSE OF ACTION
Violations of Sections 17(a)(2) and (3) of the
29. Paragraphs 1 through 25 are realleged and incorporated herein by reference. 30. Defendants, and each of them, by engaging in the conduct described in paragraphs 1 through 25 above, directly or indirectly, in the offer or sale of securities in the form of investment contracts, by the use of means or instruments of transportation or communication in interstate commerce or of the mails: (1) obtained money or property by means of untrue statements of material fact or by omitting 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 (2) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities. 31. By reason of the foregoing, defendants, directly or indirectly, violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a). THIRD CAUSE OF ACTION
Violations of Section 10(b) of the Exchange Act
32. Paragraphs 1 through 25 are realleged and incorporated herein by reference. 33. Defendants by engaging in the conduct described in paragraphs 1 through 25 above, directly or indirectly, in connection with the purchase and sale of securities in the form of investment contracts, by use of means or instrumentalities of interstate commerce, or of the mails, with scienter: (1) employed devices, schemes or artifices to defraud; (2) 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; or (3) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons. 34. By reason of the foregoing, defendants, directly or indirectly, violated, and unless restrained and enjoined, will continue to violate, 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]. FOURTH CAUSE OF ACTION
Violations of Sections 5(a) and 5(c) of the Securities Act
35. The allegations contained in paragraphs 1 through 25 are realleged and incorporated by reference. 36. Defendants, and each of them, by engaging in the conduct described in paragraphs 1 through 25 above, directly or indirectly, through use of the means or instruments of transportation or communication in interstate commerce or the mails, offered to sell or sold securities in the form of investment contracts, or carried or caused such securities to be carried through the mails or in interstate commerce, for the purpose of sale or delivery after sale. 37. No registration statement has been filed with the Commission or has been in effect with respect to these securities. 38. By reason of the foregoing, the defendants, directly or indirectly 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)]. PRAYER FOR RELIEF WHEREFORE, The Commission respectfully requests that the Court: I. Issue findings of fact and conclusions of law that the defendants committed the violations charged and alleged herein. II. Issue in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, orders temporarily restraining and preliminarily and permanently enjoining defendants 4NExchange, Grant and Bassett and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from engaging in the transactions, acts, practices and courses of business described herein, and from engaging in conduct of similar purport and object in violation 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. III. Issue in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, orders permanently enjoining defendants 4NExchange, Grant and Bassett, and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from engaging in the transactions, acts, practices and courses of business described herein, and from engaging in conduct of similar purport and object in violation 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. IV. Issue in a form consistent with Rule 65(e) of the Federal Rules of Civil Procedure, orders temporarily restraining and preliminarily and permanently enjoining defendants 4NExchange, Grant and Bassett, and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the orders by personal service or otherwise, and each of them, from: A. transferring, changing, wasting, dissipating, converting, concealing or otherwise disposing of, in any manner, any funds, assets, claims, or other property or assets owned or controlled by, or in the possession or custody of defendants; B. destroying, mutilating, concealing, transferring, altering, or otherwise disposing of, in any manner, any books, records, computer programs, computer files, computer printouts, correspondence, memoranda, brochures, or any other documents of any kind, pertaining in any manner to the business of 4NExchange, Grant and Bassett, including, without limitation, the sale of securities; C. transferring, assigning, selling, hypothecating, or otherwise disposing of any notes, investment contracts, partnership agreements, or other securities of the defendants; and D. transferring, assigning, selling, hypothecating, or otherwise disposing of any assets of 4NExchange, Grant and Bassett, existing and in the custody or control of 4NExchange, Grant and Bassett, as of the date of the Order. V. Grant such other and further relief as this Court may determine to be just, equitable and necessary, including, but not limited to, a freeze of assets, the acceleration of discovery, including the forthwith production of books and records, an accounting and disgorgement. VI. Enter an Order directing defendants 4NExchange, Grant and Bassett to pay civil fines and/or penalties under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. VII. Issue an Order directing all of the defendants, jointly and severally, to prepare and present to the Court and the Commission, within five (5) days from the entry of said order, a sworn accounting of all of the proceeds collected by the defendants from the activities described in the Commission's Complaint. VIII. 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. Dated this _______________ day of May, 2002. Thomas M. Melton
http://www.sec.gov/litigation/complaints/complr17500.htm
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