U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20540 / April 25, 2008
SEC v. Jason R. Hyatt, Jay Johnson and Hyatt Johnson Capital, LLC, Civil Action No. 1:08-CV-2224 (N.D. Ill.)(Lindberg, J.)
The Securities and Exchange Commission ("Commission") announced that on April 18, 2008, the Honorable William J. Hibbler of the United States District Court for the Northern District of Illinois, acting as emergency judge, issued an ex parte order for emergency relief (the "Order") against Defendants Jason R. Hyatt ("Hyatt"), a resident of St. Charles, Illinois, Jay Johnson ("Johnson"), a resident of Downers Grove, Illinois, and Hyatt Johnson Capital, LLC ("HJ Capital"), a privately-held company headquartered at Downers Grove, Illinois. The Order, among other things, imposed an asset freeze on all assets under the control of Defendants Hyatt and HJ Capital.
The Commission earlier that day filed a civil injunctive complaint alleging that Defendants Hyatt, Johnson and HJ Capital, from approximately 2003 through 2007, while acting as unregistered broker-dealers and investment advisers, offered and sold to investors membership shares in at least ten Limited Liability Corporations ("LLCs") controlled and managed by HJ Capital (the "HJ Capital LLCs"). The Defendants promised to use investor funds to purchase securities sold by LLCs managed by BCI Aircraft Leasing, Inc. ("BCI") on behalf of the HJ Capital LLCs. In reality, according to the Complaint, at least $5.4 million was misappropriated, among other thing, to operate a Latin-themed restaurant in Chicago named De La Costa and to pay for Defendant Hyatt's personal expenses, including numerous mortgage payments and substantial home improvements for two homes, as well as at least $155,000 worth of art and antiques, a Maserati, a Mercedes, a Hummer H2, a Yukon Denali, and other vehicles.
The Complaint alleges that, as a result of their conduct, the Defendants violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
Specifically, the Complaint alleges that, from approximately 2003 through approximately 2007, the Defendants raised at least $24.5 million from approximately 120 investors in at least twelve states. The Complaint also alleges that the Defendants represented to investors that the BCI LLCs would use investor funds, along with other sources of funds, to purchase commercial aircraft on lease to commercial airlines. In connection with the sale of a promissory note for approximately $2 million ("the Promissory Note"), the Defendants represented to an individual investor that his funds would be invested in a joint venture between BCI and HJ Capital called Chicago Aviation Partners, which would use the funds to purchase a group of commercial aircraft.
The Complaint alleges that, unbeknownst to HJ Capital investors, from July 2006 to March 2007, Defendant Hyatt, through Defendant HJ Capital, misappropriated nearly $1.6 million in investor funds for his personal use. In addition, the Complaint alleges that Defendant Hyatt, through Defendant HJ Capital, misappropriated the $2 million from the Promissory Note investment to fund the startup costs of a Latin-themed restaurant in Chicago named De La Costa, which Hyatt co-owned with several other partners. According to the Complaint, when Defendant Johnson became aware of Hyatt's misappropriation of this $2 million investment, Johnson chose to participate in a scheme with Hyatt to cover up his fraud, diverting at least $2.4 million that belonged to other investors to repay the note investor, thereby concealing the past misappropriation.
The Complaint also alleges that, from 2003 to 2006, Defendant Hyatt, through Defendant HJ Capital, misappropriated nearly $1.8 million of investor funds in the form of undisclosed commissions from BCI in connection with the capital invested by HJ Capital LLCs in BCI offerings. BCI paid these commissions out of the investor funds it received from HJ Capital. According to the Complaint, Defendant Johnson knew or was reckless in not knowing that Hyatt was receiving undisclosed commissions, and yet failed to disclose this fact, and made other misleading statements to investors, in connection with subsequent offers or sales of securities.
The Complaint also alleges that, unbeknownst to HJ Capital investors, BCI and its owner and CEO Brian Hollnagel ("Hollnagel") had been defrauding investors by, among other things, failing to use investor funds to purchase aircraft as represented (sometimes never purchasing aircraft at all), misappropriating investor profits in certain LLCs in order to fund other unrelated purchases on behalf of BCI, and using some investors' funds to make payments to other investors as purported returns.
The Complaint alleges that the Defendants Hyatt, Johnson and HJ Capital falsely assured investors that, as part of their management of the HJ Capital LLCs, they had performed and would continue to perform due diligence regarding BCI's use of investor funds. Contrary to their representations, the Defendants did little, if anything, to verify the legitimacy of the BCI offerings. In fact, according to the Complaint, the Defendants received records indicating that BCI was diverting HJ Capital investor funds for improper uses, specifically, diversion to undisclosed, materially different BCI LLCs. Defendants thus knew or were reckless in not knowing of BCI's improper diversion of investor funds. Despite this, the Defendants failed to either adequately review or take action to follow up on these red flags. The Defendants also failed to disclose this information to HJ Capital investors.
Previously, on August 13, 2007, the Commission brought an emergency enforcement action in the U.S. District Court, Northern District of Illinois, against BCI and Hollnagel. SEC v. Hollnagel et al., 1:07-cv-4538 (J. Bucklo). [August 24, 2007 Litigation Release No. 20254] As a result of that action, the Court made findings of fraud, issued a preliminary injunction against BCI and Hollnagel, and ordered BCI and Hollnagel to repay all investors, including the HJ Capital LLCs, within 60 days.