U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20888 / February 6, 2009
Securities and Exchange Commission v. Lewis E. Graham II and FLOWorks, Inc., defendants, and Linworth LLC, relief defendant, Case No. 02:09-CV-00250 (D. Nev. February 6, 2009)
SEC Brings Fraud Charges Against Lewis E. Graham II and FLOWorks, Inc.
The Securities and Exchange Commission (“Commission”) announced today that it filed a civil injunctive action in the United States District Court of Nevada against defendants Lewis E. Graham II (“Graham”) and FLOWorks, Inc. (“FLOWorks”) and relief defendant Linworth LLC (“Linworth”) alleging fraud in connection with the securities of Stanford Square Investors LLC (“SSI”). Graham, a resident of Las Vegas, Nevada, controls FLOWorks and Linworth. FLOWorks is the manager of SSI, a Nevada limited liability company with approximately 100 investors.
The Commission’s complaint alleges that in June 2005, SSI sold its primary asset, a commercial office building in Palo Alto, California. Although SSI’s operating agreement provided that the company would terminate upon the sale of substantially all of its assets, in July 2005 Graham and FLOWorks, without the approval of the SSI members, caused SSI to purchase an interest in a commercial property in Eugene, Oregon. According to the complaint, Graham’s communications to the SSI investors after the purchase misstated and omitted important information about the nature and tax-free status of the Eugene property transaction, the value of the property, liabilities to be assumed by SSI, and Graham’s personal interest in the property’s proposed tenant. The Commission contends that these misstatements and omissions were made in connection with an offer by the purported seller of the Eugene property to purchase the membership interest of any investor that did not wish to participate in the new property venture. With respect to those members that elected to sell, the purported buyer has failed to complete these transactions. The Commission asserts that the actions of Graham and FLOWorks have resulted in substantial harm to SSI investors, including millions of dollars in unreported taxable gains, as well as undisclosed liabilities secured by liens on the Eugene property amounting to several million dollars. The Commission contends that Graham misled the SSI investors in order to continue to take substantial fees from SSI and to further his personal financial interests in the new venture.
The Commission’s complaint alleges that Graham and FLOWorks violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, and imposition of civil money penalties against Graham and FLOWorks based on their illegal conduct. The Commission also seeks disgorgement of ill-gotten gains from Linworth based upon its improper receipt of funds from SSI.