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U.S. Securities and Exchange Commission

United States Securities and Exchange Commission

Litigation Release No. 16576 / May 31, 2000


Securities and Exchange Commission Files Fraud Action Against Florida Residents and Companies In Connection With Promissory Note Scheme

The Securities and Exchange Commission announced that on May 31, 2000 it filed a complaint in the Southern District of Florida alleging that Larry Schwartz of Boca Raton, Florida; Raphael "Ray" Levy of Lake Worth, Florida; First Capital Services, Inc. of Boca Raton, Florida and U.S. Capital Funding, Inc. of Lake Worth, Florida defrauded investors in connection with the sale of promissory notes. The Commission's complaint alleges that Schwartz and Levy, the control persons of First Capital and U.S. Capital Funding, respectively, used a nationwide network of insurance agents to induce more than 600 investors in 27 states to purchase at least $55 million in unregistered promissory notes. The notes required a minimum investment of $25,000 and promised to pay annual rates of return of 9.25% and higher. The complaint alleges that Schwartz and Levy falsely represented that investor principal and the payment of interest was insured or guaranteed, and that the investment was risk-free. They also represented that investors' funds would be used by First Capital solely to purchase insured corporate accounts receivable or accounts receivable owed by the federal, state or local governments.

According to the complaint, all of these representations were false and misleading as the notes were neither insured nor guaranteed, and the investment was not risk-free. In addition, U.S. Capital and First Capital did not use investor funds solely in the manner represented. Instead, in Ponzi-scheme fashion, they used investor funds to make interest payments and return principal to other investors. It is further alleged that First Capital purchased risky receivables which were not insured or backed by the federal, state or local governments, and it extended long-term loans, including to affiliated companies directly or indirectly controlled by Schwartz. To date, U.S. Capital and First Capital have defaulted on the payment of approximately $37 million in interest and principal to investors.

The complaint alleges that Schwartz, Levy, First Capital and U.S. Capital violated the antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleges that Levy and U.S. Capital violated Section 15(a) of the Exchange Act by selling securities without registering with the Commission as broker-dealers or associating with a registered broker-dealer, as appropriate. Finally, the complaint alleges that Schwarz, Levy, First Capital and U.S. Capital violated Section 5 of the Securities Act by offering and selling unregistered securities. The complaint seeks the entry of an injunction against all defendants prohibiting further violations of the securities laws. The Commission also seeks the entry of an order requiring the defendants to pay civil penalties and to disgorge their ill-gotten gains plus prejudgment interest. Finally, the Commission seeks an accounting and the appointment of a receiver.