Litigation Release No. 17719 / September 11, 2002
Accounting and Auditing Enforcement Release No. 1626 / September 11, 2002
Securities and Exchange Commission v. Donne Corporation, Sherman S. Smith, Shawn Smith, and Bruce Anderson (Case No. C 02-04238 SC) (N.D. Cal.)
SEC Charges Church Consulting Company and Its Chairman, CEO and CFO with Affinity Fraud Ponzi Scheme
Criminal Authorities Also Indict Chairman for Mail, Wire and Securities Fraud and Money Laundering
The Securities and Exchange Commission today filed civil charges against Donne Corporation and its founder and officers for perpetrating an affinity fraud in a Ponzi-like investment scheme. Affinity fraud refers to investment scams that prey on members of identifiable groups such as religious, ethnic and racial groups. The promoters of these scams are group members or claim to be group members. The Commission's complaint alleges that, from January 1998 through January 2001, the defendants targeted religious individuals and raised approximately $4 million through the unregistered and fraudulent sale of Donne stock.
The defendants are:
- Donne Corporation, a suspended California-based corporation with offices in Napa, California and Brandon, Florida, which was a consulting business for churches to raise money for building improvements and expansions.
- Sherman S. Smith, 56, of Napa, California, Donne's founder and chairman. Sherman Smith was registered with the State of California as an investment adviser. In addition, he is a Baptist minister and has lectured throughout the country on church and personal finances.
- Shawn Smith, 30, of Napa, California, Donne's former chief financial officer. Shawn Smith, who is Sherman Smith's son, maintained Donne's bank accounts and business records.
- Bruce Anderson, 46, of Tampa, Florida, Donne's former president and chief executive officer. Anderson oversaw Donne's business activities. Anderson consented, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction and payment of $15,000 in civil penalties and disgorgement.
Also today, the United States Attorney's Office for the Northern District of California announced that Sherman Smith was indicted by a federal grand jury on mail, wire and securities fraud and money laundering charges. The indictment also seeks the forfeiture of Smith's money laundering proceeds, including his house located in Lexington, Kentucky. The criminal indictment is based on the same conduct alleged in the Commission's complaint.
According to the Commission's complaint, filed in federal court in San Francisco, the defendants operated a Ponzi-like investment scheme through Donne. Sherman Smith solicited religious individuals, whom he had met through his work as a pastor and investment adviser, by making false and misleading statements about Donne's financial status, projected earnings and investment returns, and use of investor funds. The complaint further alleges that Anderson and Shawn Smith prepared false and misleading information about Donne's business and financial condition that was distributed to investors. The complaint also alleges that some Donne investors were promised and paid a guaranteed return of 12% per year on their investment. However, the defendants, without investors' knowledge, used the proceeds from Donne's sales of stock to new investors to pay investment returns to existing investors.
The Commission's complaint alleges that the defendants misrepresented that:
- Donne was a profitable business and a safe investment, when in fact Donne consistently operated at a loss and did not have enough assets to cover its expenses and liabilities;
- Donne stock was increasing in value and would be "revalued" from $10 to $30 per share by the end of 2000, when in fact there was never any reasonable basis for the stock's valuation; and
- Donne would use investor funds for its operational expenses, when in fact about $1.8 million of investor funds was used for undisclosed purposes unrelated to Donne's business, including building Smith's home in Kentucky, producing a movie, and paying Smith's personal and unrelated business debts.
The Commission charged Donne, Sherman Smith, Shawn Smith and Anderson with violating the registration and antifraud provisions of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and the antifraud provisions of Section 10(b) and Rule 10b-5 thereunder of the Securities Exchange Act of 1934. Sherman Smith is also being charged with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
The complaint seeks permanent injunctions against Donne, Sherman Smith, Shawn Smith and Anderson. It also seeks civil penalties and disgorgement from Sherman Smith, Shawn Smith and Anderson, and an order barring Sherman Smith from serving as an officer or director of a public company. Simultaneous with the filing of the complaint, Anderson settled with the Commission. He consented, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining him from future violations of the registration and antifraud provisions of the federal securities laws and ordering him to pay a total of $15,000 in civil penalties and disgorgement.
The Commission acknowledges the assistance and cooperation of the Federal Bureau of Investigation and the United States Attorney's Office for the Northern District of California in connection with this matter.
