Securities and Exchange Commission
Litigation Release No. 17740A / September 24, 2002
Securities and Exchange Commission v. Basic Capital Management, Inc. and Gene E. Phillips, Civil Action No. 1:02CV01872 (D.D.C.)
Gene E. Phillips and Basic Capital Management, Inc. Agree to $850,000 Civil Penalty in Margin Credit Fraud Scheme
On September 24, 2002, the Commission filed a civil complaint in the United States District Court for the District of Columbia against Gene E. Phillips, a resident of Dallas, Texas, and Basic Capital Management, Inc., one of the largest privately owned real estate mangement com-panies in the United States. The complaint alleges that Phillips and Basic Capital violated the antifraud and stock accumulation reporting provisions of the securities laws: Sections 10(b) and 13(d) (1) and (2) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13d-1 and 13d-2 thereunder. Without admitting or denying the allegations in the Complaint, Phillips and Basic Capital consented to the entry of a judgment ordering them to pay a civil money penalty of $850,000.
The Commission's Complaint alleges that:
- Between May 1996 and June 1997, Basic Capital and five other affiliated entities (the "Phillips Group") collectively purchased over one million shares of the common stock of Greenbriar Corporation, a security listed on the American Stock Exchange. Phillips had substantial contact with the management of Basic Capital and had a significant influence over its advisory services and investment decisions as well as over the investment decisions of the five affiliates. The Greenbriar holdings of the Phillips Group in the aggregate exceeded 5% of those shares by July 1996 and amounted to approxi-mately 16.1% by June 1997.
- Phillips and Basic Capital should have filed a Schedule 13D with the Commission within ten days after the Phillips Group collectively acquired five percent of Greenbriar's outstanding shares in July 1996. Thereafter, they should have made amendments to that filing each time the Phillips Group collectively acquired an additional one percent or more of Greenbriar's outstanding shares. They did not file a Schedule 13D, however, until April 9, 1998. Accordingly, Phillips and Basic Capital violated the stock accumulation reporting provisions, Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder.
- The Phillips Group deposited their Greenbriar shares in margin accounts and borrowed against those shares to fund additional stock purchases. Because of the failure of Phillips and Basic Capital to comply with Section 13(d) on a timely basis, the broker-dealers who extended margin credit to the Phillips Group did so without knowing that the Phillips Group controlled as much as 16.1% of Greenbriar's outstanding shares. This information was material because it would have affected the manner in which the broker-dealers evaluated the market for Greenbriar stock and the liquidity of the shares pledged as collateral for the margin loans. By knowingly or recklessly failing to provide the broker-dealers with the information required by Section 13(d), Phillips and Basic Capital violated the antifraud provisions of the securities laws: Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Contemporaneously with the filing of the complaint, the Commission issued an Order in a related administrative proceeding requiring Phillips, Basic Capital and four related affiliates, Nevada Sea Investments, Inc. International Health Products, Inc., One Realco Corporation, and TacCO Financial, Inc. to cease and desist from violating the antifraud and stock accumulation reporting provisions of the securities laws. Without admitting or denying the findings in the Commission's Order, all the respondents in that administrative proceeding consented to the issu-ance of the Order. For further information on the cease-and-desist proceeding, see Exchange Act Release No. 46538.
The Commission acknowledges the assistance of the American Stock Exchange in this matter.
SEC Complaint in this matter