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U.S. Securities and Exchange Commission


LITIGATION RELEASE NO. 18103 / April 24, 2003


Securities and Exchange Commission v. 1st Atlantic Guaranty Corporation, Civil Action No. 03-CV-1213 DKC (D. Md.)

The Securities and Exchange Commission ("Commission") announced that, on April 23, 2003, it filed an emergency civil action in the United States District Court for the District of Maryland, against defendant 1st Atlantic Guaranty Corporation ("1st Atlantic"), of Bethesda, Maryland. 1st Atlantic is a face-amount certificate company registered with the Commission pursuant to the Investment Company Act of 1940. A face-amount certificate company is a specialized type of investment company that issues fixed-income debt securities, agreeing to pay the principal amount of the instruments plus accrued interest on maturity.

The Honorable Catherine C. Blake, upon motion of the Commission, entered emergency relief, including a temporary restraining order and freeze of payments to certificate holders, against the defendant, and scheduled a hearing on the Commission's motion for appointment of a receiver for May 5, 2003, with a preliminary injunction hearing to be scheduled thereafter.

The Commission's complaint charges 1st Atlantic with violating Sections 28(a) and 28(b) of the Investment Company Act, and seeks permanent injunctive relief. The complaint alleges that, from at least September 2001 to the present, as a result of the transfer of certain assets previously held by it, 1st Atlantic has been and is operating with reserves well below the legal minimum required by the Investment Company Act. Between 1998 and 2002, the former chief executive officer and chairman of 1st Atlantic diverted approximately $1 million from 1st Atlantic and transferred assets with a value of more than $2.8 million to a subsidiary without consideration.

The complaint further alleges that, in an attempt to cover its reserve deficiency, in September 2001, 1st Atlantic began to improperly count the value of the common stock of its subsidiary, State Bond and Mortgage Company, LLC ("State Bond") as a "qualified investment." However, the stock of State Bond is not a qualified investment, as defined under the Investment Company Act and, therefore, cannot be counted by 1st Atlantic towards its reserve requirement. Without that asset, 1st Atlantic has qualified investments of only $450,000 to pay certificate liabilities of more than $4 million and is operating in violation of the reserve requirements. Under the terms of the certificates, holders are entitled to demand immediate redemption (with a small penalty) and investors who seek immediate payment could dissipate the remaining assets of the company to the detriment of other investors. The Commission's motion for emergency relief sought to address these concerns.


SEC Complaint in this matter



Modified: 04/24/2003