Litigation Release No. 18202 / June 26, 2003
Securities and Exchange Commission v. Gary L. Mcnaughton, Individually and d/b/a the Haven Equity Company, and Andrew K. Lech, U.S. District Court for the Northern District of Ohio Case No. 1:03CV1249 (N.D. OH. June 23, 2003)
On June 23, 2003, the Securities and Exchange Commission filed a Complaint in the United States District Court for the Northern District of Ohio, to halt the fraudulent offering of unregistered securities by Gary L. McNaughton, individually, and d/b/a The Haven Equity Company (McNaughton) and the unregistered offering of securities by Andrew K. Lech (Lech). On June 24, 2003, Judge Dan A. Polster of the United States District Court for the Northern District of Ohio entered temporary restraining orders restraining and enjoining McNaughton, a resident of Elyria, Ohio and Lech, a resident of Ontario, Canada from future violations of the federal securities laws. The Court also ordered a freeze of certain assets of the defendants.
The Commission's Complaint alleges that from at least 1999, McNaughton raised at least $20 million from approximately 150 investors through the sale of unregistered securities in the form of notes under the name of The Haven Equity Company ("Haven Equity"). The Complaint also alleges that McNaughton and most of the investors reside in and around Lorain County, Ohio and belong to the same church where McNaughton is a youth assistant. The Complaint alleges that in selling these notes, McNaughton fraudulently guaranteed a return on the investment as well as the principal. McNaughton guaranteed extraordinary annual returns of 15% to 20% to investors and told investors that they would receive their returns in the form of monthly interest payments. The Complaint alleges that McNaughton told investors that he will send their money to his wealthy childhood friend, Lech, who is supposed to use his expertise in options trading to generate the guaranteed returns. Beginning in March 2003, investors did not receive their monthly interest payments. The Complaint alleges that McNaughton lacked the financial resources to fulfill the guarantee. McNaughton had no reasonable basis to believe that Lech would generate returns sufficient for McNaughton to make good on his guarantee because he had no details of what Lech did with investor money or of Lech's supposed securities trading. Moreover, the Complaint alleges that McNaughton used funds from the Haven Equity bank accounts into which investor funds were deposited to pay certain personal expenses such as luxury automobiles, a boat, motor home and credit card purchases.
The Complaint also alleges that as investors stopped receiving their payments, McNaughton resorted to raising additional investor funds which he used to continue paying other investors their monthly interest. McNaughton also attempted to perpetuate the Haven Equity scheme, by convincing investors to transfer their investment to Lech, who offered his own notes ("Lech notes") to Haven Equity investors, the terms of which were virtually identical to the Haven Equity notes. However, investors who executed Lech notes never received their guaranteed returns.
The Complaint further alleges that McNaughton violated Section 5 (a) and (c) and Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Complaint also alleges that Lech violated Section 5(a) and (c) of the Securities Act of 1933. The Commission seeks, among other things, an injunction against further violations of the federal securities laws, disgorgement plus prejudgment interest and appropriate civil penalties. The Court ordered a hearing for July 2, 2003 on the Commission's Motion for a Preliminary Injunction.
