U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19490 / December 8, 2005
SEC v. Bradley T. Smith, et al. (U.S. District Court for the Southern District of Ohio, Case No. C2-CV-04-739, filed August 10, 2004)
Court Orders Disgorgement, Penalty and Permanent Injunctions Against Ohio Businessman Bradley Smith and His Companies for Securities Fraud
On December 6, 2005, the Honorable Gregory L. Frost of the U.S. District Court for the South District of Ohio entered Final Judgment setting the monetary and injunctive relief to be imposed against defendants Bradley T. Smith (Smith), Continental Midwest Financial, Inc. (Continental) and Scioto National, Inc. (Scioto) and relief defendants BancShareholders of America, Inc. (BSA) and Bancshare Investors Brokerage, Inc. (BSIB), in connection with two fraudulent private offerings through which the defendants raised approximately $2.1 million. Smith is an Ohio resident, and all of the companies named in the lawsuit shared offices in the Columbus, Ohio area. The Final Judgment orders Continental and Scioto to disgorge the entire amounts raised in these offerings plus prejudgment interest and holds Smith jointly and severally liable for these amounts. Additionally, the Final Judgment imposes a $120,000 civil penalty against Smith, and permanent injunctions against Smith, Continental and Scioto. The final judgment also requires relief defendants BSA and BSIB to disgorge funds that Continental and Scioto had improperly transferred to them. Previously, on September 27, 2005, the court had granted summary judgment in favor of the SEC on the issue of liability, finding Defendants liable for fraud.
The Commission commenced this lawsuit on August 10, 2004, alleging that from July 2002 until August 2004, Smith raised approximately $2.1 million through private securities offerings for two companies that he founded and controlled: Continental and Scioto. The SEC alleged that Smith and the companies told investors, both orally and in offering and marketing materials provided to investors, that most of the money raised would be used to buy stock in small community banks. Instead, most of the money was spent for other purposes, including to pay expenses for Smith's other businesses, as well as Smith's own personal expenses, including his personal credit card charges, house payments and a car purchase.
In its September 27, 2005 summary judgment ruling, the Court found that Smith, Continental and Scioto made material misrepresentations to investors concerning the use of proceeds from the offerings, in violation of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. In addition to his direct liability, Smith was also held liable for the violations of the Exchange Act by Continental and Scioto as a control person under Section 20(a) of the Exchange Act.
In its Final Judgment, the Court ordered Defendants Continental and Scioto to disgorge the total amount of investor funds that they had fraudulently raised from their private offerings, plus prejudgment interest. Specifically, Continental was ordered to pay $1,409,149 and Scioto was ordered to pay $885,048. The Court held Smith jointly and severally liable for the entire amounts of disgorgement and interest owed by Continental and Scioto, pursuant to Section 20(a) of the Exchange Act, which requires "control persons" to be held jointly and severally liable for the liability of the persons or entities they control. The Court additionally ordered Smith to pay a civil penalty in the amount of $120,000. The Court also entered permanent injunctions against all three defendants prohibiting future violations of the antifraud provisions of the federal securities laws set forth at Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Court also ordered relief defendants BSA and BSIB, two other entities controlled by Smith, to disgorge all amounts that had improperly been transferred to them by Smith from of the proceeds of the Continental and Scioto offerings. BSA was ordered to pay a total of $679,009 and BSIB was ordered to pay $313,012, which amounts include prejudgment interest.
The Commission thanks the Ohio Department of Commerce, Division of Securities for its assistance in this matter.