Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

SCHOLES v. AFRICAN ENTERPRISE

June 21, 1994

STEVEN S. SCHOLES, not individually but solely as Receiver for Michael S. Douglas, D&S Trading Group, Ltd., Analytic Trading Systems, Inc., Analytic Trading Service, Inc., and Market Systems, Inc., Plaintiff,
v.
AFRICAN ENTERPRISE, INC., BETHANY EVANGELICAL FREE CHURCH, HEART CRY INTERNATIONAL, HINDUSTAN BIBLE INSTITUTE, INC., INTERNATIONAL STUDENTS, INC., PROCLAMATION INTERNATIONAL, INC., and WORLD VISION, INC., Defendants.


ALESIA


The opinion of the court was delivered by: JAMES H. ALESIA

This case arises out of a fraudulent investment scheme perpetrated by Michael S. Douglas ("Douglas") from August 1987 to November 1989. At issue are monetary conveyances made by Douglas, during the pendency of the fraudulent investment scheme, to the defendants, all of which are non-profit corporations. Plaintiff Steven S. Scholes, as Receiver for the defunct investment entities, named sixteen defendants in his First Amended Complaint. Many defendants have settled the claims. Summary Judgment motions are pending against and on behalf of the following seven remaining defendants: (1) Bethany Evangelical Free Church ("Bethany"), (2) World Vision, Inc. ("World Vision"), (3) Proclamation International, Inc. ("Proclamation"), (4) International Students, Inc. ("International Students"), (5) Hindustan Bible Institute, Inc. ("Hindustan"), (6) African Enterprise, Inc. ("African Enterprise") and (7) Heart Cry International ("Heart Cry"). Scholes asserts claims for fraudulent conveyance and unjust enrichment against each.

 Presently before the court are (1) the Receiver's Motion for Summary Judgment Against Hindustan Bible Institute, Inc., International Students, Inc., and Proclamation International, Inc., (2) the Receiver's Motion for Summary Judgment Against African Enterprise, Inc. and Bethany Evangelical Free Church, (3) the Receiver's Motion for Summary Judgment Against Heart Cry International and World Vision, Inc., (4) Motion of Certain Defendants [namely African Enterprise, Hindustan, International Students, and World Vision] for Summary Judgment, and (5) Motion for Summary Judgment of Proclamation International, Inc. and Bethany Evangelical Free Church.

 I. FACTS

 From August 1987 until November 13, 1989, Douglas and others perpetrated a massive securities fraud, for which Douglas was indicted on June 19, 1990. (certified copy of Indictment (hereinafter "Indictment"), Exhibit A, Reply Mem. In Supp. of Receiver's Mot. for Summ. J. Against African Enterprise, Inc. and Bethany Evangelical Free Church (hereinafter "AE Reply Memo")) The Indictment charged Douglas with seven counts of mail fraud and one count of providing false information to the United States government. On January 11, 1991, Douglas was convicted, pursuant to a guilty plea, of three counts of mail fraud and one count of providing false information to the government, and was sentenced to 12 years in prison. (AE Reply Memo, Exhibit B (certified copy of Judgment in a Criminal Case); Plea Agreement in United States v. Michael S. Douglas, case No. 90 CR 557 (N.D. Ill. October 4, 1990) (hereafter "Plea Agreement"))

 Douglas operated the scam by purporting to sell limited partnership interests in three entities now in receivership: D&S Trading Croup, Ltd. ("D&S"), Analytic Trading Systems, Inc. ("AT Systems") and Analytic Trading Service, Inc. ("AT Service"). (Pl.'s Stmt. of Material Facts as to Which There is No Genuine Issue with Respect to Hindustan Bible Institute, Inc., International Students, Inc., and Proclamation International, Inc. (hereafter "Pl.'s Hindustan 12(m) Stmt."), at P 5) Douglas had effective control over each of these entities. (Id.; see Dep. Transcript of Douglas (hereafter "Douglas Dep."), pp. 364-65, attached as Exhibit F to the Statement of Material Facts as to which There Is No Genuine Issue With Respect to Heart Cry International, and World Vision, Inc. (hereinafter "Pl.'s Heart Cry 12(m) Stmt.")) Douglas misappropriated funds from these entities and provided public investors with false and misleading information concerning them. (Pl.'s Hindustan 12(m) Stmt., P 6; Plea Agreement P 5) Douglas funded the withdrawal of certain investors' capital and income with other investors' capital, in a classic Ponzi scheme. (Id.)

 In January 1987, Douglas was released from incarceration after being convicted on charges relating to previous fraudulent activity. (Douglas Dep., pp. 24, 26-27) Prior to this time, Douglas had been in dire financial straits. (See certified copy of Affidavit of Assets and Liabilities of Michael Douglas, attached to AE Reply Memo as Exhibit C) At the time of his release in January 1987, Douglas, by his own admission, had a negative net worth. (Douglas Dep., pp. 39, 53) Douglas had unpaid judgments totalling $ 28,166.06 outstanding against him upon his release. (See certified copy of Judgments attached to AE Reply Memo as Exhibit D) None of those judgments has been satisfied. (See Docket Sheets attached to AE Reply Memo as Exhibit E)

 From the time he was released from incarceration in January 1987 until the formation of D&S in August 1987, Douglas held two jobs, one with Computerland and one with San Gregorio Partners. (Douglas Dep., pp. 53-55) During this period of time, Douglas earned $ 3,512.48 from Chicago Metropolitan Computers, Inc. and $ 6,548.00 from San Gregorio Partners. (See Pl.'s Heart Cry 12(m) Stmt., Exhibit I (1987 federal tax return of M.S. Douglas and J.T. Douglas, pp. 19-20)) Thus, at the time Douglas started D&S he had a negative net worth of at least $ 18,105.58 -- the total of the judgments outstanding against him at the time less his total gross compensation of $ 10,060.48 from the time he was released until he began D&S.

 Douglas embezzled, converted and diverted investor funds from D&S, AT Systems and AT Service. (Pl.'s Hindustan 12(m) Stmt., at P 10; see also Exhibit A, Affidavit of [the accountant retained by the Receiver,] Richard A. Mark (hereinafter "Mark Affidavit"), attached thereto, at P 3; Plea Agreement P 5) From August 1987 until November 13, 1989, the date the SEC shut Douglas down, Douglas had no source of income other than the money he took from D&S, AT Systems, AT Service and investors. (Douglas Dep., pp. 56-58; Mark Affidavit, P 3) All of Douglas' "net worth" as of November 30, 1989, the date the Receiver was appointed, was attributable to monies Douglas diverted from D&S, AT Systems and AT Service. (Douglas Dep., pp. 57-58; Mark Affidavit, P 3) According to the affidavit of Mr. Mark, the accountant retained by the Receiver, from August 1987 through November 1989 Douglas was insolvent both in the sense that his liabilities exceeded his assets and in the sense that he was unable to pay his debts as they came due. (Mark Affidavit, P 3) Furthermore, according to the Receiver, Douglas failed to retain sufficient property to pay his creditors. (See Affidavit of Steven S. Scholes, attached as Exhibit B to Pl.'s Hindustan 12(m) Stmt. (hereinafter "Scholes Affidavit"), at PP 2, 3)

 Douglas knew in August 1987 that D&S was not properly registered with regulatory authorities. (Douglas Dep., pp. 270-71; Plea Agreement P 5) From the inception of D&S, Douglas misappropriated monies from D&S and used them for his personal purposes, but he did not replace the funds and he did not disclose the diversions to investors. (Douglas Dep., pp. 193-99; Mark Affidavit, P 3; Plea Agreement P 5) Douglas knew these diversions were illegal. (Douglas Dep., pp. 199-200)

 AT Systems began operations in approximately September 1988, simultaneous with the closing of D&S. (Mark Affidavit, PP 4, 5) Douglas was an officer, sole shareholder of, and person with control over, AT Systems. (Douglas Dep., pp. 249-50) Substantially all the funds invested in D&S were reinvested in AT Systems. (Douglas Dep., pp. 316-17) AT Systems purportedly was the corporate managing general partner of a limited partnership, in which interests were sold to the public. (Douglas Dep., p. 257) Numerous investors in AT Systems executed limited partnership agreements titled "ATS Fund I Limited Partnership." (Pl.'s Heart Cry 12(m) Stmt., Exhibit K, at P 3) However, no such limited partnership was in fact ever formed. (See Id., Exhibit M, at P 3) AT Systems operated until approximately September 1989, when AT Service began operations. (Douglas Dep., p. 267) Douglas closed AT Systems out of fear that the SEC was going to shut down AT Systems because the interests it was selling were not properly registered. (Douglas Dep., pp. 268-71)

 Douglas knew from the inception of AT Systems that the securities AT Systems was selling were required to be registered. (Douglas Dep., p. 271) As he did with D&S, Douglas diverted AT Systems money to his own use from the inception of AT Systems (Douglas Dep., pp. 290-91, 322, 380-81; Mark Affidavit, P 3), despite the fact that he knew the diversions were illegal. (Douglas Dep., p. 317) Approximately $ 4.1 million of the funds initially raised through AT Systems was transferred to D&S to fund the close-out of all D&S accounts. (Plea Agreement P 5)

 AT Service began operations in approximately September 1989. (Mark Affidavit, P 6) Douglas had the same control and authority over AT Service that he had with respect to AT Systems. (Douglas Dep., pp. 364-65) Douglas was aware that the SEC was investigating AT Systems (Douglas Dep., p. 340), and Douglas desired to funnel former D&S and AT Systems investors and capital into an entity that was unknown to the SEC and with which he would not be connected as an officer, director, employee, or shareholder. (Douglas Dep., pp. 316-17, 326-27, 340, 343) Substantially all the funds invested in AT Systems were reinvested in AT Service. (Douglas Dep., p. 343) AT Service purportedly was the corporate managing general partner of a limited partnership, in which interests were sold to the public. (Douglas Dep., pp. 341-43) Numerous investors in AT Service executed limited partnership agreements titled "ATS Arbitrage Fund I Securities Trading Partnership," and "ATS Discretionary Fund II Securities Trading Partnership." (Pl.'s Heart Cry 12(m) Stmt., Exhibit K, PP 4 and 5) However, no such limited partnerships were in fact ever formed. (See Id., exhibit N) AT Service operated until November 13, 1989, when the SEC shut it down. (Douglas Dep., p. 366)

 Douglas knew during all relevant times that AT Service was not properly registered with regulatory authorities. (Douglas Dep., pp. 270-71; Plea Agreement P 5) Douglas misappropriated monies from AT Service and used them for his personal purposes. (Mark Affidavit, P 3) During the time Douglas was conducting this fraud, he diverted in excess of $ 1.5 million which he contributed to several charities in his own name, as follows.

 (See Pl.'s Hindustan 12(m) Stmt., Exhibit C) Hindustan deposited the monies it received from Douglas into Hindustan's account at Bank of America, account no. 2111-1930. (Pl.'s Heart Cry 12(m) Stmt., Exhibit Q; Pl.'s Hindustan 12(m) Stmt., Exhibit G) The monies transferred to Hindustan were monies Douglas obtained from D&S, AT Systems and AT Service. (Douglas Dep., pp. 1800-03) Given that all Douglas' income from August 1987 to November 1989 was derived from D&S, AT Systems and AT Service (Douglas Dep., pp. 56-58), the funds transferred to Hindustan were monies originating from one or more of those entities.

 In exchange for the transfers it received from Douglas, Hindustan provided no more than "an express or implied promise that his donation would be used for the tax-exempt purposes of [Hindustan] and, more specifically, for the purpose or purposes for which he designated his donations." (See Pl.'s Hindustan 12(m) Stmt., Exhibit H (Hindustan's Resp. to Int. No. 2, at pp. 5-6)) Hindustan provided no cash or other assets in exchange for the transfers. (Mark Affidavit, P 7) Douglas claimed the transfers he made to Hindustan in 1988 as a deduction for charitable contributions on his 1988 federal income tax return. (See Pl.'s Heart Cry 12(m) Stmt., Exhibit R at p. 19) Hindustan provided Douglas with receipts for the contributions, acknowledging the transfers as "tax deductible." (See Pl.'s Hindustan 12(m) Stmt., Exhibit I (Hindustan Tax Receipts))

 INTERNATIONAL STUDENTS, INC. International Students is a Colorado not-for-profit corporation located in Colorado Springs, Colorado. (See Pl.'s Hindustan 12(m) Stmt., Exhibit J (Affidavit of Gordon Loux, at P 2)) Douglas made the following charitable contributions to International Students on the respectively indicated dates: Date Dollar Amount September 1, 1987 100.00 October 1, 1987 100.00 October 28, 1987 100.00 October 30, 1987 1,200.00 October 30, 1987 1,000.00 December 2, 1987 100.00 December 31, 1987 100.00 January 4, 1988 100.00 January 15, 1988 100.00 January 28, 1988 100.00 March 21, 1988 200.00 March 21, 1988 50.00 April 13, 1988 200.00 May 2, 1988 200.00 May 31, 1988 200.00 July 1, 1988 200.00 August 18, 1988 200.00 September 23, 1988 200.00 October 19, 1988 200.00 November 1, 1988 1,000.00 November 14, 1988 1,000.00 December 5, 1988 1,000.00 December 12, 1988 1,000.00 January 6, 1989 1,000.00 January 30, 1989 1,000.00 April 5, 1989 1,000.00 April 6, 1989 100.00 April 24, 1989 100.00 April 24, 1989 1,000.00 April 28, 1989 100,000.00 August 25, 1989 5,000.00 August 25, 1989 200.00 September 25, 1989 1,000.00 September 25, 1989 200.00 October 16, 1989 1,000.00 October 16, 1989 200.00 Total: $ 120,450.00

 The monies transferred to International Students were monies Douglas obtained from D&S, AT Systems and AT Service. Given that all Douglas' income from August 1987 to November 1989 was derived from D&S, AT Systems and AT Service, all the funds transferred to International Students were monies ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.