The opinion of the court was delivered by: WAYNE R. ANDERSEN
Plaintiff, Securities and Exchange Commission ("SEC") has filed a motion for preliminary injunction. In their response, defendants John D. Lauer and Clifton Capital Investors L.P. ("CCI") (hereinafter collectively referred to as "defendants") have raised a challenge to the jurisdiction of the SEC to bring this action and to the jurisdiction of this court to entertain the case. For the reasons stated below, we deny Lauer and CCI's challenge to the jurisdiction of this court.
Defendant CCI is an Illinois limited partnership formed in November 1992. CCI is located in Clifton, Illinois and its general partners are Lauer and Kenneth Senffner. Since its inception, CCI has provided certain limited administrative support to CHA, has sold insurance, rehabilitated residential property and acted as the administrator for the Konex Roll Program ("Roll Program").
Defendant Konex Holding Corp. ("Konex") is a Nevada corporation with an office in Lexington, Kentucky. Konex was incorporated in August 1991 and its registration was revoked in May 1993. Konex claims to offer "International Financial Investments" and is the promoter of the Roll Program.
Defendant Lyle E. Neal is a resident of High Hat, Kentucky. Neal is Chairman, Chief Executive and sole shareholder of Konex. Until January 1993, Neal was also purportedly an officer of Copol. Defendant Copol Investments Limited ("Copol") is an entity headquartered at St. Peter Port, Guernsey, British Virgin Islands. Copol was incorporated in the British Virgin Islands on March 5, 1991. Copol purportedly buys and trades Prime Bank Instruments for Konex and others. Defendant Joseph Polichemi is a U.S. citizen who resides in London, England and Florida. Polichemi is the Chairman of Copol.
Since at least January 1993, Konex has been offering and promoting its Roll Program. In connection with that offering, Konex has raised at least $ 12.5 million from at least one investor, CHA's Benefit Plan. In addition, in or about March 1994, the Roll Program received another $ 1.5 million from Lauer.
Konex's solicitations were made through a group of finders who would be compensated if they found investors for the Konex Roll Program. Neal provided these finders with information on the Program for their use in soliciting prospective investors. In or about January 1993, one of the finders contacted Lauer, CHA's Director of Benefits, and introduced him to Konex's Roll Program. The finder explained that Konex would use investor funds to purchase and trade instruments issued by the "top 100 World Prime Banks" and that investors would earn a 25%-75% annual return. Lauer told the finder that he was not interested.
Several weeks later, Neal, Konex's owner and Chairman, contacted Lauer and reiterated what Konex's finder had stated and added that Konex only dealt with the "top 25 European Prime Banks." Neal also told Lauer that bank instruments would be pre-sold before being purchased, thereby substantially reducing risk and guaranteeing profit.
Because of a shortfall in Benefit Plan assets created by early retirements at the CHA Lauer concluded that higher returns were required to eliminate this deficit. At that time, the Benefit Plan's assets were earning only a market rate of interest. Because Neal and Konex's finder previously told Lauer of the high rate of interest available from the Konex Roll Program, Lauer considered it as a possible means to cover the Benefit Plan's deficit. Lauer contacted Neal in mid-February 1993 to learn more about the Roll Program.
After Lauer expressed interest in the Roll Program, Neal employed a concerted effort to convince Lauer of the viability of the Program, the high returns to be earned and the safety of the investment. In or about late February 1993, Lauer met with Neal in Florida. At the meeting, Neal stated that CHA would earn 1-1/2% per trade and could reasonably expect approximately 40 trades per year. For the stated minimum $ 10 million investment, this would result in a per trade return of $ 150,000, or a return of approximately 60% annually. Neal also advised Lauer that Konex's European affiliate, Copol, would actually handle the trades. According to Neal, Copol, through Polichemi, had been trading Prime Bank Instruments for 20 years. Copol agreed to pay Konex 3% per face amount of the transaction for every successful roll trade. The 1-1/2% percent return was to be paid out of that amount.
As a follow up to their February meeting, on or about March 11, 1993, Neal directed Konex's attorney to send Lauer an attestation letter stating that he had spoken with certain individuals and what those individuals told them concerning Konex, Copol, Polichemi and the Roll Program.
In late March 1993, Lauer met with Neal and Konex's attorney in New York. At this meeting, Neal presented Lauer with certain draft contracts. In addition, Neal gave Lauer for his review a Konex promotional brochure regarding trading purported Prime Bank Instruments through the Roll Program. The brochure stated, among other things, that funds would be held in the "investor's name in a prime world bank account and could be withdrawn at any time." The brochure stated a projected range of returns. Finally, it concluded by reemphasizing that the investor's "funds are always secure."
Also at the meeting in New York, Neal told Lauer that four to five other investors and a "substantial" trust had already invested. Neal also represented that funds from these investors would ultimately be pooled with CHA funds to purchase Prime Bank Instruments. Polichemi also met with Lauer and described his 20 years' experience in successfully trading purported Prime Bank instruments, including transactions allegedly made on behalf of Saudi Arabia's royal family.
In late March 1993, Lauer invested $ 10 million in Konex's Roll Program, ostensibly on behalf of CHA. Despite the fact that $ 10 million of CHA funds were used to make the investment, all contracts relating to the investment identified CCI, a company Lauer controlled, as the investor. Contemporaneous with signing these agreements, Lauer agreed to have CCI act as administrator for the Roll Program. As the administrator, CCI was to receive a fee of 1/8 of 1% of the face amount invested for each Roll Program trade.
Pursuant to Neal's instructions, Lauer subsequently wired $ 10 million of CHA funds to an attorney trust account established to receive and disburse investor funds in the Roll Program. From that trust account, CHA's funds were immediately wired to Copol's bank account at Kreditbank, S.A., Luxembourg.
In April 1993, Neal advised Lauer that a successful trade had been made. Lauer, on behalf of CCI, directed the alleged profits from the trade, $ 150,000, to a Konex account, not to the CHA. CCI received a fee of $ 12,500 as Konex's administrator. In May 1993, Neal advised Lauer that a second successful trade had been made. CCI reinvested the alleged profits from that trade. As Konex's administrator, CCI again received its fee of $ 12,500. Between April and May 1993, Lauer invested another $ 2.5 million in the Roll Program, of which at least $ 1 million was CHA's money.
In approximately June 1993, Neal advised Lauer that additional funds would be needed to trade Prime Bank Instruments. Lauer did not invest additional amounts and, therefore, Konex claimed Copol could not perform any more trades. Beginning in or about June 1993, Lauer requested Konex to produce, pursuant to their contract, documents regarding the alleged successful trades. Konex never provided Lauer with those documents. Beginning in approximately mid-1993, Lauer requested the return of CHA funds. To date, the CHA's funds have not been returned.
Between August 1993 and January 1994, CCI allegedly received over $ 4 million from Copol. The SEC alleges that Lauer then used those funds to purchase, among other things, his $ 1.01 million personal residence.
The SEC has brought this action alleging violations of Section 17(a) of the Securities Act (15 U.S.C. § 77q(a)) and Section 10(b) of the Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5). These provisions generally prohibit schemes or artifices to defraud in connection with the offer, sale or purchase of securities.
The SEC claims that an interest in the Konex Roll Program constitutes an investment contract which, by definition, is a security under both Section 2(1) of the Securities Act (15 U.S.C. § 77b(1)) and Section 3(a)(10) of the Exchange Act (15 U.S.C. § 78c(a)(10)).
The SEC claims that Lauer made material misrepresentations and omissions and misappropriated investor funds. Lauer invested CHA Benefit Plan funds through CCI, a company Lauer owns, which served as administrator of Konex's Roll Program. CCI thereafter received $ 25,000 from purported trades made with CHA funds. Lauer never informed CHA about CCI's role in the Roll Program or about the nature of the investment itself. Thus, the SEC claims that Lauer failed to disclose the role of his ...