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S.E.C. v. RANDY
March 2, 1999
SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
MICHAEL RANDY, A DEBTOR IN BANKRUPTCY, P. MICHAEL GOODMAN, PETER W. WOODBRIDGE, A DEBTOR IN BANKRUPTCY, MICHAEL J. CLARK, JAMES C. MORRIS, DAVID C. WILEY, GEORGE J. CONWAY, DAVID A. JOHNSTON, H. RALPH SYLVESTER, DONALD R. KRUEGER AND JOHN C. HAWVER, DEFENDANTS.
The opinion of the court was delivered by: Andersen, District Judge.
MEMORANDUM OPINION AND JUDGEMENT ORDER AGAINST DAVID A.
The Securities and Exchange Commission ("SEC") filed this
action against eleven individuals alleging that they violated the
registration and anti-fraud provisions of the federal securities
laws by engaging in a scheme to defraud over 500 public investors
out of approximately $16 million by offering and selling bogus
certificates of deposit issued by an entity called Canadian Trade
Bank. The SEC alleges that defendants violated Sections 5(a) and
5(c) of the Securities Act of 1933, 15 U.S.C. § 77e(a) and (c),
by offering and selling certificates of deposit that were not
registered with the SEC. The SEC also alleges that the defendants
violated Section 15(a) of the Securities Exchange Act of 1934,
15 U.S.C. § 78o(a)(1), by engaging in securities transactions for
others while not registered as broker-dealers. The SEC also
claims that defendants committed fraud in violation 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.
Since the SEC filed its complaint on September 27, 1994,
defendants Morris, Woodbridge, Clark, and Wiley have settled with
the SEC. Defendants Randy, Slyvester, Conway, Krueger, Hawver,
and Goodman have defaulted and this court has entered final
judgment against them. David A. Johnston is the only remaining
defendant. The SEC has filed a motion for summary judgment
against Johnston on all counts of the complaint. For all of the
foregoing reasons, this court grants the motion for summary
The following facts, taken from the parties' 12M and 12N
statements and accompanying exhibits, are undisputed unless
otherwise noted. In 1988, Michael J. Randy ("Randy") contracted
with WFI of Beverly Hills, California to create Canadian Trade
Bank in the Caribbean Colony of Monteserrat, a tiny island in the
British West Indies. WFI was a corporation that was in the
business of organizing, establishing, and selling previously
unnamed banks on the islands of Montserrat and Grenada. Later in
1990, in an effort to eliminate "paper banks" that had no
employees and no assets beyond the name and the banking license,
the government of Montserrat sent notices of revocation to a
number of banks including Canadian Trade Bank. The government
informed Canadian Trade Bank that its license would be revoked
because it failed to maintain a $300,000 minimum capital
requirement. When Canadian Trade Bank failed to respond, the
Montserrat government revoked the license.
Thereafter, in March 1990, Randy organized Canadian Trade Bank
under the laws of Granada and attempted to establish it as a
licensed bank. Because Granada had no law authorizing the
licensing of offshore banks, Randy simply called Canadian Trade
Bank a bank and conducted illegal and unauthorized bank business.
Canadian Trade Bank had no assets, employees, or established
business. In 1991, Granada began to tighten up its banking laws
and required all companies acting like banks to become licensed.
Canadian Trade Bank did not apply for a license and so in
December 1991 it was eliminated from the rolls of registered
corporations. From at least September 1990 through December 1992,
Randy did business as Canadian Trade Bank, operating from his
residence in Richton Park, Illinois. Randy controlled all
operations and assets of Canadian Trade Bank from his home
offices in Illinois. During this period, Randy also did business
as International Brokers and as the God Is Real Universal Life
Church, operating those companies from his home.
The literature also falsely claimed that the certificates of
deposit were safe investments that were fully insured to a
minimum of 100% of each account by "International Insurance."
Randy also claimed that the funds were insured by Lloyds of
London (which demanded that he stop saying this), "Polaris"
(which did not exist), and by international insurance companies
that insured $150 for every $100 on deposit. Randy failed to
disclose to investors that the Grenadian and Canadian governments
had not legally licensed Canadian Trade Bank as a bank and that
the U.S. government had not licensed it to conduct banking
business. Randy also failed to disclose that the bank was not
located in Montserrat, Grenada, or Canada, but that Randy
conducted substantially all activities relating to Canadian Trade
Bank at his offices in Illinois. Randy further failed to disclose
that he used investor funds for, among other things, personal
expenses, unrelated business expenses, paying off earlier
investors, and speculative investments and loans.
Johnston first learned of Canadian Trade Bank in 1991 when he
was contacted by Jim Conway. At that time, Johnston was a
licensed Florida life and health insurance agent who sold various
insurance products through Edison Worldwide Capital, a company he
formed in 1990. Conway provided Johnston with Canadian Trade Bank
promotional literature that described the purported advantages of
the certificates of deposit and provided favorable comparisons of
the international banking system to the U.S banking system.
Conway explained that Canadian Trade Bank was a company doing
business in Montserrat and Grenada. Subsequently, Johnston met
with Conway and they both spoke with Randy over the telephone.
Randy stated that he was dealing with offshore banks but did not
provide their names. Randy told Johnston that Conway had been
selling the certificates of deposit and that Conway would give
him the necessary information. Randy also gave Johnston the
telephone number of a contact person in Montserrat he could call
to verify the information Randy had given him.
Shortly after the telephone call with Randy, Johnston and
Conway contacted Montserrat to verify that Canadian Trade Bank
was licensed to conduct business as a bank. Johnston and Conway
spoke with a barrister who informed them that Canadian Trade
Bank's charter was revoked in Montserrat and that it was moving
to another island. Despite this information, Johnston agreed to
sell Canadian Trade Bank certificates of deposit. In late 1991,
Johnston was joined at Edison Worldwide by Ralph Slyvester, a
licensed insurance agent in Florida. Johnston introduced
Slyvester to Conway so that Slyvester could sell Canadian Trade
Bank certificates of deposit. Johnston and Slyvester agreed to
sell the certificates in exchange for a 10% commission. Johnston
and Sylvester agreed to divide equally any commissions received
from the sale of insurance products through Edison Worldwide.
Conway, claiming to be the Canadian Trade Bank representative in
a percentage of the commissions Johnston and Sylvester received
for referring them to the bank.
Johnston and Slyvester then began, along with other sales
agents at Edison Worldwide, to offer and sell Canadian Trade Bank
certificates of deposit. Johnston conducted seminars to discuss
the certificates. From 1991 to 1993, Johnston conducted two
luncheon investment seminars as the President of Edison Worldwide
in which he presented information about the certificates of
deposit. These seminars were intended for, and attended by,
elderly retirees who were looking for safe, conservative
investments. At some of these seminars, Johnston and other Edison
Worldwide agents spoke about various safe investment vehicles,
including annuities. Johnston presented Canadian Trade Bank
certificates of deposit as a safe investment that paid a high
rate of return. Johnston and other Edison Worldwide agents
requested potential investors to sign a card to schedule an
appointment to discuss further the certificates of deposit. In
some instances, Edison Worldwide agents gave investors documents
on Canadian Trade Bank and international banking.
Typically, after the seminars, Johnston and other Edison
Worldwide agents met with potential investors at their homes.
During these meetings, Johnston and the agents would stress the
certificates' exceptionally high rate of return and its safety
and would give the investors literature on Canadian Trade Bank.
Johnston and the other agents helped the investor complete an
application or "CD Purchase Order" form that included the terms
of their investment. Johnston and his agents then instructed the
investors to make checks payable to Canadian Trade Bank and
informed them when they would receive their certificates.
Johnston and the agents then gave the investors additional
promotional material that was provided to them by Randy. Johnston
and his agents also explained to the investors that the
certificates of deposit were backed by "Triple A" bonds and that
the certificates were able to pay 14% annual interest because the
bank earned 23% on the investments it made with the funds. After
an investor's check cleared, Randy sent to Johnston the
investor's certificate and a 10% commission check.
From at least February to December 1992, Johnston and his
Edison Worldwide agents sold at least $1.7 million in
certificates to at least 77 investors. Johnston and his Edison
Worldwide agents profited from the fraudulent activity be
receiving commissions totaling $109,713. Of that amount, Johnston
received a total of $24,453.81 in commissions. During this
period, Johnston was never registered as an associated person of
a broker-dealer and Edison Worldwide was not registered with the
Commission as a broker-dealer. Following his participation in
Randy's scheme, Johnston was named as a respondent in an action
brought by the State of Florida in 1993 regarding Canadian Trade
Bank. As a sanction in that proceeding, Johnston claims to have
repaid approximately $9,000 in commissions. Similarly, in January
1996, the State of Florida filed an administrative action against
Johnston and a company he formed alleging that they were not
registered with the state, that they sold unregistered
securities, and that they engaged in fraudulent conduct.
On September 27, 1994, the SEC filed this action against
Johnston, Randy, Slyvester, and Conway for their participation in
the scheme with seven other individuals. These individuals are
James C. Morris, Donald R. Krueger, John C. Hawver, P. Michael
Goodman, Peter Woodbridge, Michael Clark, and David Wiley. The
SEC alleges that the defendants made numerous material
misrepresentations and omissions in the offer and sale of at
least $15 million in unregistered Canadian Trade Bank
certificates of deposit to over 500 investors. The SEC alleges
that these misrepresentations and omission have resulted in, and
will continue to result in, violations of the registration and
provisions of Sections 5(a), 5(c), 17(a)(1), 17(a)(2), and
17(a)(3) of the Securities Act, as amended 15 U.S.C. § 77e(a),
77e(c), 77q(a)(1)-(3), and Sections 10(b) and 15(a)(1) of the
Exchange Act of 1934, as amended 15 U.S.C. § 78j(b),
78o(a)(1), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated
thereunder. The SEC seeks injunctive relief, an accounting,
disgorgement, prejudgment interest, and civil penalties.
Summary judgment is proper "if the pleadings, deposition,
answers to interrogatories, and admissions on file, together with
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment
as a matter of law." Fed. R.Civ.P. 56(c). The party seeking
summary judgment carries the initial burden of demonstrating an
absence of evidence to support the position of the non-moving
party. Doe v. R.R. Donnelley & Sons Co., 42 F.3d 439, 443 (7th
Cir. 1994). The non-moving party must then set forth specific
facts showing that there is a genuine issue of material fact and
that the moving party is not entitled to judgment as a matter of
law. Anderson v. Liberty Lobby, 477 U.S. 242, 252, 106 S.Ct.
2505, 2512, 91 L.Ed.2d 202 (1986). A genuine dispute about a
material fact exists only if the evidence is such that a
reasonable jury could return a verdict for the non-moving party.
Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548,
2553, 91 L.Ed.2d 265 (1986).
In making this determination, the court must draw every
reasonable inference from the record in the light most favorable
to the non-moving party and should not make credibility
determinations or weigh evidence. Associated Milk Producers,
Inc. v. Meadow Gold Dairies, Inc., 27 F.3d 268, 270 (7th Cir.
1994). The nonmovant must support its contentions with admissible
evidence and may not rest upon the mere allegations in the
pleadings or conclusory statements in affidavits. Celotex, 477
U.S. at 324, 106 S.Ct. 2548. The plain language of Rule 56(c)
mandates the entry of summary judgment against a party who fails
to establish the existence of an element essential to its case
and on which that party will bear the burden of proof at trial.
The production of only a scintilla of evidence will not suffice
to oppose a motion for summary judgment. Anderson, 477 U.S. at
252, 106 S.Ct. 2505.
In this case, the SEC contends that the undisputed facts
establish by a preponderance of the evidence that Johnston
violated the anti-fraud and registration provisions of the
federal securities laws. The SEC argues that Johnston violated
Sections 5(a) and 5(c) of the Securities Act by offering and
selling unregistered securities in the form of Canadian Trade
Bank certificates of deposit. The SEC also claims that Johnston
violated Section 15(a) of the Exchange Act by engaging in
securities transactions for others while not registered with the
SEC as a broker-dealer under Section 15(b). Finally, the SEC
maintains that Johnston participated in a scheme to defraud
public investors of approximately $16 million in violation of
Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act, and Rule 10b-5 thereunder. Because each of these
claims are based on the sale or offer to sell securities, we must
determine whether the Canadian Trade Bank certificates of deposit
constitute "securities" before turning to the substantive
I. The Canadian Trade Bank Certificates of Deposit are
Securities under Section 2(1) of the Securities Act and Section
3(a)(10) of the Exchange Act.
The definition of a "security" is essentially the same under
both Section 2(1), 15 U.S.C. § 77b(1), of the Securities Act and
Section 3(a)(10), 15 U.S.C. § 78c(a)(10), of the Exchange Act.
Marine Bank v. Weaver, 455 U.S. 551, 556 n. 3, 102
S.Ct. 1220, 1223 n. 3, 71 L.Ed.2d 409 (1982). Under these
sections a security includes a "note" and any "evidence of
indebtedness." As the SEC correctly notes, a certificate of
deposit is a specialized type of promissory note because it
represents a promise to repay a principal amount, plus accrued
interest at a specified rate, within a specified period of time
on demand. Although a certificate of deposit is in essence a
"note" that at first glance appears to fall within the purview of
the federal securities laws, certificates of deposit are exempt
from the definition of a "security" under certain circumstances.
The Securities Act expressly exempts from its registration
requirements conventional certificates of deposit and other
instruments issued or guaranteed by a regulated domestic
financial institution. 15 U.S.C. § 77c(a)(2) and (a)(5).
Although the Exchange Act does not expressly exclude such
certificates of deposit from its scope, the Supreme Court has
held that certificates of deposit issued by a bank that is
regulated and insured by the federal government are not
securities under the Act. Marine Bank, 455 U.S. at 558, 102
S.Ct. 1220. The Court reasoned that certificates of deposit
issued by a federally-regulated bank are distinguishable from
other long-term debt obligations because they are subject to the
comprehensive set of regulations governing the banking industry.
Id. "[W]hereas the holder of an ordinary longterm debt
obligation assumes the risk of the borrower's insolvency," the
banking regulations virtually guarantee a return of the
investment. Id. at 558, 102 S.Ct. 1220. Because these
purchasers are "abundantly protected under the federal banking
laws," the federal securities laws provide no added protection.
Id. at 559, 102 S.Ct. 1220. The Court noted, however, that
certificates of deposit do not ...