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United States Securities and Exchange Commission v. Benger

June 29, 2009

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
STEFAN H. BENGER, SHB CAPITAL, INC., JASON B. MEYERS, INTERNATIONAL CAPITAL FINANCIAL RESOURCES, LLC, PHILIP T. POWERS, HANDLER, THAYER & DUGGAN, LLC, FRANK I. REINSCREIBER, AND GLOBAL FINANCIAL MANAGEMENT, DEFENDANTS,
CTA WORLDWIDE SERVICES, S.A., AND STEPHEN VAN HASE, RELIEF DEFENDANTS.



The opinion of the court was delivered by: Joan Humphrey Lefkow United States District Judge

Judge Joan H. Lefkow

MEMORANDUM OPINION AND ORDER

Plaintiff, United States Securities and Exchange Commission ("SEC"), brought this action for violations of the Securities Act of 1933 ("Securities Act"), codified at 15 U.S.C. §§ 77a et seq., and the Securities Exchange Act of 1934 ("Exchange Act"), codified at 15 U.S.C. §§ 78a et seq., and equitable relief in connection with allegedly fraudulent Regulation S securities offerings.*fn1 CTA Worldwide Services, SA ("CTA") and Stephan Von Hase ("Von Hase") are foreign citizens alleged to have received in excess of $2.2 million in profits from the offerings. Von Hase and CTA now move to dismiss the complaint for lack of subject matter and personal jurisdiction pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(2). For the following reasons their motion to dismiss [#70] is denied.

LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) challenges the court's subject matter jurisdiction and a motion under 12(b)(2) challenges the court's personal jurisdiction. The burden of proof on jurisdictional challenges, under either Rule 12(b)(1) or 12(b)(2), is on the party asserting jurisdiction. United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003); RAR, Inc. v. Turner Diesel, 107 F.3d 1272, 1276 (7th Cir. 1997).

In determining whether subject matter jurisdiction exists, the court must accept all well-pleaded facts alleged in the complaint and draw all reasonable inferences from those facts in the plaintiff's favor. Sapperstein v. Hager, 188 F.3d 852, 855 (7th Cir. 1999). "When evidence pertinent to subject matter jurisdiction has been submitted, however, 'the district court may properly look beyond the jurisdictional allegations of the complaint . . . to determine whether in fact subject matter jurisdiction exists.'" Id. at 855 (quoting United Transp. Union v. Gateway W. Ry. Co., 78 F.3d 1208, 1210 (7th Cir. 1996) (internal citations omitted).

Similarly, "[i]n considering whether it has personal jurisdiction, the court may review affidavits submitted by the parties." Purdue Research Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). "[W]hen the district court rules on a defendant's motion to dismiss based on the submission of written materials, without the benefit of an evidentiary hearing . . . . the plaintiff 'need only make out a prima facie case of personal jurisdiction.'" Id. at 782 (quoting Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002)). "In evaluating whether the prima facie standard has been satisfied, the plaintiff 'is entitled to the resolution in its favor of all disputes concerning relevant facts presented in the record.'" Id. (quoting Nelson v. Park Indus., 717 F.2d 1120, 1123 (7th Cir. 1983)).

BACKGROUND*fn2

From March 2007 to February 2009, the defendants in this action raised $44.2 million dollars by selling Regulation S*fn3 securities to more than 1,400 foreign investors. The SEC contends that the offerings were fraudulent because defendants failed to disclose to investors that less than one-third of their investment funds would be used to purchase the securities while two-thirds were to be received by the defendants as a commission.

I. The Regulation S Offerings*fn4

Three sets of defendants are involved in this case: Stefan H. Benger ("Benger"), SHB Capital, Inc. ("SHB"), Jason B. Meyers ("Meyers"), and International Capital Financial Resources, LLC ("International Capital") are collectively referred to as the Distribution Agents. Benger is the president of SHB and Meyers is the president of International Capital. The Distribution Agents are all Illinois citizens who operated out of their offices in Chicago. From there, they entered into distribution agreements with certain issuers (not parties to this law suit) to sell stock to foreign investors for commissions in excess of 60 percent of the invested funds. Philip T. Powers ("Powers"), Handler, Thayer & Duggan, LLC ("Handler, Thayer"), Frank I. Reinschreiber ("Reinschreiber"), and Global Financial Management ("Global Financial"), collectively referred to as the Escrow Agents, assisted the Distribution Agents.*fn5 The Escrow Agents, also Illinois citizens based in Chicago, were responsible for collecting the investors' share purchase agreements and their payments and then distributing the proceeds of the sales. CTA and Von Hase, collectively referred to as Relief Defendants, received some of those proceeds.

The Distribution Agents offered penny stocks*fn6 issued by China Voice Holding Corp., Integrated Biodiesel Industries, Ltd., Biomoda, Inc., Pharma Holdings Inc., World Energy Solutions, Inc., Revolutions Medical Corp., Earthsearch Communications, Inc., and Essential Innovations Technology (collectively, "issuers"). All of the issuers are incorporated in or have administrative offices within the United States.*fn7 The Distribution Agents entered into distribution agreements with each issuer. The distribution agreements provided that the Distribution Agents would offer the issuers' stock to foreign investors in exchange for sales commissions exceeding 60 percent of the proceeds of the investment. See, e.g., ¶ 2.2 of the distribution agreement used in the China Voice offering, Docket No. 11, Ex. 8.*fn8 Each distribution agreement included an escrow agreement between one of the Escrow Agents and issuers that outlined the role of the escrow agent in the Regulation S offering. The escrow agreements provided that the specified escrow agent was to be compensated in the amount of $5,000 or 1% of the gross proceeds of the sale. See, e.g., ¶ 6 of the escrow agreement used in the China Voice offering, Docket No.11, Ex. 8.

The Distribution and Escrow Agents did not offer the issuers' stock directly to foreign investors. Rather, the Distribution Agents retained foreign sales agents to make cold calls to prospective investors and to employ high-pressure tactics to secure their investment. SEC calls them "boiler room agents." The boiler room agents targeted elderly British and European citizens. Although many of the boiler room agents were on warning lists compiled by the United Kingdom's Financial Services Authority, they represented to prospective investors that they worked for legitimate brokerage firms in the United Kingdom. The high-pressure tactics used included falsely representing that the price of the stock being offered was about to rise sharply, urging potential investors to liquidate savings and other investments, purporting to offer discounted pricing, and, on at least one occasion, threatening to sue investors if they did not purchase the full amount of shares initially agreed upon. During the calls, the boiler room agents either failed to disclose that commissions in excess of 60 percent would be charged or told prospective investors that only nominal transaction fees would be charged.

Once the boiler room agents had secured an investment, the investors were sent a share purchase agreement ("SPA") to confirm their stock purchase.*fn9 Von Hase admitted in his deposition that Escrow Agents in the United States created the SPAs. Von Hase Dep. 103-04, Ex. 1 to Polish Decl. The SPAs did not disclose that the commission charged exceeds 60 percent of the total consideration paid by the investors. For example, the SPAs used in China Voice's Regulation S offering contained two types of charts, both of which are captioned "Transaction Information - Price and Shares." Id.; Docket No. 11, Ex. 3. The charts detailed the purchase price per share, the number of shares being purchased, the transaction fee and the total consideration to be paid for the ...


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