United States Court of Appeals
For the First Circuit
No. 02-1640
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
MARTIN D. FIFE and FAROUK KHAN,
Defendants, Appellants.
DENNIS S. HERULA, MARY LEE CAPALBO (AKA MARY LEE CAPALBO HERULA),
SEAVIEW DEVELOPMENT & HOLDINGS, LTD., MICHAEL CLARKE, ROBERT
WACHTEL, JOHAN HERTZOG, and CHARLES SULLIVAN,
Defendants,
and
DAVID ULLOM,
Relief-Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Mary M. Lisi, U.S. District Judge]
Before
Torruella, Circuit Judge,
B. Fletcher,* Senior Circuit Judge,
and Stahl, Senior Circuit Judge.
*
Hon. Betty B. Fletcher, of the Ninth Circuit, sitting by
designation.
Donald S. Zakarin, Pryor Cashman Sherman & Flynn LLP,
with whom Matthew F. Medeiros, Little, Bulman, Medeiros, & Whitney,
P.C. were on brief, for appellant.
Mark Pennington, with whom Giovanni P. Prezioso, Meyer
Eisenberg, and Eric Summergrad were on brief, for appellees.
November 6, 2002
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B. FLETCHER, Senior Circuit Judge. Defendants-Appellants
Martin D. Fife (“Fife”) and Farouk Khan (“Khan”) appeal the
district court’s order granting a preliminary injunction
prohibiting further violations of securities law and a freeze
against defendants-appellants’ assets and other assets in
defendants-appellants’ possession. They contend that the district
court erred and abused its discretion in finding that the
Securities and Exchange Commission (“SEC”) established a
substantial likelihood of success in proving that defendants-
appellants violated the anti-fraud provisions of the federal
securities laws. We have jurisdiction pursuant to 28 U.S.C. §
1292. For the reasons stated below, we affirm the preliminary
injunction and asset freeze against Fife and Khan.
I. FACTS AND PROCEDURAL BACKGROUND
This case arises from the alleged misappropriation of
investor funds and the alleged fraudulent offering of securities in
connection with an investment program operated by Fife through the
entities Brite Business S.A., Brite Business Corporation and
Seaview Development and Holdings, Ltd. (“Seaview”).
A. The Investors
During 1999 and 2000, Michael A. Clarke (“Clarke”) raised
approximately $51.75 million from five investors under Brite
Business, S.A. and later through Brite Business Corporation.
Clarke promised extraordinary returns, such as generating a $20
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million dollar profit in the first twelve banking days. The five
investors, with the corresponding amounts invested, are: (1)
William Britt, a U.S. citizen who invested through his entity,
Beehive International, LLC ($10 Million); (2) Four Star Financial
Services, LLC, a U.S. entity ($11.75 million); (3) Robert Burr, a
U.S. citizen who invested through his entity, Trigon Capital ($10
million); (4) Rashad Mohamed Mahran Al Bloushi (“Al Bloushi”), an
individual from the United Arab Emirates ($7.5 million); and (5)
Rheaume Holdings, Ltd. (“Rheaume”), a British Virgin Islands entity
($12.5 million). Another investor, Malcolm Monlezun (“Monlezun”),
invested $1 million in November of 2000.
B. Fife’s Involvement
Fife agreed to manage and invest Brite Business funds, in
return for which he would receive a commission. In the SEC
investigation, Fife testified that his duties were to “administer
the bank accounts that [he] had signatory power over and to develop
a balance sheet enhancement program with leverage[d] funds sent in
to be used for financial projects.”1 Fife’s balance sheet
enhancement program involved pooling investors’ money and then
leveraging the money by purchasing treasury bills in order to
qualify for third world development projects. The profits from the
1
The SEC formally initiated an investigation entitled In the
Matter of Brite Business Corporation on December 21, 2001. The
investigation included conducting sworn investigative depositions.
After several of these investigative depositions, the SEC filed the
present case in federal district court.
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investment in the third world development projects would then be
distributed to the investors. Fife claimed that investors would
make returns of between 30 and 100 percent per year. These
returns, however, were not guaranteed because of risks involved.
In October 1999, Fife established a brokerage account at
the Rhode Island branch office of Raymond James Financial Services,
Inc. (“Raymond James”), a securities broker-dealer, in the name of
Brite Corp. Fife was the signatory on the account, and Fife’s
acquaintance, Dennis S. Herula (“Herula”), was the designated
registered representative. Approximately $44.5 million of the
$51.75 million raised for Brite Corp. was deposited into this
account.2
Mary Lee Capalbo (“Capalbo”), an attorney and the wife of
Herula, established a separate brokerage account at Raymond James
entitled the “Mary Lee Capalbo Esq. Special Client Account”
(“Capalbo Account”). Capalbo was the signatory on this account.
Fife transferred $15.5 million from the Brite account at Raymond
James into the Capalbo Account at Raymond James. These transfers
occurred through five transactions between April 2000 and September
2
The following deposits were made into the Brite account at
Raymond James: (1) In October 1999, $7.5 million of investor funds
from Al Bloushi; (2) In December 1999, $10 million of investor
funds from Beehive; (3) In March 2000, $7 million of investor funds
from Four Star; (4) In March 2000, $10 million of investor funds
from Trigon; and (5) In March 2000, $12.5 million of investor funds
from Rheaume.
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2000.3 After these transfers, $29 million remained in the Brite
Account at Raymond James under Fife’s supervision.
Of the $29 million remaining in the Brite account at
Raymond James, $27.3 million was returned to investors.4
Approximately $20.5 million in principal plus promised return
allegedly has been lost. Al Bloushi has received only $200,000 of
his $5 million investment, and Rheaume has received only $4,500
from its $12.5 million investment.5 As of September 18, 2000, all
of the investment money under Fife’s control in the Brite Account
at Raymond James had been transferred out. The money deposited in
the Capalbo Account was used to purchase shares in a money market
mutual fund. An additional investor, Monlezun, invested $1 million
raising the total amount of investor funds in the Capalbo Account
3
The date of the transfers with the corresponding amounts are as
follows: (1) March 31, 2000: $5.5 million; (2) April 6, 2000:
$4.5 million; (3) April 14, 2000: $4.5 million; (4) August 4,
2000: $972,318; and (5) September 18, 2000: $11,201.
4
The following amounts were returned/paid to investors: (1)
Beehive received $10.1 million on its $10 million investment; (2)
Four Star received $7 million of its $7 million investment from the
Brite Account at Raymond James and then an additional $1.5 million
interest payment from the Capalbo account at Raymond James; (3)
Trigon received $10,000,095 on its $10 million investment; (4) Al
Bloushi received $200,000 of his $7.5 million investment from the
Capalbo Account at Raymond James; (5) Rheaume received $4,500 of
its $12.5 million investment; and (6) Monlezun received $125,000 of
his $1 million investment.
5
According to the Raymond James account statement for Monlezun,
one million dollars was transferred out of that account in November
2000.
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at Raymond James to $16.5 million.6 Monlezun received only
$125,000 from his $1 million investment.
From June 2000 to November 2000, $8 million of Brite
investor funds was paid to various entities including Seaview7,
Tamini8, Sullivan9, Puffin10, Brite, Commonwealth, Four Star11, and
Al Bloushi. Additional transfers in the amount of $8.6 million
were made to the Mary Lee Capalbo “Special Client Account” at
Citizens Bank.
C. Rheaume Agreement
Brite entered into an agreement in March 2000 with
Rheaume Holdings (“Agreement”). The Agreement stated that “‘Brite’
will attempt to pay benefits on a best efforts basis at a minimum
average over a 90 day period of 10% per week of the amount
invested.” According to the Agreement, the first payment should
6
This investment was transferred into the Capalbo account at
Raymond James in November 2000.
7
From January 2000 to September 2001, Fife loaned Khan, on behalf
of Seaview, $195,000. This loan has not been repaid.
8
In June 2000, Fife paid the Tamini Group $2.245 million for
initial fees for an enhancement program. The program was not
successful, and the money was lost.
9
In June 2000, Fife loaned Sullivan $350,000 of investors’ money
for personal needs. This loan was not repaid.
10
In August 2000, Fife paid Puffin $2 million for initial fees for
an enhancement program. Puffin was a fraud and the money was lost.
11
In addition, Four Star received an additional $1.5 million
interest payment from the Capalbo Account at Raymond James.
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have occurred twelve international banking days from the receipt of
Rheaume’s deposit by Raymond James.
On May 8, 2000, Fife wrote a letter to Rheaume ensuring
“the safety, security, monitoring and auditing of our client funds
is and always will be my primary function. So without hesitation
I state to you that absolutely your deposit is safe, secure,
unencumbered, will not be invested without your authorization, can
not be moved, or withdrawn without your approval.” With regard to
the enhancement program, Fife stated, “I myself have been
successful for the past six months doing the same placement of
funds.” The letter further represented that there would be “no
risk of loss” and that Rheaume would receive benefits from its
investment in the next two weeks.
Almost immediately after Rheaume’s investment was in
Fife’s control, Fife began transferring funds from the Brite
Account at Raymond James into the Capalbo Account at Raymond James.
These funds were transferred without Rheaume’s knowledge or
authorization. The funds in the Capalbo Account were invested in
securities without Rheaume’s knowledge or authorization, and funds
in the Capalbo Account were thereafter transferred into another
Capalbo Account at Citizen’s Bank without Rheaume’s knowledge or
authorization. Moreover, Fife no longer had direct control over
the investments since he was not a signatory on the accounts.
In July 2000, Robert Curl (“Curl”), Rheaume’s
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representative, requested a report of the balance in Rheaume’s
account. Fife forwarded letters from Herula to Curl on Raymond
James letterhead reporting Rheaume’s investment plus accrued
interest in the Brite Account at Raymond James. However, these
reports were false since the funds in the Brite Account were nearly
depleted. After several months, Curl requested the return of
Rheaume’s funds. Fife told Curl that the money could not be
returned because Raymond James worried about large sums of cash
coming in and going out of an account in a short period of time.
This statement was false.
A few months later, Fife suggested to Rheaume that it
transfer its $12.5 million investment plus accrued interest in the
Brite Account at Raymond James to an account at Charles Schwab in
order to facilitate a “swift return.” In December 2000, Fife
advised Curl that the money was transferred to a Capalbo Account at
Charles Schwab. Charles Schwab account statements were forwarded
to Rheaume by Fife.
Throughout 2001, Fife, Herula, and Capalbo sent Curl
forged Charles Schwab account statements showing upwards of $59
million in the account. Curl was told that Rheaume’s investment
plus accrued interest was now pooled with other investor funds in
the Capalbo Account at Charles Schwab, and these funds would
eventually be transferred to Fife’s trading program at Seaview.
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These funds, however, were never moved to Charles Schwab.12
After these funds were allegedly placed in the Charles
Schwab account, Curl again requested the return of Rheaume’s funds.
Fife then advised Curl that the National Association of Securities
Dealers (“NASD”) had frozen the account. The NASD, however, never
froze this account. Fife offered to use Rheaume’s money in other
finance deals once the NASD released the money in the Charles
Schwab Account. Fife stated that he would be able to use Rheaume’s
money to generate excellent returns on other project finance deals.
D. Seaview
Khan and Fife were business partners in Seaview. Seaview
was loaned $195,000 of Brite’s investor money from Fife. Seaview’s
start-up costs were obtained from Brite. When Brite dissolved,
Brite’s money was moved into an account at Seaview. Seaview
offered the same type of balance sheet enhancement program that
Fife envisioned for Brite’s investors.
E. Khan’s Involvement
Khan engages in project financing and project development
work. As Fife’s partner at Seaview, Khan engaged in various tasks
on behalf of the entity. Khan wrote a letter to Herula describing
the “investment program” regarding the leveraging of monies. Once
12
In 2001, Rheaume’s money had already been moved at least
twice without authorization. Moreover, there was no activity in
the Capalbo Account at Charles Schwab from January 2001 to April
2001.
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leveraged through balance sheet enhancement, the money would be
used towards project finance. Khan signed several letters directed
to potential investors in the balance sheet enhancement program.
The SEC claims that these letters were intentionally aimed to
mislead potential investors. There is no proof that these letters
were mailed; however, a similar proposal was mailed to Al Bloushi,
one of Brite’s investors.
In December 2001, Khan sent letters to Al Bloushi and his
representative in an attempt to convince Al Bloushi to invest
additional funds in the amount of $100 million dollars in a private
placement project finance program. One letter promised that Al
Bloushi would receive a guaranteed return of 7% per year, without
any risk. In addition, Al Bloushi would receive a reward for
holding the investment for a year and a day. This reward included
a 20% return on the 30th day of the trading cycle and an 80% return
on the investment that was to be paid in four installments of 20%
each.
In the SEC investigation, Khan testified that he told Al
Bloushi’s representative that if an investment were made, he was
guaranteed a return. This representation was material since
project finance is very risky. If a project finance investment
fails, then the investor receives nothing. Khan testified that
“[t]he risks are high, the rewards are high. There’s a risk/reward
relationship on every, every transaction. There’s tremendous
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amount of risks involved: there’s tremendous amount of rewards to
be made. The investor has to be a sophisticated investor.”
Although Khan testified that he informs investors of the risks of
project finance, these risks were not included in the project
proposal sent to Al Bloushi.
F. Procedural Background
The SEC filed this action alleging that nine defendants,
including appellants Fife and Khan, violated section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and SEC Rule
10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5; section 17(a) of
the Securities Act of 1933, 15 U.S.C. § 77q(a); and, as against
Fife individually, section 206 of the Investment Advisers Act, 15
U.S.C. § 80b; requesting disgorgement of the defendants’ “ill-
gotten gains”; and requesting the imposition of a civil monetary
penalty.13 The SEC requested an ex parte preliminary injunction to
prohibit defendants from further violations of the federal
13
The Defendants include the following individuals: Michael
Clarke, founder of Brite Business, S.A., a British Virgin Islands
Corporation; Charles W. Sullivan, incorporated Brite Business
Corporation in Delaware in 1999; Johan C. Hertzog, represented to
clients that returns on investments would be extraordinary; Robert
M. Wachtel, the U.S. representative of Brite Business, solicited
Brite Business investor Rheaume; Martin Fife, identified himself as
President of Brite Business Corporation and managed investor funds;
Khan; Dennis S. Herula, a registered representative at Raymond
James from August 1999 until January 2001; Seaview Development and
Holdings, Ltd., a private business incorporated by Fife and Khan to
administer balance sheet enhancement programs; and Mary Lee
Capalbo, Herula’s wife, the attorney in control of Brite investor
funds.
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securities laws as alleged in the complaint, and an order freezing
defendants’ assets and other assets in defendants’ possession, as
well as $190,000 held by relief defendant David L. Ullom.14 The
district court granted the preliminary injunction and asset freeze
as to defendants Herula, Capalbo, Fife, Khan, and Seaview. The
court found that Fife and Khan were the alter egos of Seaview.
This appeal ensued.
II. STANDARD OF REVIEW
We review the grant or denial of a preliminary injunction
for abuse of discretion; legal issues are reviewed de novo, and
findings of fact are reviewed for clear error. Lanier Prof’l
Servs. v. Ricci, 192 F.3d 1, 3 (1st Cir. 1999).
III. DISCUSSION
The SEC has authority under the Securities Exchange Act
to bring an action in district court to enjoin individuals from
engaging “in acts or practices constituting a violation of any
provision” of the securities laws. 15 U.S.C. § 78u(d). In Aaron
v. SEC, 446 U.S. 680 (1980), the Supreme Court stated that the
district court shall grant such an injunction “upon a proper
showing.” Id. at 689. The requisite elements of “a proper
showing” include, “at a minimum, proof that a person is engaged in
or is about to engage in a substantive violation of either one of
14
Ullom acquired Brite Business investor funds in return for no
services being performed.
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the Acts or of the regulations promulgated thereunder.” Id. at
700-01.
In this circuit, a preliminary injunction may be granted
if the movant shows a likelihood of success on the merits, a risk
of irreparable harm, a favorable balance of equities, and that the
injunction would be in the public interest. Langlois v. Abington
Hous. Auth., 207 F.3d 43, 47 (1st Cir. 2000). The “sine qua non”
of a preliminary injunction analysis is whether the plaintiff is
likely to succeed on the merits of its claim. Weaver v. Henderson,
984 F.2d 11, 12 (1st Cir. 1993).
In the instant case, the district court applied the
criteria mandated by the Second Circuit in SEC preliminary
injunction actions, see SEC v. Unifund SAL, 910 F.2d 1028, 1036-37
(2nd Cir. 1990), and failed to consider the risk of irreparable
harm. Unlike the Second Circuit, we require consideration of
irreparable harm in actions initiated by the SEC. SEC v. World
Radio Mission, 544 F.2d 535, 541-42 (1st Cir. 1976) (finding that
the district court properly considered the “balance of the harms
which would result from the grant or denial of preliminary relief,”
but failed to pursue plaintiff’s chances of ultimate success); see
also SEC v. Lehman Brothers, Inc., 157 F.3d 2, 9 (1st Cir. 1998)
(finding that there was no obvious harm in allowing appellant
lienholder to maintain the escrow allegedly secured by debtor
through unlawful insider trading). Although the district court
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failed to consider irreparable harm in granting the preliminary
injunction, the essential requirement--finding that the SEC is
likely to succeed on the merits of its claim--was met. Weaver, 984
F.2d at 12; Aaron, 446 U.S. at 700-01. The district court found
that “Fife misrepresented the nature of the investment program, its
overall risk, and the status of funds after they were placed” with
Brite, and that the SEC established that Khan engaged in a course
of business that would operate as a fraud or deceit upon the
purchaser. Moreover, “[t]he district court’s amply supported
finding of the likelihood that future violations would occur would
ordinarily, without more, entitle plaintiff to a preliminary
injunction.” World Radio Mission, 544 F.2d at 541. The district
court here found that the SEC would likely succeed in showing such
future violations because of the nature of Fife and Khan’s
occupations, their claims of ignorance as to the scheme, the
misappropriation of large amounts of investor funds, the recency of
their alleged conduct, and the continuing existence of the accounts
and entities used to perpetrate the alleged scheme in this case.
We may affirm the district court’s grant of a preliminary
injunction and asset freeze on any grounds supported by the record.
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 84 (1st Cir. 2002)
(quoting Greenless v. Almond, 277 F.3d 601, 605 (1st Cir. 2002)).
The record sufficiently establishes "the harm caused plaintiff
without the injunction, in light of the plaintiff's likelihood of
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eventual success on the merits, outweighs the harm the injunction
will cause [appellants]." Vargas-Figueroa v. Saldana, 826 F.2d
160, 162 (1st Cir. 1987) (emphasis in original); accord
Commonwealth of Massachusetts v. Watt, 716 F.2d 946, 953 (1st Cir.
1983); cf. World Radio Mission, 544 F.2d at 541 ("To the extent
that a defendant can show harm, this must be discounted by the
degree that a plaintiff can show likelihood of success.").
Accordingly, we must affirm the preliminary injunction and asset
freeze unless the district court abused its discretion.
A. Requirements and Evidence of Violations of the
Anti-Fraud Provisions of the Securities Laws
Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a),
in relevant part, provides:
It shall be unlawful for any person in the offer or sale
of any securities . . . by the use of any means or
instruments of transportation or communication in
interstate commerce or by the use of the mails, directly
or indirectly--
(1) to employ any device, scheme, or artifice to
defraud, or
(2) to obtain money or property by means of any
untrue statement of a material fact or any omission
to state a material fact necessary in order to make
the statements made, in light of the circumstances
under which they were made, not misleading, or
(3) to engage in any transportation, practice, or
course of business which operates or would operate
as a fraud or deceit upon the purchaser.
Id. Under section 17(a) of the Securities Act, “[s]pecific
reliance by the investor need not be shown.” United States v.
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Ashdown, 509 F.2d 793, 799 (5th Cir. 1975). Negligence is
sufficient to establish liability under section 17(a)(2). Aaron,
446 U.S. at 695-697.
Section 10(b) of the Securities Exchange Act, 15 U.S.C.
§ 78j(b), makes it “unlawful for any person, directly or
indirectly, . . . to use . . . any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.” Id. The SEC
promulgated Rule 10b-5 under the Securities Exchange Act, 15 U.S.C.
§ 78j(b). Pursuant to this rule, it shall be unlawful for any
person:
(a) To employ any device, scheme, or artifice
to defraud,
(b) To make any untrue statement of a material
fact or to omit to state a material fact
necessary in order to make the statements
made, in the light of the circumstances under
which they were made, not misleading, or
(c) To engage in any act, practice, or course
of business which operates or would operate as
a fraud or deceit upon any person,
in connection with the purchase or sale of any
security.
17 C.F.R. 240.10b-5. A statement is material if there is a
substantial likelihood that a reasonable investor would consider it
important in deciding whether or not to invest his money in a
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particular security. See Basic v. Levinson, 485 U.S. 224, 231-232
(1988).
Under section 10(b) and rule 10b-5, the defendants must
act with scienter. Scienter is “a mental state embracing intent to
deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425
U.S. 185, 193 n.12 (1976). The plaintiff must demonstrate that the
defendants acted with a high degree of recklessness or consciously
intended to defraud. Aldridge, 284 F.3d at 82. Recklessness is “a
highly unreasonable omission, involving not merely simple, or even
inexcusable[] negligence, but an extreme departure from the
standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the defendant
or is so obvious the actor must have been aware of it.” Greebel v.
FTP Software, 194 F.3d 185, 198 (1st Cir. 1999) (quoting Sundstrand
Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)).
Fife and Khan assert that they did not act with the
requisite degree of scienter. This argument fails. Fife and Khan
made material representations, either recklessly or with scienter,
with regard to the sale and offer of securities and made misleading
and false statements to investors.
During the two and a half years that Fife controlled the
Raymond James account, he made only two purchases in the Brite
balance sheet enhancement program; both purchases were for treasury
bills, one on margin and the other for cash. Fife lost
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approximately $1.7 million in one of these treasury bill purchases.
Fife did not use investor funds to participate in third world
projects, the underlying premise of the enhancement program.
Further, during Fife’s control of investor funds, $20.5 million of
investor funds were dissipated.
Although Fife alleges that he never saw any investor
contracts between Brite and its investors, his letter to Rheaume
indicates that he was at least aware of some of the Agreement’s
terms by using some of the contract language in his letter such as
“private placement by invitation for qualified clients” and
“without putting its funds at risk.” At the time the letter was
written, Fife had already transferred and invested Rheaume’s money
without prior authorization. He had not been successful in his
balance sheet enhancement program in the previous six months, and
a very great risk of loss accompanied participation in the balance
sheet enhancement program. Thus, Fife’s statements were material
misrepresentations.
Since Fife and Khan were partners engaging in balance
sheet enhancement programs, they knew of the risks involved in
participating in these programs, failed to inform investors of
these risks, and positively represented that there was no risk. If
a project did not succeed, the investor would not receive back his
investment or any return on his investment principal. Instead of
advising clients of these risks, they promised high returns. Both
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Fife and Khan contacted Brite investors soliciting additional
opportunities to invest funds without disclosing the high risks
associated with the balance sheet enhancement program. These
misrepresentations and omissions were material because a reasonable
investor would want to know the risks involved in the balance sheet
enhancement program. See Basic, 485 U.S. at 231. Moreover, Fife
repeatedly made false representations to Brite investor, Rheaume,
concerning the management of its investment funds.
The SEC made a sufficient showing that Fife and Khan made
material misrepresentations in connection with the purchase or sale
of securities in interstate commerce under the balance sheet
enhancement program. In view of defendants’ past conduct, the
defendants’ occupations, and their continued defense that their
past conduct was blameless, we conclude that the SEC made an
adequate showing that repetition of such conduct in the future is
reasonably likely. Therefore, the district court’s grant of a
preliminary injunction as to Fife and Khan under the section 17(a)
of the Securities Act and section 10(b) of the Securities Exchange
Act was not an abuse of discretion.
B. Requirements and Evidence of Violations of
Section 206 of the Investment Advisers Act
Section 202(a)(11) of the Investment Advisers Act defines
the term “Investment adviser” as “any person who, for compensation,
engages in the business of advising others, either directly or
through publications or writings, as to the value of securities or
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as to the advisability of investing in, purchasing, or selling
securities.” 15 U.S.C. § 80b-2 (a)(11). The Investment Advisers
Act prohibits fraud by those who act as investment advisers. 15
U.S.C. § 80b-1. Fife asserts that he is not an Investment Adviser
under the statutory definition and therefore, could not have
violated the act.
The district court found sufficient evidence to hold that
the SEC met its burden of demonstrating that it is likely to
succeed in proving that Fife violated sections 206(1) and 206(2) of
the Investment Advisers Act. First, Fife advised Curl regarding
Rheaume’s investment. Second, Fife’s fraudulent conduct was in
connection with the offer, purchase, or sale of securities. Fife
made various transfers of Rheaume’s money without prior
authorization, invested money in money market accounts without
prior authorization, and falsely represented the status of
Rheaume’s funds. The Supreme Court concluded that “Congress
intended the Investment Advisers Act of 1940 to be construed like
other securities legislation enacted for the purpose of avoiding
frauds, not technically and restrictively, but flexibly to
effectuate its remedial purposes.” SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180, 195 (1963) (internal quotation marks
omitted). Third, although Fife has not yet received compensation,
he understood that he would be compensated for his efforts by a
commission based on a percentage of the profits from the
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investments, if successful, pursuant to a formula to be agreed upon
at a later time. Therefore, the district court did not err in
holding that the SEC set forth a substantial likelihood of success
against Fife under the Investment Advisers Act.
C. Asset Freeze
The district court found that the order freezing the
defendants’ assets appropriate because of the high risk that any
remaining investment funds or proceeds thereof would be further
depleted without such an order. The record illuminates
misrepresentations and omissions concerning the offer or sale of
securities. Under these circumstances, there is simply no viable
argument that an asset freeze was an abuse of discretion. Rizek v.
SEC, 215 F.3d 157, 163 (1st Cir. 2000).
IV. CONCLUSION
The asset freeze and preliminary injunction enjoining
Fife and Khan from further violations of section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and section
17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) are
affirmed. The preliminary injunction enjoining Fife from further
violations of section 206 of the Investment Advisers Act of 1940,
15 U.S.C. § 80b is affirmed.
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