The opinion of the court was delivered by: KAPLAN
LEWIS A. KAPLAN, District Judge.
The SEC here claims that the defendants have engaged in a scheme to induce investors to pay defendants fees to obtain orders from major banks to purchase so-called "prime bank instruments" ("PBIs") from the investors. The Commission contends that PBIs do not exist, that the purchase orders are not forthcoming, that defendants are well aware of both facts, and that the defendants' operations simply defraud the investors out of the fees without there being any realistic prospect of the investors realizing on their "investments." It seeks an order freezing defendants' assets pending trial and requiring them to render a verified accounting of their affairs.
Fraud in connection with PBIs, which often are referred to by other names,
has become rife in recent years. While the details of these schemes vary, all or most rest on the premise that major international banks buy and sell PBIs -- said to be high yield bank instruments -- on a secret market that offers large and essentially risk free profits. Brokers or promoters, by one means or another, offer to cut victims in on these profits for a fee. In fact, there is substantial evidence that no such market and no such instruments exist. In any case, banks whose names are used in these schemes often deny any knowledge of the instruments and transactions. See generally International Chamber of Commerce, Commercial Crime Bureau, Prime Bank Instrument Frauds (1994) (Troncoso Dec. Ex. 2); Board of Governors of the Federal Reserve System, Interagency Advisory, Warning Concerning "Prime Bank" Notes, Guarantees, and Letters of Credit and Similar Financial Instruments (Oct. 21, 1993) (Id.) The frauds are facilitated by the use of complex structures and technical financial terminology that usually are beyond the ken of potential victims. This case is said to involve such a fraud.
The Transactions At Issue
The SEC focuses here on four transactions involving defendants Joseph A. Bremont individually and through two companies he controlled, Comcar International. Ltd. and Commercial Capital Resources, Inc. (collectively "Bremont"), and Jimmy B. Sanchez.
Broadly speaking, the SEC contends that Bremont, with the aid of Sanchez, began by persuading investors of the large profits supposedly available from the purchase and sale of PBIs. Bremont then offered, for a fee, to obtain a purchase order for a PBI from a major bank which the investor then would fill by acquiring a PBI elsewhere at a discount and selling it to the buyer thus procured at an enormous profit. In order for the scheme to make apparent sense, the investor had to be persuaded of his or her ability to buy a PBI with which to fill the order supposedly to be obtained by Bremont. The SEC asserts that Bremont knew or recklessly disregarded the facts that (1) no purchase orders could or would be obtained, and (2) even if they could, the PBIs that the investors were to purchase did not exist. The primary beneficiaries of these enterprises, according to the SEC, were Bremont and Sanchez.
On July 26, 1993, Bremont signed a contract with Pegasus Enterprises, Inc. ("Pegasus") in which Bremont promised to provide a purchase order for a PBI in the amount of $ 8,800,000. (Troncoso Dec. Ex. 38) Pegasus agreed to pay Bremont $ 150,000, which was to be placed in an escrow account for release to Bremont upon receipt of a PBI purchase order. The evident purpose of the escrow arrangement was to give the investors the false comfort that their funds would not be released until a purchase order was provided.
On August 6, 1993, a purchase order purporting to be from First Federal Bank was received by the escrow agent who, on Bremont's directions, paid $ 100,000 of the escrow money to Sanchez and most of the rest to Bremont. (Troncoso Dec. Ex. 41) The transaction was a fraud because, as defendants admit, First Federal does not exist and the purchase order was a forgery. (Troncoso Dec. P 5; Bremont Mem. 13; Sanchez Mem. 14)
The Call Indiana Transactions
On March 29, 1994, Bremont signed a contract through Comcar with a group of investors known as Call Indiana, promising that he would cause a bank to issue a $ 44 million purchase order for a PBI. (Troncoso Dec. Ex. 42) Call Indiana placed $ 175,000 in an escrow account, which was released to Bremont upon the escrowee's receipt of a purchase order from the non-existent First Federal on April 1, 1994. Three additional contracts were signed, with Call Indiana placing $ 400,000 in the escrow account on each occasion. (Id. Ex. 45(A)-(C)) A purchase order from National Westminster Bank was received by the escrow agent on September 1, 1994, resulting in the release of the remaining funds. (Id. Exs. 52-53) In total, Call Indiana placed $ 1,375,000 in the escrow account, almost all of which was transferred directly to Bremont. (Troncoso Dec. Ex. 46) Although the purchase order from National Westminster was apparently genuine when issued "[a] few days later [the bank] became uneasy . . . and . . . duly notified [Bremont] that they were not prepared to be further involved. . . ." (Id. Ex. 7) Bremont, however, failed to advise the escrowee or Call Indiana of this fact.
As in the Pegasus transaction, the fraud in the April 1, 1994 transaction resulted from the use of a forged purchase order. The September 1, 1994 purchase order may not have been fraudulent at the time of issuance, although Bremont's failure to notify either the escrow agent or the investors of its subsequent revocation arguably rendered it too fraudulent.
The Pro Vantage Transaction
A similar pattern was followed in a transaction with Pro Vantage One International ("Pro Vantage."). On February 15, 1995, Bremont signed a contract with Pro Vantage, promising to obtain a purchase order for a $ 100 million face value PBI. (Id. Ex. 30) Pro Vantage paid $ 350,000 into an escrow account, which was released when a purchase order ostensibly from Turkiye Halk Bankasi was received by the escrowee on ...