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October 28, 1999


The opinion of the court was delivered by: Owen, District Judge.


The Securities and Exchange Commission ("SEC") alleges that Martin A. Armstrong, and his companies, Princeton Economic International Ltd. and Princeton Global Management Ltd. (collectively, "defendants") and their myriad of subsidiaries and affiliates of all stripes,*fn1 violated section 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77g(a), and section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, by fraudulently offering and selling promissory notes in the millions issued by a down-the-line subsidiary of defendant Princeton Economic International Ltd. ("PEIL"), Cresvale International, Limited (Tokyo) ("Cresvale"), to Japanese institutional investors, and misrepresenting the net asset value to the investors, thereby concealing large and mounting trading losses. The Commodities Futures Trading Commission ("CFTC") claims that defendants also violated sections 4b, 4m and 4o (1) of the Commodity Exchange Act, 7 U.S.C. § 6b, 6m, 6o (1), by engaging in this scheme as to futures.

In August and early September 1999, defendants began to transfer assets in an apparent effort to hide them against a day of reckoning appearing on the horizon. On September 13, 1999, Judge Kaplan of this Court granted a temporary restraining order restraining defendants from further violating securities laws, freezing defendants' assets, appointing a temporary receiver to collect the assets and report and granting other relief. However, shortly thereafter, Armstrong, with full knowledge of this order, and on the advice of at least one of his attorneys, covertly filed his own proceeding for receivers in the Turks and Caicos Islands to diminish, if not thwart, this Court's Temporary Receiver's powers and ability to act. On September 19, 1999, the Supreme Court, Providenciales, in the Turks and Caicos Islands appointed Joint Provisional Liquidators ("JPLs") of PEIL. (See infra at p. 425). As a result, this Court entered a second temporary restraining order on September 19, 1999 ordering defendants not to file any petition in bankruptcy on behalf of the corporate defendants or seek the appointment of a liquidator, receiver or other fiduciary without leave of this Court.*fn2 As of this moment, I have sanctioned an accommodation (subject to defeasance) between the Temporary Receiver and the Turks JPLs. The SEC, CFTC and Temporary Receiver now move for preliminary injunctions.

The SEC's Motion for Preliminary Injunction

On October 14, 1999, the SEC, PEIL and Princeton Global Management entered into a Partial Consent Judgment of Permanent Injunction. Accordingly, the SEC seeks a preliminary injunction only against Armstrong as heretofore temporarily restrained as provided in Judge Kaplan's order. This would put Armstrong under court restraint against future violations of the securities law, freeze assets, prohibit the destruction of documents and further authorize the Temporary Receiver to act as specified — except to the extent that the Memorandum of Agreement of October 7, 1999 ("MOA") is in force and modifies any provision of Judge Kaplan's and my orders.

In obtaining a statutory injunction, a government agency is not subject to the burdens borne by a private litigant, such as proof of irreparable injury or inadequacy of other remedies. CFTC v. British Am. Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977). Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), entitle the SEC to a preliminary injunction upon "a substantial showing of likelihood of success as to both a current violation and the risk of repetition." SEC v. Cavanagh, 155 F.3d 129, 132 (2d Cir. 1998); SEC v. Unifund SAL, 910 F.2d 1028, 1039-40 (2d Cir. 1990).

The SEC contends that Armstrong violated section 17(a) of the Securities Act and section 10(b) of the Exchange Act and Rule 10b-5 thereunder, acting with scienter,*fn3 by making material misrepresentations (or material omissions if he had a duty to speak) or using a fraudulent device in connection with the purchase or sale of a security. SEC v. First Jersey Sec., 101 F.3d 1450, 1467 (2d Cir. 1996).

I find jurisdiction here. Defendant Armstrong's contention in his memorandum to the Court that "the Princeton Notes were issued by foreign entities outside the United States" (Def.'s Br. at 21) is patently and facially contrary to the record. A Princeton Note for $10,420,000 issued by Cresvale to Kissei Pharmaceutical Co., Ltd. bears Armstrong's signature, (Decl. of Kristine Collins in Supp., Ex. 12), and counsel's guarded protestation at the hearing of the non-authenticity of Armstrong's signature evaporates in the comparison to Armstrong's nine admittedly genuine signatures on Exhibit 9 to the same declaration. This operation was, it is clear, all one ball of Armstrong's wax. The claim in his memorandum (Def.'s Br. at 21) that he "did not participate in the offer and sale of the Princeton Notes," is specious. Further, in penning the memorandum's language, "The SEC fails to allege any participation by the defendant [Armstrong] in the offer and sale of the Princeton Notes" (Def.'s Br. at 21-22), the writer appears not to have read ¶ 12 of the SEC's complaint.

Next, the Princeton Notes are securities. Finally, there is no question that the SEC, on this record, has put before this Court documentary and other evidence which shows that Armstrong and the entities under his control, having represented that the proceeds of their note sales would be kept in segregated accounts and used to purchase conservative investments, actually lost sums in the many millions in risky currency and commodities trading, and then commingled accounts prior to subsequent transactions to cover this up. From this, it appears that he and entities under his control used thereafter-acquired investor money to pay off maturing notes fostering the appearance that all was well, and arranged for the mailing of letters to investors containing false statements which overstated the net asset value of the accounts (the "NAV letters"). These misrepresentations were material, and certainly were in connection with later "sales" as the law has in mind, and their contents would have unquestionably influenced an investor's decision. First Jersey, 101 F.3d at 1466. The SEC's evidence also demonstrates that defendants knowingly engaged in this conduct, satisfying the scienter requirement. This evidence not only shows current violations as required by the test for a preliminary injunction, but, upon an examination of the surrounding circumstances, it warrants the conclusion of the likelihood of future violations. See SEC v. Bonastia, 614 F.2d 908, 912 (3d Cir. 1980); SEC v. Bausch & Lomb, Inc., 565 F.2d 8, 18 (2d Cir. 1977).

Defendants have presented nothing but unsupported arguments and conjecture in their endeavor to put the foregoing in issue, and Armstrong invoked his Fifth Amendment privilege against self-incrimination to all questions on his deposition. I observe that the Court is permitted to, and I do draw an adverse inference from his refusal to testify. SEC v. Scott, 565 F. Supp. 1513, 1533 (S.D.N.Y. 1983). Thus, on this record, the SEC has made a substantial showing of success on the merits as to both current and, if undeterred, a clear likelihood of future violations of the securities laws. The SEC's preliminary injunction against Armstrong is therefore granted in all respects. Judge Kaplan's order of September 13, 1999 continues in full force pending the submission and signing of an appropriate formal order(s) hereafter, and I observe that this Opinion and Order is in no way to be construed as in conflict with or conflicted by any other outstanding order(s) in this action. (See, e.g., Partial Consent J. of Permanent Inj. as to Defs. Princeton Economics International Ltd. and Princeton Global Management Ltd. at ¶ VI).

The CFTC's Motion for Preliminary Injunction

The CFTC seeks a statutory restraining order pursuant to section 6c of the Commodity Exchange Act, 7 U.S.C. § 13a-1, freezing defendants' assets, prohibiting the destruction of, and giving the CFTC access to, defendants' books and records, and continuing the receivership. To obtain a preliminary injunction, the CFTC, like the SEC, must show a substantial likelihood of success as to both violation and repetition. Cavanagh, 155 F.3d at 132; Unifund, 910 F.2d at 1039. The CFTC alleges that Armstrong and the corporate defendants have engaged in fraud in violation of sections 4b(a)(i)-(iii) and 4o (1) of the Commodity Exchange Act and have failed to register with the CFTC as Commodity Pool Operators ("CPOs")*fn4 and Commodity Trading Advisors ("CTAs")*fn5 in violation of section 4m.

Sections 4b(a)(i)-(iii) prohibit any person from cheating, defrauding, or deceiving or attempting to cheat, defraud or deceive any person in connection with commodity futures trading and from willfully entering or causing the entry of any false report or record concerning such trading. In an enforcement proceeding, the CFTC can show a violation of this anti-fraud provision by establishing that the defendant intended to make and did make a material misrepresentation with scienter. CFTC v. American Metals Exch. Corp., 775 F. Supp. 767 (D.N.J. 1991), aff'd in part and vacated, 991 F.2d 71 (3d Cir. 1993); see JCC, Inc. v. CFTC, 63 F.3d 1557, 1565 n. 23 (11th Cir. 1995) (stating that reliance is not a necessary element in an enforcement proceeding). Here, the evidence, particularly the NAV letters, supports the CFTC's contention that defendants intended to conceal large trading losses from pool participants and misrepresented the size of the remaining assets, and then knowingly made these representations to the investors in violation of section 4b of the Commodity Exchange Act.

As to the claim that defendants have violated section 4m of the Act, by failing to register as CPOs or CTAs, the CFTC presented evidence that defendants, since at least November 1997, have commingled the proceeds derived from the sale of notes to customers in a commodity pool, and that defendants and/or their agents issued trading advice and direction and maintained authority and discretion over the funds. These are functions of ...

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