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March 26, 2002


The opinion of the court was delivered by: Robert W. Sweet, United States District Judge.


The Securities and Exchange Commission (the "SEC") has brought this motion for summary judgment against Douglas C. Brandon ("Brandon") pursuant to Rule 56 of the Federal Rules of Civil Procedure. This case involves material misrepresentations regarding a Ponzi scheme in which Brandon represented himself as trustee and sole signatory (the "Trustee") for Credit Bancorp, Ltd. ("Credit Bancorp" or "CBL"). Because there are no disputed issues of material fact and because Brandon's statements and omissions were false and misleading, and he was on notice of their falsity, the SEC's motion is granted.

Parties and Prior Proceedings

The instant motion of the SEC was heard and marked fully submitted on December 5, 2001.


The facts as set forth below are obtained from the parties' submissions and are not in dispute except as noted.

I. The Credit Bancorp Securities Investment Program

The Credit Bancorp credit facility program was represented to investors as an opportunity to borrow money, using their assets as collateral, at financing rates that were "considerably lower than those charged by major brokerage houses." The program also claimed to remit a "dividend" based on the value of any unencumbered collateral. The amount of the dividend varied, but was generally between four and six percent.

The credit facility purported to offer investors a guaranteed, quarterly dividend in exchange for assigning their securities to Credit Bancorp. Credit Bancorp told potential investors that it earned money by charging interest on loans to other credit facility investors and through "CBL's proprietary investment strategy." Brandon understood this to mean "taking assignments of securities for the purpose of engaging in locked arbitrage in Europe."

Investors were told their securities would be deposited into a Credit Bancorp account to be used in locked arbitrage. By locked arbitrage, Credit Bancorp meant that it would "receiv[e] value on its account" for the investors' securities, and that value would allow Credit Bancorp "to expand its own credit line with its partner banks," which in turn would implement the "CBL proprietary investment strategy."

The Credit Bancorp proprietary investment or trading strategy was supposedly accomplished via Credit Bancorp's unique relationships with its European banking partners. Once Credit Bancorp had investor assets in Credit Bancorp accounts, they were given a "trading line off credit" by an institution. This institution would use the line of credit, on behalf of Credit Bancorp, for intra-day trading.

An investor's participation in Credit Bancorp's program began with the signing of the "CBL credit facility agreement" and a separate "letter of engagement" that was to be executed and sent to a designated Credit Bancorp office. Richard Blech, the president and owner of Credit Bancorp ("Blech"); Brandon; and the investor would sign the engagement letter. This agreement provides that by the execution of this document, a trust would be established under Kentucky Law, and Brandon would owe the investor the duties and responsibilities of a trustee as set forth in Ky. Rev. Stat. Ann. § 386.705 — 386.735.*fn1

The investors would then transfer their securities or other assets to the Trustee to be placed in a Credit Bancorp account. The engagement letter states, "Only [Brandon] as trustee will have signatory or withdrawal power over the account under the terms of the Credit Facility." The majority of the credit facility agreements signed by Credit Bancorp investors stated that the Trustee would have legal title to the assets, and the investor would retain equitable title and beneficial ownership at all times. Article IV, section 4.3 of the sample credit facility agreement provider, that, "[n]either CBL nor Trustee will at any time sell, pledge, assign, margin, lien, hypothecate, encumber, or otherwise dispose of the assets except as authorized in this agreement. Credit Bancorp's promotional packet represented that all investor "US Dollars assets" were to be held in U.S. banks or brokerage firms, while other collateral (precious metals, stones, and art) was to be held in Swiss banks. Moreover, the promotional packet stated that assets "cannot be sold or traded by the trustee, unless instructed by [the investor] in writing to do so."*fn2

Finally, Credit Bancorp promised to provide the investor with an Evidence of Insurance Certificate to certify that a "Comprehensive Financial Products Policy" in the amount of $500 million was in place, through its insurance brokerage firm, J&H Marsh & McClennan ("Marsh"). The certificate would name each party and identify the assets placed into the trustee account. Credit Bancorp represented that all assets were insured by Lloyd's of London and all custodial risk was covered by the "All Risks Securities Policy" issued by Lloyd's. The insured party on this policy was listed as being Credit Bancorp Limited. Credit Bancorp represented that the policy covered:

all risks of physical loss or damage to negotiable and non-negotiable securities and documents of value anywhere in the world, in transit or at rest, including any premises of the Assured (Credit Bancorp Limited) or any clearance system or agency with which the securities are held or deposited, any depository or subdepository of any such clearance system or agency or subcustodian, from whatever cause arising, to include acts of the insured trustee, including infidelity.

James Hall ("Hall"), the Marsh employee responsible for Credit Bancorp's account, testified that Credit Bancorp's insurance policy consisted of three separate parts: the financial institution bond, the directors' and officers' coverage, and the errors and omissions coverage.

Of course, most of these promises were unfounded. As has been previously held, Credit Bancorp was an elaborate international Ponzi scheme.

II. Brandon's Role

Brandon served Credit Bancorp in numerous capacities. In addition to serving as Trustee, he also was Credit Bancorp's legal counsel and performed other services.

A. Brandon's Role as Trustee

In or around March 1997, Brandon became involved with Credit Bancorp, as Trustee for investors who participated in the credit facility program.

A promotional packet delivered to prospective investors included information about Brandon, describing him as having extensive knowledge of "both corporate and securities law." In the packet was a sample credit facility agreement that stated, "CBL will compensate Douglas C. Brandon, Attorney at Law (hereinafter known as "Trustee") to act as Trustee, to hold assets for the life of the credit facility in a CBL account for the benefit of XYZ and CBL." The agreement also sets forth, in Article 4 section 4.6, that Brindon, as Trustee, "shall subordinate any duty he may have toward CBL or its affiliates in favor of Trustee's fiduciary duty toward XYZ . . . should there arise a dispute regarding conflicting claims between XYZ and third parties or CBL as to the assets which are the subject of this Agreement . . . ."

Brandon made representations to investors as Trustee in writing and in person. Brandon admits that he traveled an at least six occasions on behalf of Credit Bancorp to speak to prospective investors who wished to interview him personally. Brandon addressed customer concerns regarding the safety of their assets and the legitimacy of the Credit Bancorp scheme and explained to them how Credit Bancorp generated income and how he controlled the assets.

Brandon made at least five representations to investors. He claimed that (1) the securities would be put in custodial accounts, (2) he would be the sole signatory on those accounts, (3) he had the power to return the investors' securities, (4) the securities would not be disposed of without the investors' permission, and (5) he was representing the investors' best interest.

1. Custodial Accounts

Brandon represented to investors that securities would be placed in a custodial trust account. In fact, as part of its scheme, Credit Bancorp maintained at least 37 accounts with a wide variety of financial institutions. Securities and funds were moved among these accounts, in many instances being margined or otherwise encumbered.*fn3

Brandon never saw, nor requested to see, any documents to confirm that the accounts were opened in accordance with the engagement letter and the credit facility agreement delivered to investors. He contends he relied on other evidence. First, he relied on documents provided by Blech, delivered to Brandon absent any signature, to confirm his representation that the accounts opened on behalf of investors were indeed custodial accounts and that he was the signatory on those accounts. Second, he claims he relied on conversations with Hall, an employee at Marsh, about the accounts. Yet Brandon conceded that Hall never told him that Marsh was reviewing the third party account-opening documents, and Hall testified that he never confirmed that the accounts were custodial accounts. Hall's testimony is supported by Robin, a Credit Bancorp salesman, who participated in telephone calls with Brandon and Hall. Hobin admits that neither Hall nor anyone at Marsh ever said they were monitoring investor accounts.

2. Sole Signatory

Brandon never verified the claim that he was the sole signatory on any investor accounts. Brandon took no steps to verify that third party institutions had actually received his signature to be used in Brandon's role as sole signatory. Brandon received and relied upon statements generated by Credit Bancorp regarding individual investor accounts, but Brandon never reviewed the underlying documents, including account statements provided by depository institutions, to confirm or validate the authenticity of the Credit Bancorp statements. Brandon takes the position that he relied on Marsh to monitor that he was the sole signatory, even though he admits that no one at Marsh told him they had undertaken this unusual task.

Moreover, Brandon eventually discovered, after attempting to obtain the return of a investor's securities from Bank of New York, that his signature alone was insufficient to secure the release of those securities. In fact, Bank of New York refused even to talk to Brandon about the account. After the second such incident (with a different investor and financial institution), Brandon amended the CBL engagement letter after one of his failed attempts to access a customer's securities. As discussed later, the amendment did little, if anything, to expand Brandon's authority over the accounts.

3. Power to return securities

Brandon represented that he had the power to return securities to investors when they requested it in writing. In fact, Brandon did not have the authority to withdraw any securities by himself. Instead, Brandon admits that an independent broker dealer assigned by Credit Bancorp had to execute the transaction. When a customer requested the return of his securities, Brandon would contact another Credit Bancorp employee, either Rittweger or Virginia Allen ("Allen"), who would then request the shares be withdrawn. This procedure was never disclosed to investors or prospective investors.

Brandon admits that, when he requested the return of shares from the Bank of New York, he learned that his signature alone would be insufficient to effectuate the release of the investor's securities and that it required some proof that Credit Bancorp had approved the transaction other than his approval. Brandon never communicated this fact to investors. As discussed in the next section, Brandon on at least three other occasions tried unsuccessfully to obtain the return of an investor's securities. Despite these failures, Brandon continued to represent that he had the power to return securities to investors.

4. Securities would not be sold, etc.

Brandon also promised investors that their securities would not be assets of Credit Bancorp and that they, the investors, would also retain ownership of the securities. Brandon claimed that this would protect investor securities even if Credit Bancorp went bankrupt, because creditors would not have any claim to the investor's securities. This also was not the case.

5. Representing investors' best interests

Brandon assured investors that he would represent their interests in the protection and ...

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