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 relevant parties to this action as well as various prior
proceedings are described more fully in previous opinions of this court,
familiarity with which is presumed. See SEC v. Credit Bancorp, Ltd.,
138 F. Supp.2d 512, 517 (S.D.N.Y. 2001);
SEC v. Credit Bancorp, Ltd., 194
F.R.D. 457; SEC v. Credit Bancorp, Ltd., 93 F. Supp.2d 475 (S.D.N.Y.
2000); SEC v. Credit Bancorp Ltd. 96 F. Supp.2d 357 (S.D.N.Y. 2000); SEC
v. Credit Bancorp, Ltd. 103 F. Supp.2d 223; SEC v. Credit Bancorp, Ltd.,
109 F. Supp.2d 142 (S.D.N.Y. 2000); SEC v. Credit Bancorp, Ltd., No. 99
Civ. 11395, 2000 WL 968010 (S.D.N.Y. July 12, 2000); SEC v. Credit
Bancorp, Ltd., 191 F.R.D. 469 (S.D.N.Y. 2000); SEC v. Credit Bancorp,
Ltd., 2000 WL 1170136.
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
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
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.
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.
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 ...