SEC Enforcement Defense Team for the "Middle Market"

Not all companies or individuals that our Firm represents should be or can be identified--including the outcome of an SEC or other securities regulatory investigation. Our Firm routinely handles "informal inquiries" initiated by the SEC as well as private administrative proceedings conducted by FINRA with respect to member firms and registered representatives of broker-dealers.

To the extent our defense team is called upon to represent alleged securities violators in public proceedings, such as a United States District Court, our Firm routinely publishes limited information about these "Related Cases" much like the SEC publishes press releases on its website, ostensibly for the purpose of publishing mere unproven allegations of securities violations on the World Wide Web. We view this as fair and balanced in light of the serious negative impact that the SEC's press releases have on alleged securities violators in the modern world of Internet access. 

Our clients in this SEC civil enforcement action have been defending this case since November 2002, at which time the SEC brought a civil enforcement action alleging a variety of securities laws violations in the clients’ successful management of a series of 28 registered limited liability partnerships. Over $25,000,000 was raised in reliance on a financial instrument structure that was already being successfully used by large competitors in the industry and under a structure that was consistent with four separate legal opinions by reputable law firms. 

The unique characteristic about this case is that the clients have prevailed over the SEC not once, not twice, but three times. Initially the U.S. District Court—Northern District of Georgia denied the SEC’s request for a preliminary injunction after a full hearing on the merits; then after a trial on the merits two years later, again the Court ruled in favor of Merchant Capital. The SEC, having rights to appeal their losses, did so by filing their appeal with the Eleventh Circuit Court of Appeals, which reversed and remanded the case back to the trial court for further proceedings. After those further proceedings, the SEC lost the third time and promptly filed a second appeal.

The case is awaiting decision on appeal so no one can predict when this marathon case will conclude.  Important in this case is that a well respected, senior Federal Judge found on multiple occasions that Merchant Capital had not engaged in securities fraud or deception and therefore the SEC was not entitled to any relief and dismissed the case. [See: SEC v. Merchant Capital, LLC--U.S. District Court, Northern District of Georgia--Case No: 1:02-cv-2984-MHS]

Although not an easy case to settle, our Firm has recently negotiated a settlement in principal with the SEC that will enable the company to “create a life after an SEC enforcement action.” The SEC commenced this case making bold, sweeping allegations that investors were defrauded; that the company had no bona fide alternative energy technology as represented to the small core group of dedicated shareholders that have financed the growth of the company to date.

After examining the development of certain proprietary technology and inventions by the company, but more importantly realizing that of 25 shareholders, perhaps only 1 shareholder was unhappy—the SEC has been willing to move towards a sensible resolution to its claims that should permit the continued growth and development of the company’s very exiting alternative energy products.

This is one case where the SEC “shot first and asked questions later” in terms of the commencement of the civil enforcement action. Perhaps the end result is a better appreciation for how issuers must conduct their private placement offerings and for the SEC, not to jump to quick in commencing enforcement actions where the facts have not yet been adequately developed. [See: SEC v. Aerokinetic Energy Corporation, et al; U.S. District Court—Middle District of Florida; Civil Case No. 8;08-cv-1409-T-27TGW]

The SEC filed its complaint on October 2, 2008 against two companies and the two principals of each company, contending that the issuance of a series of promissory notes to over 100 lenders constituted an unregistered public offering. The SEC also has alleged that the promissory notes were offered to the lenders though various allegations of fraud and misrepresentation. Or Firm’s clients have steadfastly denied any wrongdoing and maintain that the financial structure of the offering of the notes was expressly developed and approved by a securities law firm retained by the defendants to provide advice and services to assure compliance with Federal securities laws. 

At the request of the SEC, the U.S. District Court has appointed a receiver for the two businesses and has entered asset freeze orders which essentially shuts down the Nations Warranty business, unless the receiver chooses to continue to operate the business. It seems that so far, the losers in this case could be the lenders or purchasers of the promissory notes in that Nations Warranty is not likely to have sufficient revenues or assets from which the lenders can get repaid. This is in large part due to the reality that the receivership costs money and will continue to cost money that would otherwise become available for repayment of the notes.

In the first month of the receivership along, fee petitions have been filed by the receiver requesting almost $80,000 dollars in compensation, legal fees, costs of the receivership and fees charged by the receiver’s separate business venture that provides services and staff to SEC receivers appointed at the request of the SEC. Like so many other similar situations, it would seem that the only lack of judgment perpetrated by the defendants in this case was consulting with the wrong securities lawyer. [See SEC v. Nations Warranty et al--U.S. District Court, Northern District of Georgia; Civil Case No.: 1:08-cv-3097-BBM]