S.E.C. v. Fife

Page 1

311 F.3d 1

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellee, v. Martin D. FIFE and Farouk Khan, Defendants, Appellants. Dennis S. Herula, Mary Lee Capalbo (aka Mary Lee Capalbo Herula), Seaview Development & Holdings, Ltd., Michael Clarke, Robert Wachtel, Johan Hertzog, and Charles Sullivan, Defendants, and David Ullom, Relief-Defendant.

No. 02-1640.

United States Court of Appeals, First Circuit.

Heard September 13, 2002.

Decided November 6, 2002.

COPYRIGHT MATERIAL OMITTED

Donald S. Zakarin, Pryor Cashman Sherman & Flynn LLP, with whom Matthew F. Medeiros, Little, Bulman, Medeiros, & Whitney, P.C. were on brief, for appellant.

Mark Pennington, with whom Giovanni P. Prezioso, Meyer Eisenberg, and Eric Summergrad were on brief, for appellees.

Before TORRUELLA, Circuit Judge, BETTY B. FLETCHER,^* Senior Circuit Judge, and STAHL, Senior Circuit Judge.

BETTY B. FLETCHER, Senior Circuit Judge.

Defendants-Appellants Martin D. Fife ("Fife") and Farouk Khan ("Khan") appeal the district court's order granting a preliminary injunction prohibiting further violations of securities law and a freeze against defendants-appellants' assets and other assets in defendants-appellants' possession. They contend that the district court erred and abused its discretion in finding that the Securities and Exchange Commission ("SEC") established a substantial likelihood of success in proving that defendants-appellants violated the anti-fraud provisions of the federal securities laws. We have jurisdiction pursuant to 28 U.S.C. § 1292. For the reasons stated below, we affirm the preliminary injunction and asset freeze against Fife and Khan.

I. FACTS AND PROCEDURAL BACKGROUND

This case arises from the alleged misappropriation of investor funds and the alleged fraudulent offering of securities in connection with an investment program operated by Fife through the entities Brite Business S.A., Brite Business Corporation and Seaview Development and Holdings, Ltd. ("Seaview").

A. The Investors

During 1999 and 2000, Michael A. Clarke ("Clarke") raised approximately $51.75 million from five investors under Brite Business, S.A. and later through Brite Business Corporation. Clarke promised extraordinary returns, such as generating a $20 million dollar profit in the first twelve banking days. The five investors, with the corresponding amounts invested, are: (1) William Britt, a U.S. citizen who invested through his entity, Beehive International, LLC ($10 Million); (2) Four Star Financial Services, LLC, a U.S. entity ($11.75 million); (3) Robert Burr, a U.S. citizen who invested through his entity, Trigon Capital ($10 million); (4) Rashad Mohamed Mahran Al Bloushi ("Al Bloushi"), an individual from the United Arab Emirates ($7.5 million); and (5) Rheaume Holdings, Ltd. ("Rheaume"), a British Virgin Islands entity ($12.5 million). Another investor, Malcolm Monlezun ("Monlezun"), invested $1 million in November of 2000.

B. Fife's Involvement

Fife agreed to manage and invest Brite Business funds, in return for which he would receive a commission. In the SEC investigation, Fife testified that his duties were to "administer the bank accounts that [he] had signatory power over and to develop a balance sheet enhancement program with leverage[d] funds sent in to be used for financial projects."¹ Fife's balance sheet enhancement program involved pooling investors' money and then leveraging the money by purchasing treasury bills in order to qualify for third world development projects. The profits from the investment in the third world development projects would then be distributed to the investors. Fife claimed that investors would make returns of between 30 and 100 percent per year. These returns, however, were not guaranteed because of risks involved.

In October 1999, Fife established a brokerage account at the Rhode Island branch office of Raymond James Financial Services, Inc. ("Raymond James"), a securities broker-dealer, in the name of Brite Corp. Fife was the signatory on the account, and Fife's acquaintance, Dennis S. Herula ("Herula"), was the designated registered representative. Approximately $44.5 million of the $51.75 million raised for Brite Corp. was deposited into this account.²

Mary Lee Capalbo ("Capalbo"), an attorney and the wife of Herula, established a separate brokerage account at Raymond James entitled the "Mary Lee Capalbo Esq. Special Client Account" ("Capalbo Account"). Capalbo was the signatory on this account. Fife transferred $15.5 million from the Brite account at Raymond James into the Capalbo Account at Raymond James. These transfers occurred through five transactions between April 2000 and September 2000.³ After these transfers, $29 million remained in the Brite Account at Raymond James under Fife's supervision.

Of the $29 million remaining in the Brite account at Raymond James, $27.3 million was returned to investors.⁴ Approximately $20.5 million in principal plus promised return allegedly has been lost. Al Bloushi has received only $200,000 of his $5 million investment, and Rheaume has received only $4,500 from its $12.5 million investment.⁵ As of September 18, 2000, all of the investment money under Fife's control in the Brite Account at Raymond James had been transferred out. The money deposited in the Capalbo Account was used to purchase shares in a money market mutual fund. An additional investor, Monlezun, invested $1 million raising the total amount of investor funds in the Capalbo Account at Raymond James to $16.5 million.⁶ Monlezun received only $125,000 from his $1 million investment.

From June 2000 to November 2000, $8 million of Brite investor funds was paid to various entities including Seaview,⁷ Tamini,⁸ Sullivan,⁹ Puffin,¹⁰ Brite, Commonwealth, Four Star,¹¹ and Al Bloushi. Additional transfers in the amount of $8.6 million were made to the Mary Lee Capalbo "Special Client Account" at Citizens Bank.

C. Rheaume Agreement

Brite entered into an agreement in March 2000 with Rheaume Holdings ("Agreement"). The Agreement stated that "`Brite' will attempt to pay benefits on a best efforts basis at a minimum average over a 90 day period of 10% per week of the amount invested." According to the Agreement, the first payment should have occurred twelve international banking days from the receipt of Rheaume's deposit by Raymond James.

On May 8, 2000, Fife wrote a letter to Rheaume ensuring "the safety, security, monitoring and auditing of our client funds is and always will be my primary function. So without hesitation I state to you that absolutely your deposit is safe, secure, unencumbered, will not be invested without your authorization, can not be moved, or withdrawn without your approval." With regard to the enhancement program, Fife stated, "I myself have been successful for the past six months doing the same placement of funds." The letter further represented that there would be "no risk of loss" and that Rheaume would receive benefits from its investment in the next two weeks.

Almost immediately after Rheaume's investment was in Fife's control, Fife began transferring funds from the Brite Account at Raymond James into the Capalbo Account at Raymond James. These funds were transferred without Rheaume's knowledge or authorization. The funds in the Capalbo Account were invested in securities without Rheaume's knowledge or authorization, and funds in the Capalbo Account were thereafter transferred into another Capalbo Account at Citizen's Bank without Rheaume's knowledge or authorization. Moreover, Fife no longer had direct control over the investments since he was not a signatory on the accounts.

In July 2000, Robert Curl ("Curl"), Rheaume's representative, requested a report of the balance in Rheaume's account. Fife forwarded letters from Herula to Curl on Raymond James letterhead reporting Rheaume's investment plus accrued interest in the Brite Account at Raymond James. However, these reports were false since the funds in the Brite Account were nearly depleted. After several months, Curl requested the return of Rheaume's funds. Fife told Curl that the money could not be returned because Raymond James worried about large sums of cash coming in and going out of an account in a short period of time. This statement was false.

A few months later, Fife suggested to Rheaume that it transfer its $12.5 million investment plus accrued interest in the Brite Account at Raymond James to an account at Charles Schwab in order to facilitate a "swift return." In December 2000, Fife advised Curl that the money was transferred to a Capalbo Account at Charles Schwab. Charles Schwab account statements were forwarded to Rheaume by Fife.

Throughout 2001, Fife, Herula, and Capalbo sent Curl forged Charles Schwab account statements showing upwards of $59 million in the account. Curl was told that Rheaume's investment plus accrued interest was now pooled with other investor funds in the Capalbo Account at Charles Schwab, and these funds would eventually be transferred to Fife's trading program at Seaview. These funds, however, were never moved to Charles Schwab.¹²

After these funds were allegedly placed in the Charles Schwab account, Curl again requested the return of Rheaume's funds. Fife then advised Curl that the National Association of Securities Dealers ("NASD") had frozen the account. The NASD, however, never froze this account. Fife offered to use Rheaume's money in other finance deals once the NASD released the money in the Charles Schwab Account. Fife stated that he would be able to use Rheaume's money to generate excellent returns on other project finance deals.

D. Seaview

Khan and Fife were business partners in Seaview. Seaview was loaned $195,000 of Brite's investor money from Fife. Seaview's start-up costs were obtained from Brite. When Brite dissolved, Brite's money was moved into an account at Seaview. Seaview offered the same type of balance sheet enhancement program that Fife...