Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almd-2_02-cv-01372/USCOURTS-almd-2_02-cv-01372-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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IN THE DISTRICT COURT OF THE UNITED STATES FOR THE

MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

SECURITIES AND EXCHANGE )

COMMISSION, )

)

Plaintiff, )

)

v. ) CIVIL ACTION NO.

) 2:02cv1372-T

ASSET RECOVERY AND ) (WO)

MANAGEMENT TRUST, S.A., )

et al., )

)

Defendants. )

ORDER ON PRETRIAL HEARING

A pretrial hearing was held in this case on April 20, 2005, wherein the following proceedings

were held and actions taken:

1. PARTIES AND TRIAL COUNSEL

Plaintiff: Securities and Exchange Commission

Trial Counsel: Martin F. Healey

Asita Obeyesekere

Defendant: Frank R. Johnson

Trial Counsel: Alvin T. Prestwood

Tara S. Knee 

William L. Rodgers, Jr.

Prestwood & Associates, P.C.

350 Adams Avenue 

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Post Office Box 1910

Montgomery, Alabama 36102-1910

(334) 264-6401

(334) 834-4954 (facsimile) 

Defendant: Carlos Fernandez Alfaro

Trial Counsel: William Blanchard

Marion Chartoff

Defendant: Milton Vaughn

Trial Counsel:

Defendant: Asset Recovery and Management Trust

Trial Counsel:

COUNSEL APPEARING AT PRETRIAL HEARING

Plaintiffs: Securities and Exchange Commission

Martin F. Healey

Asita Obeyesekere

Defendants: For Frank R. Johnson:

Alvin T. Prestwood

Tara S. Knee

William L. Rodgers, Jr.

For Carlos Fernandez Alfaro:

William Blanchard

Marion Chartoff

For Milton Vaughn:

For Asset Recovery and Management

2. JURISDICTION AND VENUE

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The SEC seeks a permanent injunction and disgorgement of ill-gotten gains pursuant to Section

20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Section 21(d)(1) of the Exchange Act [15 U.S.C.

§ 78u(d)(1)]. The Commission seeks the imposition of civil monetary penalties pursuant to Section

20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C.

§ 78u(d)(3)].

This Court has jurisdiction over this action pursuant to Sections 20(d) and 22(a) of the

Securities Act [15 U.S.C. §§ 77t(d), 77v(a)] and Sections 21(d), 21(e) and 27 of the Exchange Act

[15 U.S.C. §§ 78u(d), 78u(e), 78aa]. In addition, Johnson and Vaughn reside in this District.

3. PLEADINGS

A. Complaint, Answers and Summary Judgment Motions

The SEC filed a complaint in this matter. Defendants Johnson and Vaughn filed answers and amended

answers. Defendant Fernandez filed a motion to dismiss the complaint, which was responded to and

opposed by the SEC. Defendant Johnson filed a motion for summary judgment, which was responded

to and opposed by the SEC. These motions were denied by this Court. Defendant Asset Recovery and

Management Trust, S. A. (“ARM”) has not filed an answer to the complaint. On December 6, 2004,

the SEC filed summary judgment motions against each of the defendants. On the same date,

defendants Johnson, Fernandez and Vaughn filed motions for summary judgment. All of the

summary judgment motions are pending.

B. Request to Defer Summary Judgment Motions Regarding Defendant Fernandez

Defendant Fernandez retained new counsel in February. Since that time the SEC and he have

engaged in settlement discussions. While no settlement agreement has been reached, the discussions

have progressed such that the SEC and defendant Fernandez jointly request that the Court defer

ruling on the summary judgment motion brought against Fernandez by the SEC, as well as the

summary judgment motion brought by Fernandez, so that the settlement discussions may continue.

The SEC does not request that the summary judgment motions against defendants Johnson, Vaughn

and ARM be deferred, and will be prepared to argue those at the April 20 conference.

C. Eleventh-Hour Filings By Defendant Johnson

Discovery in this case originally closed on December 15, 2003. The Court then extended the

time for completion of discovery to December 31, 2004, and then again to March 31, 2005. During

those discovery periods the SEC served defendant Johnson with a request for production of

documents. He declined to produce any, claiming Fifth Amendment protect ion. T he SEC

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propounded interrogatories to Johnson. He declined to answer, claiming Fift h Amendment

p rot ection. The SEC deposed Johnson, who declined to answer any questions claiming Fift h

Amendment prot ect ion. On April 14, 2005 defendant Johnson filed materials purportedly in

support of his own motion for summary judgment, and in opposition to the SEC’s motion. 

Those materials included an affidavit by Johnson and a statement by him that he is now willing to

testify at a deposition. 

This is pure gamesmanship by defendant Johnson. Having delayed providing documents or

answers to questions for more than two years, he now claims a willingness to testify. Allowing

defendant Johnson to flout this Court’s discovery orders, would only result in yet another significant

delay in the progress of this case. The SEC would be entitled to have documents produced by

Johnson; to have him respond to interrogatories; and, to take his deposition. After that, the SEC

would be entitled to determine whether additional discovery would be necessary as a result of

documents and responses received from Johnson. This would have the effect of rendering this

Court’s earlier discovery orders meaningless, and would delay for several months the trial in this

case.

Finally, in his papers Johnson makes the remarkable claim that he asserted Fifth Amendment

claims at the urging of an attorney who was representing a co-defendant in the case. At all times

during these proceedings Johnson was represented by the same attorneys who presently represent

him. The notion that Johnson was somehow misled by an attorney who was not representing him

while the attorneys who were representing him sat idly by is simply ridiculous.

At the pretrial conference the SEC will be prepared to argue for the exclusion of these and

any other late submissions offered by defendant Johnson. 

4. CONTENTIONS OF THE PARTIES:

The SEC contends as follows: 

a) Defendants Johnson, Vaughn, Fernandez and ARM committed securities fraud and

registration violations through a fraudulent “prime bank” scheme. The defendants raised more than

$900,000 from hundreds of United States investors, spirited the funds to various Costa Rican banks,

and ultimately appropriated it to their own use. The fraudulent scheme was developed by

defendants Johnson, Vaughn and Fernandez-Alfaro, and was operated through defendant ARM.

 

b) The fraudulent conduct by the defendants had its genesis in a prior “prime bank” fraud

scheme carried out by Johnson through the International Benevolent Fund Trust (“IBFT”). The

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IBFT scheme targeted more than 9000 investors, who collectively lost millions of dollars between

1996 and 1999. In 1999, the Office of the United States Attorney for the Middle Dist rict of

Alabama prosecuted Johnson for the IBFT fraud scheme, in the process effectively shutting down

IBFT and the fraudulent conduct related to it. Johnson, Vaughn and Fernandez then developed the

ARM scheme to replace and exploit the earlier fraudulent scheme.

c) T he ARM scheme targeted investors who were victims of prior fraudulent schemes,

including the IBFT victims. The defendants represented to these investors that ARM would assist

in recovering funds they had lost as a result of those earlier schemes to defraud. In addition to these

“recovery services,” ARM also offered investments in its own supposed high yield, offshore trading

programs, through unregistered securities which the defendants called “joint venture contracts.” The

defendants promised exorbitant returns on investments in these trading programs, claiming that they

would have access to international trading banks, the mythical “prime banks,” which they

represented typically were available only to a select few with millions of dollars to invest. In fact,

the “prime banks” and the trading programs were wholly fictitious, and the joint venture contracts

were valueless. After luring investors with the promise of recovering lost funds, and thereby earning

their trust, the defendants then enticed them into investing in ARM’s trading programs. From

November 1999 through July 2000 and beyond, the ARM scheme raised at least $900,000 from

hundreds of investors throughout the United States. After the defendants received investors’

monies they transferred it to their own use and control. At least four banks in Costa Rica were used

by the defendants to receive these transfers of funds.

d) In the course of offering and selling ARM’s unregistered prime bank securities, defendants

engaged in numerous misrepresentations and omissions of material fact concerning, among other

things, the use and safety of investor funds, as well as promised ret urns on their investments.

Defendants represented, for example, that investors’ funds would be used to trade debt instruments

known as “bank debentures” and “standby let t ers of credit” through “world trading banks.”

Investors were told that this trading activity conformed to practices set forth by the International

Chamber of Commerce, and would provide returns of between eight to 15 times t he principal

invested, with complete safety of principal. In reality, ARM’s trading programs did not exist and

the defendants stole the investors’ monies.

e) By engaging in the conduct described in this Complaint, defendants, directly or indirectly,

singly or in concert, have engaged in transactions, acts, practices, and courses of business that

constitute violations of sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (“Securities

Act”)[15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)] and section 10(b) of the Securities Exchange Act of

1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated

thereunder.

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The defendant Milton Vaughn contends the following:

Without waiving his Fifth Amendment rights against self incrimination, defendant Milton

Vaughn, pro se, adopts the filing by counsel for plaintiff and codefendants as to the witness

list, document list, and deposition excerpts in this case. He acknowledges the trial date of the

May 2005 term and all pending motions.

The Defendant Johnson contends the following:

a) On November 2, 1999, Johnson apprised IBFT investors that Asset Recovery and

Management Trust (hereinafter referred to as “ARMTrust”) had been hired to collect money

lost by IBFT investors and attested to ARMTrust’s ability to recover monies lost through

those investments. 

b) On December 1, 1999, Johnson terminated the contract between IBFT and ARMTrust.

A response was received on or about January 12, 2000 confirming this termination. At no

time was Johnson otherwise associated with ARMTrust or any of its services. Johnson did

not solicit or encourage anyone to make new investments in ARMTrust or any entity

associated with ARMTrust, but only sought to use ARMTrust or its associated entities to

recover funds lost by IBFT investors.

c) On or about July 1, 2000, Johnson was imprisoned at Maxwell Federal Prison in

Montgomery, Alabama. Defendant Johnson was released on or about August 20, 2001.

d) While he was in prison, Johnson’s name appears as treasurer for various entities for a

period of approximately three months. This action was not known to Defendant Johnson

until this pending litigation was commenced by the Plaintiff.

e) Through the course of discovery, several investors were deposed. The investors did not

know or communicate with Defendant Johnson about any new investments with ARMTrust.

Two of the investors stated that Defendant Johnson only contracted or had an arms-length

transactions with ARMTrust.

f) Defendant Johnson claims the following defenses:

 (a) general denial of all allegations;

 (b) false allegations;

 (c) statute of limitations;

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 (d) equitable doctrines of waiver, estoppel and laches;

 (e) no involvement with ARM or ARMTrust at any time;

 (f) denies the material averments of wrongdoings; and

 (g) denies violating Securities Regulations.

g) Defendant Johnson waived his privilege against self-incrimination upon meeting with

representatives from the U.S. Attorney’s Office, the Alabama Securities Commission and the

Federal Bureau of Investigation on March 11, 2005. It is also at this time that Defendant

Johnson produced documents, other than those that the Plaintiff had previously supplied the

representatives. The Defendant Johnson believes that the Plaintiff now has in its possession

copies of all documents that it has requested in discovery. If it does not have such copies

then Defendant Johnson will supply them.

Defendant Johnson has stated that he is willing to be deposed. It is the understanding of

counsel for Defendant Johnson that the Plaintiff is willing to delay matters for co-Defendant

Fernandez-Alfaro. This time might also be utilized for Defendant Johnson to be deposed.

Counsel for Defendant Johnson would like to correct any statements that may have been

misleading concerning Defendant Johnson’s asserting his right to claim protections under the

Fifth Amendment. At the time that Defendant Johnson first invoked his Fifth Amendment

privilege, Defendant Johnson was following the advice Mr. Irving Anolik who at that time

was his co-counsel. Over t he course of this litigation, Mr. Anolik has withdrawn from

representing Mr. Johnson in this matter. Therefore, defense strategies and plans have been

changed.

The Defendant Fernandez-Alfaro contends the following:

Defendant Fernandez-Alfaro contends that he did not commit and is not liable for securities

fraud or selling unregistered securities. He was not aware of the “prime bank” scheme that

ARMTrust allegedly operated and did not develop or participate in it. He did not sell or

assist in the selling of any securities. He did not know that ARMTrust was selling securities.

He did not communicate at all with investors and did not know what was communicated to

investors by ARMTrust, and accordingly made no representations or omissions of any kind

to investors. He did not control any investors’ funds, and only transferred corporate funds

when directed and paid to do so by Milton Vaughn or his associate James Huckabee. He did

not obtain any investor’s funds for his own use. 

Defendant Fernandez-Alfaro’s role in ARMTrust was limited to: performing legal work such

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as registering the corporation and making corporate changes; establishing bank accounts at

Mr. Vaughn’s direction to assist in the st art up of the corporation; and occasionally

facilitating payments and transfers only when so directed and paid to do so by Milton

Vaughn or his associates. Defendant Fernandez-Alfaro was named as an officer and was

granted one of one hundred shares in the corporation when the corporation was formed in

order to help Mr. Vaughn meet the legal requirements for incorporation. However, it is a

common and legal practice for an attorney to do this for a client seeking to incorporate.

Defendant Fernandez-Alfaro was an officer and shareholder in name only, and he resigned

his position in the corporation and transferred his one share to Milton Vaughn as soon as the

incorporation process was complete. Defendant Fernandez-Alfaro never actually acted as

an officer of the corporation, and has never directed, planned or participated in the planning

of any corporate activity. All of his activity related to ARMTrust was performed at the

direction of Milton Vaughn or his associate James Clifton Huckabee on a fee-for-service

basis, at reasonable market rates. 

In sum, Defendant Fernandez-Alfaro denies the allegations of wrongdoing and asserts that

his actions in relation to ARMTrust were insufficient to render him liable for any of the

Plaintiff’s alleged causes of action. He also asserts defenses of lack of scienter/intent, and

lack of a duty to register ARMTrust’s securities. 

Because the only moneys Defendant Fernandez-Alfaro received from ARMTrust and Milton

Vaughn were reasonable fees for services rendered to the corporation, he has no proceeds to

disgorge from the alleged ARMTrust scheme.

Defendant Fernandez-Alfaro has submitted two documents in opposition to summary

judgment under seal due to an earlier objection by Milton Vaughn to the admission of one

of the documents on the basis of attorney-client privilege, and an anticipated objection to the

other document by Vaughn on the same basis. Defendant Fernandez-Alfaro contends that

attorney-client privilege does not protect these documents and that he should be allowed to

use them to defend himself. 

The Defendant Vaughn contends the following:

The Defendant Asset Recovery Management Trust contends the following:

5. STIPULATIONS BY AND BETWEEN THE PARTIES:

Assuming a proper foundation is shown, the SEC will stipulate to the admission of any

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documents offered by any of the defendants.

It is ORDERED that:

(1) The jury selection and trial of this cause, which is to last five (5)

days, are set for May 23, 2005, at 10:00 a.m., in Courtroom 2E,

Frank M. Johnson, Jr. Courthouse Complex, One Church Street,

Montgomery, Alabama;

(2) The parties are to file their pre-trial briefs, proposed jury selection

questions, and proposed jury instructions by May 18, 2005;

(3) Each party shall have available at the time of trial, for use by the

court (the judge, the courtroom deputy clerk, and the law clerk),

three copies of the list of his or her exhibits;

(4) At least three days before trial, counsel are to contact the

courtroom deputy clerk about the procedures for pre-marking all

trial exhibits;

(5) Each party shall have available a sufficient number of copies of

each photostatically reproducible exhibit for each of the jurors,

opposing counsel, the courtroom deputy clerk, the law clerk, and

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the judge; and

(6) All understandings, agreements, and stipulations contained in this

pretrial order shall be binding on all parties unless an objection is

noted and filed with the court within seven (7) days from the date

of this order.

DONE, this the 21st day of April, 2005.

 /s/ Myron H. Thompson 

UNITED STATES DISTRICT JUDGE

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