Source: https://www.sec.gov/litigation/complaints/comp18166.htm
Timestamp: 2019-04-21 23:18:50+00:00

Document:
Complaint: Capital Holdings, L.L.C., et al.
Defendants Solely for Purposes of Equitable Relief.
1. This matter involves an ongoing nationwide prime bank scheme. Since at least September 2001, Capital Holdings, CHI and Smitty's (collectively, "the Capital Holdings entities"), have raised approximately $40 million, including funds from at least 600 investors in at least 31 states, using a vast promotional network of financial and estate planners and insurance agents to conduct sales.
2. The Defendants assure investors that the Capital Holdings entities will use their funds as collateral to facilitate leveraged trading of medium-term notes or other financial instruments issued by major banks and governments and that the investors will benefit by sharing in the trading profits.
3. The Defendants promise investors that monthly returns will range from 2% to 15%, and that their invested principal is guaranteed to remain intact in a "non-depleting custodial trust account."
4. In addition, the Defendants represent to investors in letters from an attorney and an insurance agent that investor funds held in the trust account are fully insured.
5. In fact, investor funds are not insured and have not been used in a note or financial instrument-trading program. Instead, the Capital Holdings entities have made regular withdrawals from the "non-depleting custodial trust account" to systematically steal investors' funds for the personal use of the Defendants, pay undisclosed sales commissions and make principal and interest payments to investors ("Ponzi" payments").
6. In March 2003, the United Sates Attorney's Office in Colorado executed a number of search and seizure warrants to obtain records and assets of the Capital Holdings entities. The Defendants are currently lulling investors by promising that their invested funds will soon be returned to them or that the Capital Holdings entities will resume the program once they are "cleared by" the USAO within "30 to 90 days."
7. By reason of these activities, each Defendant has violated Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 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] thereunder. Further, Defendants Capital Holdings, CHI, Smitty's, Monarch, NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers have violated of Section 5(a) and 5(c) of the Securities Act, and Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers have violated Section 15(a) of the Exchange Act. The Commission, in the interest of protecting the public from any further fraudulent activity, brings this action against Defendants seeking preliminary and permanent injunctive relief, disgorgement of illicit profits, plus accrued prejudgment interest and a civil monetary penalty. The Commission also seeks an asset freeze against each Defendant and each Relief Defendant, an accounting and other incidental relief.
8. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] to enjoin the Defendants from future violations of the federal securities laws. The Commission also seeks disgorgement of ill-gotten gains from the Defendants, plus prejudgment interest, and civil penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]. The Commission is also seeking disgorgement, plus prejudgment interest, from the Relief Defendants, regarding all funds derived, directly or indirectly, from the Defendants' fraudulent conduct.
9. This Court has jurisdiction over this action pursuant to § 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and § 27 of the Securities Exchange Act [15 U.S.C. § 78(aa)] and Title 28 U.S.C. § 1331. Defendants, directly and indirectly, made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business described in this Complaint.
10. Venue is proper because many of the transactions, acts, practices and courses of business described below occurred within the jurisdiction of the District of Colorado.
11. Capital Holdings, L.L.C., has operated as a Montana limited liability company since July 2002. Capital Holdings' offices are located in Denver, Colorado and its sole business appears to involve issuing and selling interests in a purported prime bank trading program. Capital Holdings is controlled by Defendant N. Schmidt. Capital Holdings' registered agent is Relief Defendant McLain. Capital Holdings raised at least $26 million in investor funds between July 2002 and February 2003. On March 7, 2003, the FBI served search and seizure warrants for Capital Holdings' records and seized its bank accounts.
12. Capital Holdings Int, L.L.C., has operated as a Nevada limited liability company since August 2002. CHI's offices are located in Denver, Colorado and its sole business appears to involve issuing and selling interests in a purported prime bank trading program. From January 2003 to February 2003, CHI received over $3.2 million, apparently from investors, deposited in a single bank account of which N. Schmidt is the sole signatory. N. Schmidt controls and operates CHI.
13. Smitty's Investments, L.L.C., has operated as a Colorado limited liability company since August 2000. Smitty's offices are located in Denver, Colorado and its primary business appears to involve issuing and selling interests in a purported prime bank trading program. Smitty's is controlled by N. Schmidt. Between September 2001 and February 2003, Smitty's received nearly $8.8 million in investor funds. The Nebraska Department of Banking and Finance found that Smitty's was conducting an unregistered securities offering and issued a Cease-and-Desist Order in March 2002 in connection with Smitty's offer and sale to Nebraska residents of investment interests in a purported "high return asset management program."
14. Monarch Capital Holdings, L.L.C., has operated as a Wyoming limited liability company since August 2002 and has offices in Denver, Colorado and Independence, Ohio. Monarch has been described to some investors as a "parent" company of Capital Holdings. Monarch is controlled by Defendants N. Schmidt and George Beros, who since September 2002 have deposited at least $10 million of investor funds into a Monarch bank account. In addition, Monarch coordinates the purported "trading" activities for the Capital Holdings program. Monarch's records and bank accounts, including an account holding the $10 million, were subject to the FBI's March 7th search and seizure warrants.
15. National Marketing Solutions, L.L.C., has operated as a Wisconsin limited liability company since May 1998 and as a Nevada limited liability company since February 2002, with its principal business office in Spokane, Washington. NMS purports to be a financial services and insurance marketing agency and has a joint marketing agreement with Defendant Heritage America. NMS acts as a "master agent" for the Capital Holdings entities by recruiting teams of insurance agents to solicit investments in the Capital Holdings trading program. NMS is not registered as a broker-dealer with the Commission or with any state. NMS is subject to a Desist and Refrain Order from the California Department of Corporations, dated September 27, 2002, for substantially assisting an unrelated fraudulent prime bank securities offering.
16. North West Group, L.L.C., has operated as a Nevada limited liability company since October 2002. Defendants Mitchell, Schlabach and Smith are the principals of NWG. From August 2002 to January 2003, NWG received from Capital Holdings over $2.4 million in commissions for NWG's sales of interests in the Capital Holdings trading program. At no time during the Capital Holdings offering was NWG registered as a broker-dealer with the Commission or with any state.
17. Heritage America is a not-for-profit organization headquartered in Palos Hills, Illinois. Heritage purports to offer estate planning and asset protection services through its network of representatives and has a joint marketing agreement with NMS. Some Heritage representatives solicited and enlisted investors in the Capital Holdings trading program. At no time during the Capital Holdings offering was Heritage registered as a broker-dealer with the Commission or with any state.
18. Norman E. Schmidt age 67 and a Denver, Colorado resident, controls Capital Holdings, CHI, and Smitty's. N. Schmidt is currently serving as president and a director of Monarch and, together with proposed defendant George Beros, operates and controls Monarch. At no time during the Capital Holdings offering was N. Schmidt registered as a broker-dealer with the Commission or with any state.
19. George Beros, age 36 and a Shaker Heights, Ohio resident, has been associated with Monarch since at least August 2002 and is currently serving as its CFO and a director. Beros assisted with the structuring and creation of purported non-depleting custodial trust accounts and is a signatory on Monarch bank accounts. Beros, through Monarch, purportedly has access to traders and trading programs. At no time during the Capital Holdings offering was Beros registered as a broker-dealer with the Commission or with any state.
20. Charles F. Lewis, age unknown and a Centennial, Colorado resident, is a principal of Capital Holdings. Lewis is purportedly N. Schmidt's "right hand man". Lewis frequently met with potential investors and completed and signed investor documents on behalf of Capital Holdings. In 2000, Lewis pled guilty to a Class IV felony in connection with his activities in a prime bank scheme in Arapahoe County, Colorado, and is currently serving a three year probated term. At no time during the Capital Holdings offering was Lewis registered as a broker-dealer with the Commission or with any state.
21. Terry Lorenzen, age unknown and a Highlands Ranch, Colorado resident, is a commissioned sales representative of Capital Holdings. Lorenzen invested in Smitty's in September 2001 and actively solicited new investors for Capital Holdings. He frequently communicated with investors, purportedly at the behest of N. Schmidt. Lorenzen also engaged in lulling activities following the FBI's March 7th search and seizure by phoning and e-mailing investors to assure them that the program would resume operations in the near future. At no time during the Capital Holdings offering was Lorenzen registered as a broker-dealer with the Commission or with any state.
22. Jeffrey D. Mitchell, age unknown and a Washington state resident, is a principal of NMS and NWG and received over $12,000 in commissions in a single month for "overrides" earned from 89 Capital Holdings investors. At no time during the Capital Holdings offering was Mitchell registered as a broker-dealer with the Commission or with any state. Mitchell is subject to a Desist and Refrain Order from the California Department of Corporations, dated September 27, 2002, for substantially assisting a fraudulent offering of unregistered securities unrelated to Capital Holdings.
23. John J. Schlabach, age unknown and a Spokane, Washington resident, is a principal of NMS and NWG and frequently met with potential Capital Holdings investors. Schlabach also acted as trustee for at least 24 trusts that invested funds in Capital Holdings. At no time during the Capital Holdings offering was Schlabach registered as a broker-dealer with the Commission or with any state.
24. Michael D. Smith, age unknown and a Spokane, Washington resident, solicited potential investors through telephone calls and personal meetings and provided potential investors with Capital Holdings offering materials and agreements since at least February 2002. Smith is currently the Chief Executive Officer of NMS and a principal of NWG. Smith is also purportedly the Northwest officer of Capital Holdings. Smith also acted as trustee for at least eight trusts that invested funds in Capital Holdings. At no time during the Capital Holdings offering was Smith registered as a broker-dealer with the Commission or with any state.
25. Michael Vallone, age unknown, is an Illinois resident and Executive Director of Heritage. Since at least March 2002, Vallone used proposed relief defendants Cambridge Ventures, Ltd., Cambridge Enterprises, L.L.C. and Regency Ventures, Ltd. to deposit substantial sums into the Capital Holdings program, for which he earned commissions. At no time during the Capital Holdings offering was Vallone registered as a broker-dealer with the Commission or with any state.
26. Roy R. Chavers, age 63, is a Plano, Texas resident and since at least July 2002 solicited investors for the Capital Holdings trading program as a representative of Heritage. Chavers has been registered as a broker in Texas since July 1996, but is not currently associated with any broker-dealer. During the Commission's investigation of this matter, in lieu of providing sworn testimony, Chavers asserted his Fifth Amendment privilege against self-incrimination.
27. Gary N. Herbert, age 69, is a Denver, Colorado resident and an attorney licensed to practice law in Colorado. Herbert prepared letters containing legal analysis of the nature of the non-depleting custodial trust account, allegedly maintained by Capital Holdings, and the ostensible insurance protection of investor funds. For example, Herbert states in these legal letters "The United States Federal Securities Investor Protection Corporation (SIPC) insures the first $500,000 in securities and up to $100,000 in cash in each account in the event of a bank failure." These letters were originally issued to at least McLain, Smith, and Vallone but were reproduced and distributed to potential investors as part of the Capital Holdings offering materials.
28. George A. Weed age unknown, is an Illinois resident and is licensed to sell insurance in the State of Illinois. Weed obtained certificates of insurance from Marsh USA, Inc. (agent for Wells Fargo Bank) and falsely represented to investors that these certificates insured investor funds.
29. Fast Track L.L.C. has operated as a Colorado limited liability company since November 2001 with offices in Denver, Colorado. Proposed relief defendant Jannice McLain is Fast Track's registered agent and the sole signatory on at least one Fast Track bank account that received over $4.8 million from Capital Holdings accounts between February 2003 and March 2003. Fast Track has filed the following trade names with the Colorado Secretary of State's Office: Smitty's d/b/a Jan Schmidt, Jan Schmidt d/b/a Smitty's Investments, Jan Schmidt d/b/a Capital Holdings Inc. and Jan Schmidt d/b/a Capital Holdings Int. Fast Track was subject to the FBI's March 7th search and seizure in which its records and bank accounts were seized.
30. Cambridge Ventures, Ltd., is a Belize company controlled by proposed defendant Vallone. Cambridge Ventures "earned" over $790,000 on its $1.5 million investment in Capital Holdings over the ten-month period, beginning in March 2002, according to a January 2003 Capital Holdings monthly statement. The statement also reflects total disbursements to Cambridge Ventures in excess of $550,000 (including the January 2003 disbursement) over the ten-month period, of which, at least $65,000 was wired to proposed relief defendant Cambridge Enterprises, L.L.C. per Vallone's instruction.
31. Cambridge Enterprises, L.L.C., is an Illinois limited liability company whose registered agent is proposed defendant Vallone. Cambridge Enterprises received at least $78,000 from Capital Holdings accounts since August 2002.
32. Regency Ventures, Ltd., is a Belize company controlled by proposed defendant Vallone. Regency "earned" over $110,000, including commissions, on its $15,000 investment in Capital Holdings over the seven-month period from June 2002 until January 2003. In addition, Regency received in excess of $100,000 in disbursements from Capital Holdings through January 2003, of which, at least $25,000 was wired to proposed defendant Heritage per Vallone's instruction.
33. Jannice M. McLain, age unknown, is believed to be the wife of proposed defendant N. Schmidt. McLain is the sole signatory on at least one Fast Track bank account that received over $4.8 million from Capital Holdings between February and March 2003. McLain is the registered agent for Monarch and Fast Track. During the Commission's investigation of this matter, in lieu of providing sworn testimony, McLain asserted her Fifth Amendment privilege against self-incrimination.
34. Scott Schmidt, age unknown, is the son of proposed defendant N. Schmidt. S. Schmidt is a signatory on one of Smitty's bank accounts and used investor funds to finance his NASCAR racing activities.
35. Since approximately September 2001, the Defendants have raised approximately $40 million, including funds from at least 600 investors nationwide by selling interests in an alleged prime bank trading program conducted by the Capital Holdings entities.
36. Beginning in about August 2002, a substantial portion of investor funds have been funneled to Monarch, purportedly to turn these funds over to a "trader." No investor funds were used in a trading program of any kind, legitimate or otherwise.
37. According to written offering materials and oral solicitations, investor funds are pooled into a "non-depleting custodial trust account" and used as leverage by a "trader," to facilitate the trading of prime bank instruments, yielding returns of between 2% and 15% monthly.
38. The Defendants represent that the investment is safe, because it is fully insured by The Securities Investor Protection Corporation ("SIPC"), Lloyd's of London and other private insurance. In fact these representations proved to be false, and Capital Holdings entities diverted a large amount of investor funds to make "Ponzi" payments and misappropriated them to pay personal expenses.
39. The Capital Holdings entities have solicited prospective investors in at least two ways. First, potential investors are solicited through direct contact with one of the principals or agents of the Capital Holdings entities, including Defendants N. Schmidt, Lewis, or Lorenzen. Second, the Capital Holdings entities rely upon a nationwide network of individuals, financial or estate planners and insurance agents affiliated with NMS, NWG or Heritage, to sell the Capital Holdings investment.
40. Defendants Mitchell, Schlabach and Smith head the NMS network and coordinate the solicitation activities of NMS representatives; the Capital Holdings entities compensate Mitchell, Schlabach and Smith for their sales efforts through payments to NWG. NWG received at least $2.4 million in commissions from Capital Holdings.
41. Defendant Vallone heads the Heritage network. He recruits and trains Heritage representatives throughout the country to sell the Capital Holdings investment. As a promoter, Vallone, through Relief Defendants Cambridge Ventures, Cambridge Enterprises and Regency, earned commissions from the Capital Holdings entities.
42. Promoters affiliated with NMS and Heritage have access to an established base of clients who already rely on them for comprehensive investment advice. In at least one instance, an investor was advised by a Heritage representative to liquidate an annuity and use the proceeds to invest in Capital Holdings.
43. In the Fall 2002, N. Schmidt invited groups of "select" financial and estate planners, and insurance agents associated with NMS and Heritage to a weekend in Las Vegas to learn about the Capital Holdings trading program and specifically how to incorporate the investment into their current portfolio of investment products available to their clients.
44. During the initial meetings with principals or promoters of the Capital Holdings entities, potential investors are presented with offering materials prepared by Capital Holdings that purport to explain the trading program. The written materials are generic in nature, with a single introductory paragraph that refers to the Capital Holdings entities. These offering materials typically demonstrate the ease of earning money in the trading program.
45. As is common in prime bank cases, the introductory paragraph disclaims the characterization of the Capital Holdings trading program as a securities offering. Promoters tell prospects that, by "leveraging" the investor funds it raises, Capital Holdings expands the scope and profitability of its trading program.
46. Promoters also represent that the trading program normally requires a minimum investment of $10 million, but that they are offering smaller participants an opportunity to aggregate their funds with other investors to achieve sums large enough to trade. There does not appear to be an established minimum amount for investment.
47. Some of the promoters routinely tell potential investors that they are "good Christians" trying to help out other "good Christian people."
48. Either during or after the initial meeting with a Capital Holdings principal or promoter, potential investors are invited to participate in the Capital Holdings trading program. Investors are required to execute a written investment contract, assuming alternative forms: "Cooperative Private Placement Agreement" ("CPPA"); "Private Placement Agreement" ("PPA"); or "Private Contract Agreement" ("PCA").
49. The term for each of the investment contracts is one year and 21 days, at which time the investor can either receive return of his principal or reinvest it with Capital Holdings.
50. According to the contracts, the investor earns a monthly percentage of the gross trading profits from the leveraged use of his or her investment proceeds. The amount of the monthly earnings was not guaranteed; rather the Capital Holdings entities were to use their "best efforts" to generate the promised returns. Purportedly, returns varied from 2% to 15% of the principal monthly. The Capital Holdings entities, principals and promoters were to receive trading profits above returns paid to investors.
51. After entering into a written investment contract, investors are instructed to deposit a check, or wire their funds directly, into a Capital Holdings account maintained at Wells Fargo Bank and later U.S. Bank and KeyBank. Upon receipt of the funds by Capital Holdings, Defendant N. Schmidt issues a letter to the investor acknowledging receipt of the funds and stating that the bank is holding the funds on behalf of the investor.
52. The descriptions of the investment are generally the same in the Defendants' oral presentations, written offering materials and written investment contracts providing scant explanation of the manner in which trading profits are generated. The Defendants lead investors to believe that: (i) investor funds will be placed in a fully insured, "non-depleting custodial trust account" and pooled with others to create leverage; (ii) the leveraged funds will be used to enter into trading programs for the trading of "medium term notes" or other financial instruments; (iii) the trading program is "secret" and all United States banks deny the existence of these programs or dismiss them as scams; and (iv) the leveraged trading will generate huge profits, flowing to investors at the rate of 2% to 15% monthly, beginning 45 days from the date of the investment.
53. Investors are told that their funds are secure and will not be disbursed from the trust account at Wells Fargo, but that they can request a disbursement when they receive their monthly statement, or, alternatively, allow the "earnings" to be re-invested in the purported trading program.
54. Some investors have also been told that profits from the "trades" will be used for humanitarian projects.
55. Each of the written investment contracts expressly provided for the deposit of investor funds into a fully insured non-depleting custodial account. However, once deposited these funds could be used in different ways depending on whether the investor executed the CPPA, PCA and PPA. The CPPA states that investor funds "will remain intact, the same value, and unbroken" and similarly, the PCA states that Capital Holdings "will maintain all funds in the Custodial Non-Depleting Trust Account. . . ." but the PPA provides that Capital Holdings "will use the funds contained in the Non-Depleting Custodial Account . . . exclusively for the purpose of trading in financial instruments. . . ."
56. In addition, the offering materials generally include an introduction to bank debenture trading programs, and an assertion that they are conducted under the guidelines of the International Chamber of Commerce ("ICC"), one of the hallmarks of a prime bank scheme. In an attempt to legitimize the Capital Holdings trading program, the CPPA, PPA and PCA each contains a provision referring to compliance with the ICC rules.
57. The Defendants have misrepresented and omitted material facts in connection with the Capital Holdings trading program. The misrepresentations and omissions go to the heart of the investment  the existence of the trading program, its profitability and the safety and use of investors' funds.
58. The Capital Holdings written offering materials include a discussion of how the trading program generates profits, and the role of "leveraging." The Defendants repeat portions of this discussion in their oral presentations. Monthly statements sent to investors by the Capital Holdings entities complete the deception with running tallies of "earnings" on the investors' allegedly constant principal.
59. In fact, no portion of the investors' deposits has ever been leveraged for use in any trading program. Capital Holdings never made any "profits" from trading activity, and investor funds were never used for anything other than "Ponzi" payments, sales commissions and personal expenditures by the Defendants.
60. Each of the Defendants knew or were reckless in not knowing that the "trading programs" they extolled for their extravagant profitability do not exist. Moreover, the Defendants have used, and are continuing to use investors' principal for their own purposes, in every instance, without the knowledge or consent of investors.
61. The Defendants promised and reassured investors orally and in writing that their investment in Capital Holdings is 100% safe for two alleged reasons: the inviolability of the non-depleting custodial trust account and, the "fact" that the trust account is insured by SIPC and other private insurance. These representations were blatantly false.
62. In support of these representations, the Defendants present investors with legal "opinions," certificates of insurance from well-known insurance firms and letters signed by an insurance agent  all prepared by Defendants Herbert and Weed. In numerous instances, copies of these letters were included in the offering materials handed out to potential investors.
63. The Capital Holdings entities reinforce the investors' belief in the safety of the investment by sending monthly statements to their investors consistently showing that their principal remains on deposit, intact, in their accounts. These documents falsely bolster the apparent validity of the Defendants' blatant misrepresentations.
64. The representations, including the legal "opinions" and monthly account statements, falsely represent the nature of the "non-depleting custodial trust account." For example, Herbert's letter states, twice, "the account is never depleted." The letter also states: "The amount deposited by you remains in that bank. It is there only as collateral for another transaction, and as such, under the terms of the account with the bank it cannot be moved, nor even touched." As the bank records indicate, these statements are completely false and have misled investors. In fact, the non-depleting custodial trust account in the Capital Holdings program has been regularly pillaged.
65. The Defendants, including Herbert and Weed, have also made the following material misrepresentations and omissions regarding purported insurance protecting investors' funds in the trust account: (i) the account is insured by the United States government through SIPC; (ii) the account is insured (privately through Wells Fargo bank) for unlimited amounts in the event of bank failure; (iii) the bank insures the investor against the bank's errors and omissions and a blanket bond covers losses caused by intentional misappropriation of assets or cash; (iv) each investor will receive personal certificates of insurance in the investor's name; and (v) Capital Holdings provides additional "overlay" insurance to increase the insurance coverage to $500 million.
66. Each of the above representations is false. First, SIPC, which is not an agency of the United States government, insures only brokerage accounts. In this case, all investors' funds were deposited into a bank account at Wells Fargo. Therefore, SIPC protection does not apply to those funds.
67. Moreover, Wells Fargo does not provide the insurance protection to Capital Holdings described in the letters from Herbert and Weed. Rather, the errors and omissions protection and blanket bond insure Wells Fargo (not Capital Holdings or its investors) in the event a Wells Fargo employee should cause Wells Fargo a loss. In addition, because the insurance protection is for the benefit of Wells Fargo as the insured, there is no reason for Wells Fargo to issue personal certificates of insurance in the name of each individual investor of its customer, Capital Holdings.
68. Defendant Weed also provided investors with certificates of insurance that purport to protect the investors' funds when, in fact, they provide no such protection, and he altered some of the Wells Fargo certificates of insurance to reflect the non-existent coverage. Finally, there is no evidence that Capital Holdings maintained any type of "overlay" insurance protection for the benefit of investors.
69. The Defendants represented to investors that their actual funds would not be used for trading  that, in effect, they would never be withdrawn (i.e., debited, transferred or pledged) but used only as leverage for the trading program. The monthly account statements sent to each Capital Holdings investor buttress this representation by consistently showing that the investor's principal is still in his or her account.
70. In fact, it appears that the Capital Holdings entities have frequently made undisclosed expenditures with investor's funds by: (i) transferring millions of dollars of investor funds from Wells Fargo, U.S. Bank, and KeyBank to accounts controlled by the Defendants and Relief Defendants, including hundreds of thousands of dollars sent offshore; (ii) using millions of dollars for "Ponzi" payments to investors; (iii) using millions of dollars to pay commissions; and, (iv) misappropriating investors' funds for their personal use.
71. The Capital Holdings' investors have never been advised of these expenditures.
72. According to bank records, the Capital Holdings entities used millions for "Ponzi" payments, returning to deceived investors what they believed were profits, but were, in fact, other investors' principal. The Capital Holdings entities appear to have no other source of cash with which to satisfy the investors' promised monthly earnings.
73. The Capital Holdings entities have also funneled at least $10 million to Monarch, and some of the remaining investors' funds have been used to pay personal and business expenses of Defendants N. Schmidt, S. Schmidt and McLain, including travel, hotels, meals, racecar entry fees, artwork, automobiles, S. Schmidt's mortgage, McLain's credit card accounts, trips to Las Vegas, Nevada, La Jolla, California and Maui, and S. Schmidt's NASCAR racing activities.
74. In addition, it appears that Lewis treated investor funds as his own personal funds. Documentation in investors' files includes Lewis' handwritten notes such as "I took the 50K. CL" attached to copies of two investor checks that total $50,000 and "I took the 10,000. CL" attached to copies of an investor's money orders that total $10,000.
75. Since the search and seizures warrants were executed on March 7th, the Defendants are lulling investors with false promises that the trading program soon will resume operations. Defendant Lorenzen, for example, has been communicating with investors by telephone and e-mail assuring them that the FBI's investigation will soon be concluded and that, at worst, investors will receive their principal. In a recent e-mail, Lorenzen even discusses the prospect of investors participating in a new program offering the same "benefits" as the old program.
76. Moreover, in a letter dated April 18, 2003, Defendant Smith likewise expresses his belief that Capital Holdings' funds will soon be released by the government, but also urges investors to "encourage" the government to return the funds and threatened legal action against the government if they are not returned quickly.
77. At least one promoter affiliated with Heritage represented to investors that the federal government froze Capital Holdings' accounts due to the U.S.-Iraq war and the Patriot Act. Specifically, the Heritage agent said that the federal government believed, erroneously, that Capital Holdings was sending money overseas to fund the "other side," but that investors should get all of their money back in approximately 90 days.
78. Plaintiff Commission repeats and incorporates paragraphs 1 through 77 of this Complaint by reference as if set forth verbatim.
79. Each Defendant directly or indirectly, singly or in concert with others, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails (a) have employed devices, schemes and artifices to defraud, (b) have made untrue statements of material facts and have omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and (c) have engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
80. As a part of and in furtherance of their scheme to defraud, the Defendants, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence and oral presentations which contained untrue statements of material facts and misrepresentations of material facts and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those set forth above.
81. The Defendants made these misrepresentations and omissions knowingly or with reckless disregard for the truth.
82. By reason of the foregoing, the Defendants violated and, unless enjoined, will continue to violate the provisions of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
83. Plaintiff Commission repeats and incorporates paragraphs 1 through 77 of this Complaint by reference as if set forth verbatim.
84. The Defendants directly or indirectly, singly or in concert with others, in the offer and sale of securities, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, have (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices or courses of business which operate or would operate as a fraud or deceit.
85. As part of and in furtherance of this scheme, the Defendants, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence and oral presentations which contained untrue statements of material fact and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those statements and omissions set forth above.
86. The Defendants made the above-referenced misrepresentations and omissions knowingly or with reckless disregard for the truth. Defendants, in addition, were negligent in connection with their offer and sale of the securities alleged in this Complaint.
87. By reason of the foregoing, the Defendants violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
88. Plaintiff Commission repeats and incorporates paragraphs 1 through 77 of this Complaint by reference as if set forth verbatim.
89. Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers are in the business of effecting transactions in securities for the accounts of others.
90. Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers made use of the mails and of the means and instrumentalities of interstate commerce to effect transactions in and to induce or attempt to induce the purchase of those securities.
91. Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers were not and are not registered with the Commission as brokers or dealers, as required by section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
92. By reason of the foregoing, Defendants NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers have violated and, unless enjoined, will continue to violate section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
93. Plaintiff Commission repeats and incorporates paragraphs 1 through 77 of this Complaint by reference as if set forth verbatim.
94. The Defendants Capital Holdings, CHI, Smitty's, Monarch, NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers, directly or indirectly, singly or in concert with others, have been offering to sell, selling and delivering after sale, certain securities and have been, directly and indirectly, (a) making use of the means and instruments of transportation and communication in interstate commerce and of the mails to sell securities, through the use of written contracts, offering documents and otherwise, (b) carrying and causing to be carried through the mails and in interstate commerce by the means and instruments of transportation such securities for the purpose of sale and for delivery after sale, and (c) making use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell such securities.
95. No registration statement has been filed with the Commission or are otherwise in effect with respect to the offer and sale of any securities described herein.
96. By reason of the foregoing, Defendants Capital Holdings, CHI, Smitty's, Monarch NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers violated and, unless enjoined, will continue to violate Section 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e (c)].
97. Plaintiff Commission repeats and incorporates paragraphs 1 through 77 of this Complaint by reference as if set forth verbatim.
98. The Relief Defendants received, directly or indirectly, funds and/or other benefits from the Defendants, which either are the proceeds of, or are traceable to the proceeds of, the unlawful activities alleged herein and to which they have no legitimate claim to these funds and property.
99. The Relief Defendants obtained the funds and property as part of and in furtherance of the securities violations alleged and under circumstances in which it is not just, equitable or conscionable for them to retain the funds and property, and accordingly, each it has been unjustly enriched.
100. The Commission is entitled to an order requiring that the Relief Defendant disgorge these funds and property plus prejudgment interest thereon.
Enter a Temporary Restraining Order restraining (i) each Defendant from continuing violations of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder; (ii) Defendants Capital Holdings, CHI, Smitty's, Monarch, NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers from continuing violations of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e (c)]; and (iii) Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers from continuing violations of Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
Enter a Preliminary Injunction enjoining (i) each Defendant from further violations of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder; (ii) Defendants Capital Holdings, CHI, Smitty's, Monarch, NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers from further violations of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e (c)]; and (iii) Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers from further violations of Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
Permanently enjoin each Defendant and their agents, servants, employees, attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
Permanently enjoin Defendants Capital Holdings, CHI, Smitty's, Monarch, NMS, NWG, Heritage, N. Schmidt, Beros, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers and their agents, servants, employees, attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e (c)].
Permanently enjoin Defendants NMS, NWG, Heritage, Lewis, Lorenzen, Mitchell, Schlabach, Smith, Vallone and Chavers and their agents, servants, employees, attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
Require a full and accurate accounting and an interim asset freeze of all assets of each Defendant and Relief Defendant until a full and accurate accounting can be made of all investor monies raised in this scheme and a determination made as to the disposition of those assets.
Enter an order requiring each Defendant and Relief Defendant to return to identified accounts in the United States of America all monies and liquid assets held outside this Court's jurisdiction.
Order each Defendant to disgorge an amount equal to the funds and benefits they obtained as a result of the violations alleged, plus prejudgment interest on that amount, and each Relief Defendant to disgorge an amount equal to the funds and benefits it obtained as a result, directly or indirectly, from the Defendants conduct alleged herein, plus prejudgment interest on that amount.
Such other and further relief as the Commission may show itself entitled.

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