Source: https://www.sec.gov/litigation/complaints/comp18056.htm
Timestamp: 2019-04-19 12:18:52+00:00

Document:
Complaint: Jack Calvin et al.
This matter involves a fraudulent offering of unregistered securities in connection with GBS, a sham "letter of credit trading program" promoted by Calvin. Several other people helped Calvin carry out his fraudulent offering scheme, including Nernoff, Proffitt, Adams and Timson. The letter of credit trading program did not exist. The scheme, initiated by Calvin, raised approximately $2.8 million from approximately 120 investors by promising returns of up to 20% per month. Virtually all of the money raised was misappropriated by Calvin and his co-schemers for their personal benefit.
The GBS letter of credit trading program described to investors had the typical features of prime bank-type investment frauds. The program purported to generate profits from trading letters of credit and promised exorbitant rates of return with low risk. The representations were false because such high yield trading programs do not exist. Instead of investing the funds in the purported trading program, Calvin used the offering proceeds for his personal benefit and to pay commissions to Nernoff, Proffitt, Adams, Timson and others.
Relief defendant Shannon Calvin received approximately $139,150 in GBS investor funds to which she has no legitimate claim.
Accordingly, the Commission seeks (i) entry of permanent injunctions prohibiting the defendants from further violations of the relevant provisions of the federal securities laws; (ii) disgorgement of defendants' and the relief defendant's ill-gotten gains and unjust enrichment, plus prejudgment interest; (iii) the imposition of a civil monetary penalty against each defendant due to the egregious nature of their violations; and (iv) other equitable relief.
The Commission seeks a permanent injunction and disgorgement pursuant to Section 20(b) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §77t(b)] and Section 21(d)(1) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78u(d)(1)]. The Commission seeks the imposition of a civil monetary penalty 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]. Venue is proper in this District because a significant amount of the defendants' wrongful conduct occurred or was centered here.
In connection with the conduct described in this Complaint, Calvin, Nernoff, Proffitt, Adams and Timson directly or indirectly made use of the mails or the means or instruments of transportation or communication in interstate commerce.
Calvin, age 62, of Ozark, Missouri, was the primary promoter of the GBS scheme. In a biography provided to potential GBS investors, Calvin claimed to have owned four unnamed companies, including one in the financial services industry, two "automotive aftermarket" companies and a corporate training company. Calvin was licensed to sell insurance in Missouri until his license lapsed on January 13, 2000.
Calvin d/b/a Growth Benefit Systems. Calvin used the fictitious business name Growth Benefit Systems. The name was registered with the Missouri Secretary of State in August 1998. Although referred to in offering materials as a corporation, it appears that it was never incorporated.
Nernoff, age 60, of Roslyn Heights, New York, has an associates degree in culinary arts and a real estate broker's license. He works part-time for Dunkin' Donuts and has been a representative for numerous direct marketing companies selling, among other things, cosmetics, personal alarms and vacations. He serves as a deacon of his Baptist church.
Proffitt, age 66, of Tomkinsville, Kentucky, is a retired salesman. Proffitt has sold a variety of products including burial insurance, water softeners and a product known as "Doctor's Cream" that purportedly alleviates arthritis pain.
Adams, age 59, of Sandwich, Massachusetts, is a commercial airline pilot. Although born in Kansas, in his initial response to a Securities and Exchange Commission subpoena Adams filed a "Declaration of Non-Juristic Status" in which he purportedly "expatriated" from the United States and declared that he was no longer a U.S. citizen. Ultimately, Adams appeared for testimony and produced documents.
Timson, age 45, of Greenlawn, New York, is a licensed physician who practices in Huntington, New York.
Calvin began soliciting investors for GBS in 1999. In offering materials that he distributed, Calvin represented to potential investors that the GBS investment program generated returns by trading bank debenture instruments or letters of credit of "top rated banks." According to Calvin's GBS offering materials, investor funds would be pooled to purchase a $250,000 letter of credit that would be used in a trading program designed to yield 20% per month for thirteen months. The investors' principal supposedly would be guaranteed by a promissory note, which provided an 8% return, payable in thirteen months. In offering documents, Calvin represented that his program "is as risk free as any I have seen," and "secure" because "every purchase is made with a pre-arranged exit profit." He further represented that the bank guarantees "are low risk" and that "To date no losses have been experienced by GBS." Calvin represented in the offering documents that investors would receive their principal plus interest at the end of the thirteen-month investment term.
All of Calvin's representations were false. Bank trading programs such as those described in the offering materials do not exist and the specific program described by Calvin to potential investors did not exist. Calvin did not place investors' funds in any purported trading program. About one third of the investors' funds were used to pay commissions to salespeople, including Nernoff, Proffitt, Adams and Timson, who solicited GBS investments. Calvin spent most of the remaining investor funds on luxury purchases and living expenses for himself and his daughter, Shannon Calvin.
In early 1999, Calvin contacted Proffitt, a retired salesman, by telephone. Calvin, who had no prior relationship with Proffitt, sought his assistance with finding investors for the GBS program. Proffitt introduced Calvin to Nernoff by telephone. Calvin held himself out as a Christian who shared Nernoff and Proffitt's religious beliefs. Calvin informed them that he had been successfully involved in the GBS program for three years and had been handling similar investments for fifteen years. He provided them with a biography that stated that he "[p]rovide[d] information and facilitate[d] entry into private placement FED (sic) approved trade programs for corporate entities and private sector clientele." The biography also represented that Calvin had owned a corporate training company and founded a "major financial service company."
Calvin gave Nernoff and Proffitt offering documents describing the GBS program, and orally repeated the representations in the documents. Calvin directly and through his agents represented to investors (a) that returns were generated by pooling investor funds to generate a "block" of $250,000, (b) that the block would then be invested overseas in letters of credit, and (c) that he would guarantee investors' funds with promissory notes backed by divisible interests in a bank-guaranteed instrument that would pay 8% per year. Calvin and his agents told investors to expect 20% per month from the trading program returns. The investors were required to keep their principal invested for the duration of the thirteen-month term of the investment. Investors could choose to receive the returns on their investment each month.
Nernoff's only effort to verify Calvin's statements about the GBS program was to contact a reference provided by Calvin, who informed him that she had doubled a $400,000 investment with Calvin in a previous program in thirty days. Nernoff represented to potential investors that Calvin was an "honest individual" and a "great person" and referred to Calvin's religious beliefs to support the veracity of the offering statements.
Nernoff acted as Calvin's liaison to investors and handled most of the bookkeeping for Calvin. Nernoff received as compensation 2.5% of all investors' purported earnings. In 2001, Nernoff received an additional payment of $15,000. Nernoff refused to provide Calvin's contact information to investors. Investors were thereby impeded from doing their own due diligence and instead relied on Nernoff's statements about Calvin's honesty and integrity and the success of GBS.
Nernoff required that investors seeking to participate in the GBS program sign a "nondisclosure" agreement undertaking to keep the GBS program confidential and a "letter of intent" stating how much the investor was going to invest in the program. Nernoff then forwarded this information to Calvin. Investors were directed by Nernoff to wire their funds directly to a bank account in Springfield, Missouri, in the name of GBS. Investors also had the option of sending a cashier's check to Nernoff, who would then forward the check to Calvin.
After an investor's funds were deposited, Calvin drafted and signed a contract with the investor containing the investment terms. Calvin also signed a promissory note from GBS committing to repay the investor his or her invested principal plus 8% in thirteen months. Calvin sent the contract and promissory notes to Nernoff, who forwarded them to the investor.
At Calvin's direction, Nernoff prepared and mailed monthly statements to investors, showing the profits purportedly made to date on their investments based on figures provided by Calvin.
Nernoff recruited acquaintances that he knew from his prior participation in multi-level marketing programs to solicit investments in GBS. The GBS program paid salespeople 2.5% of all purported profits on investments made by individuals they directly recruited. Nernoff was responsible for calculating commission payments. Nernoff provided the calculations to Calvin who then directed his daughter to write commission checks. Nernoff recruited seven investors directly and more than one hundred through salespeople he recruited. He received a total of $229,251 in commissions. Altogether, GBS salespeople received commissions of at least $775,000, or 27% of the $2.8 million offering proceeds, in total.
Proffitt began soliciting investors for GBS during the summer of 1999 after he introduced Nernoff to Calvin. Proffitt made the initial pitch to the investors using information provided to him by Calvin, and referred the investors to Nernoff, who had the investor sign certain agreements, including a confidentiality agreement. From that point forward, Nernoff handled the logistics of enrolling the investor in the GBS program. Using several acquaintances as solicitors, Proffitt raised almost $750,000 for GBS from 35 investors. Proffitt received over $200,000 in commissions, 50% of which he claims to have shared with the salespeople that he recruited.
Despite having very little knowledge about Calvin and his trading programs, Proffitt took no steps to verify that Calvin's programs were legitimate. Proffitt used their common faith as the primary basis for vouching for Calvin and GBS, and represented to at least one of his salespeople that he knew Calvin personally, that Calvin was Christian and that if "you put the money in...he guarantees you a return of 8% and it should earn more than that."
Proffitt previously lost money in a trading program that was similar to GBS. He did not disclose information about that loss to investors. Instead he told them that he believed that it was a "risk worth taking."
Nernoff recruited Adams, whom he had met through their mutual involvement in direct marketing programs, to solicit investors. Adams raised approximately $200,000 for GBS from nine investors and received commissions in excess of $50,000. He passed on Calvin's offering materials to potential investors and described the program to them. Adams falsely represented to at least one investor that he had hired a private investigator to do a background check on Calvin and Nernoff and "both came out clean." He falsely represented to another investor that the program was "riskless."
Adams had no reasonable basis for vouching for the GBS program. As of the time he was soliciting investors, Adams had not met Calvin, and was merely an acquaintance of Nernoff. Adams made no reasonable attempts to check the veracity of the representations about the GBS program that he passed on to potential investors. Adams had a substantial basis upon which to doubt that the GBS program was legitimate. Adams and one of the investors he solicited for GBS had lost money in a previous prime bank scheme and its promoter had been criminally prosecuted. Adams did not disclose this fact to all of his investors.
Adams set about ensuring that he himself would get returns from GBS before the scheme collapsed by requesting regular, early withdrawals of his "returns" from his $5,000 investment. Adams also collected substantial commissions from investments made by others. Adams' receipts from the program totaled $71,386: $20,000 from purported returns on his investment and at least $51,386 in commissions.
Nernoff also enlisted Timson, a practicing physician, to sell GBS investments. Like Adams, Nernoff knew Timson from their mutual involvement in multi-level marketing programs. Timson invested no money in GBS himself but raised approximately $115,000 from four investors and received commissions of approximately $58,151.
Timson verbally passed on to potential investors the representations about the GBS program contained in Calvin's offering materials. Timson told one investor that there was a protection of principal, an 8% per year guaranteed return and a chance for higher returns. Timson did nothing to check whether there was any basis for these representations and did not understand how the promised returns would be generated. Further, Timson did not take any steps to be sure that GBS was legitimate, because "I wasn't choosing to be an investor."
During the period from May 1999 through March 2001, investors deposited approximately $2.8 million into that account. GBS paid approximately $775,000 of these funds as commissions to salespeople. Salespeople who invested also received approximately $53,000 in purported profits. Of the approximately 120 investors, 14 received payments of purported profits totaling approximately $267,910. Most investors lost the funds that they invested.
Calvin used investor funds for his and his daughter's personal benefit. He bought a house, boat, car, motorcycle, hot tub, and furniture that together were worth approximately $400,000. Calvin paid approximately $5,000 of his daughter's cosmetology school tuition with GBS investor funds. Calvin also transferred funds to his daughter in the amount of approximately $134,000, to which she has no legitimate claim. Calvin and his daughter also withdrew at least $400,000 in cash from the GBS account.
The term of the first GBS thirteen-month investment ended in July 2000. Rather than paying investors their principal and promised returns, Calvin urged them to "roll over" their investments and orally promised even higher returns of 80% per month. When some investors demanded their funds, Calvin initially made the requested payments.
In April 2001, however, Calvin ceased making payments to investors and stopped making monthly commission payments to salespeople. During the following twelve months, Calvin repeatedly sent faxes to Nernoff for dissemination to investors, assuring investors that payments were about to be made. Calvin appealed to the investors' religious beliefs in his lulling statements by making biblical references in his correspondence to Nernoff and the investors. When investors continued their demands, Nernoff arranged conference calls with Calvin. Nernoff and Calvin also participated in morning prayer meetings with investors by telephone. In addition, Nernoff and several investors have for more than a year maintained a ritual of a morning telephone prayer meeting to pray for the return of their funds. They refer to themselves as the "Moses Team."
Calvin made numerous excuses for the delay in remitting investor funds and always insisted that the funds were about to be paid. These explanations included his own purported illness, the holiday season and supposed difficulties in receiving money from abroad due to the World Trade Center attacks. Through at least the summer of 2002 Calvin continued to assure investors that their funds were about to be paid.
Plaintiff repeats and realleges Paragraphs 1 through 38 above.
Defendants Calvin, GBS, Nernoff, Proffitt, Adams and Timson, directly and indirectly, intentionally, knowingly or recklessly, in the offer or sale of securities by the use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails: (a) have employed, or are employing devices, schemes, or artifices to defraud; (b) have obtained, or are obtaining 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 the light of the circumstances under which they were made, not misleading; and (c) have engaged, or are engaging in transactions, acts, practices, or courses of business which operate, are operating or are about to operate as a fraud upon purchasers of securities as set forth above, in violation of Section 17(a) of the Securities Act [15 U.S.C. §77q(a)].
Plaintiff repeats and realleges paragraphs 1 through 40 above.
Defendants Calvin, GBS, Nernoff, Proffitt, Adams and Timson, directly or indirectly, intentionally, knowingly or recklessly, by the use of means or instrumentalities of interstate commerce or of the mails: (a) have employed, or are employing devices, schemes, or artifices to defraud; (b) have made, or are making untrue statements of material facts or have omitted, or are omitting to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; and (c) have engaged, or are engaging, in acts, practices, or courses of business which have operated, or are operating as a fraud or deceit upon persons, in connection with the purchase or sale of securities as set forth above, in violation 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.
Plaintiff repeats and realleges Paragraphs 1 through 42 above.
The investment contracts offered and sold by defendants Calvin, GBS, Nernoff, Proffitt, Adams and Timson are "securities" as that term is defined in Section 2(1) of the Securities Act [15 U.S.C. § 77b(a)] and Section 3(a)(10) of the Exchange Act [15 U.S.C. § 78(a)(10)]. No registration statement has been filed with the Commission, or been made effective, with respect to the offering.
Defendants Calvin, GBS, Nernoff, Proffitt Adams and Timson, directly and indirectly: (a) have made, are making or are about to make use of the means or instruments of transportation or communication in interstate commerce or of the mails to sell securities through the use or medium of a prospectus or otherwise as to which no registration statement has been filed with the Commission and for which no exemption from registration has been available; (b) for purposes of sale or delivery after sale, have carried and/or caused, are carrying and/or causing or are about to carry and/or cause to be carried through the mails or in interstate commerce, by means or instruments of transportation, securities as to which no registration statement has been in effect and for which no exemption from registration has been available; and (c) have made, are making or are about to make use of means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell through the use or medium of a prospectus or otherwise, securities as to which no registration statement has been filed and for which no exemption from registration has been available.
By reason of the transactions, acts, practices and courses of business set forth herein, defendants Calvin, GBS, Nernoff, Proffitt, Adams and Timson violated, are violating or are about to violate Sections 5(a) and (c) of the Securities Act [15 U.S.C. § 77e(a) and (c)].
Plaintiff repeats and realleges Paragraphs 1 through 46 above.
Defendants Calvin, GBS, Nernoff, Proffitt Adams and Timson, directly or indirectly: (a) are each a natural person not associated with a broker or dealer which is a person other than a natural person (other than a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange); (b) have made or are making use of the mails or of the means or instrumentalities of interstate commerce to effect transactions in, or to induce the purchase of, securities (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills); and (c) were not or are not registered as a broker-dealer in accordance with Section 15(b) of the Exchange Act [15 U.S.C. §78o(b)].
As a result, defendants Calvin, GBS, Nernoff, Proffitt, Adams and Timson have violated, are violating and, unless enjoined, will continue to violate Section 15(a) of the Exchange Act [15 U.S.C. §78o(a)].
The Plaintiff repeats and alleges Paragraphs 1 through 49 of the Complaint above.
As set forth in Paragraph 35 above, relief defendant Shannon Calvin has received funds and property from one or more of the defendants, which are the proceeds, or are traceable to the proceeds, of the unlawful activities of defendants, as alleged in Paragraphs 1 through 49, above.
Relief defendant Shannon Calvin has obtained the funds and property alleged above as part of and in furtherance of the securities violations alleged in Paragraphs 1 through 49, above, and under circumstances in which it is not just, equitable or conscionable for her to retain the funds and property. As a consequence, relief defendant Shannon Calvin has been unjustly enriched.
For Calvin, GBS, Nernoff, Proffitt, Timson and Adams, Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
Requiring Calvin, GBS, Nernoff, Proffitt, Timson and Adams to disgorge their ill-gotten gain, including prejudgment interest, with said monies and interest to be disbursed in accordance with a plan of distribution to be ordered by the Court, and requiring relief defendant Shannon Calvin to disgorge an amount equal to the illegally obtained investor funds she received from defendants, plus prejudgment interest on that amount.
Requiring Calvin, GBS, Nernoff, Proffitt, Timson and Adams to pay a civil money penalty 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)] in an amount to be determined by the Court.

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