The opinion of the court was delivered by: DALZELL
Together with our Memorandum issued yesterday, this will constitute our findings of fact and conclusions of law in this nonjury action under Fed. R. Civ. P. 52(a). We concluded a four-day Final Injunction hearing yesterday.
As set forth in our Memorandum and Order yesterday denying defendants' suggestion of lack of subject matter jurisdiction, we have jurisdiction over the subject matter of this proceeding pursuant to Section 20(b) of the Securities Act of 1933, 15 U.S.C. § 77t(b), and Section 21(d)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(d)(1).
What happened to this money? Only $ 11,863,424.01 -- or approximately 48% of the total received from investors -- went to anything that might be characterized as an investment. From that $ 11.8 million in putative investments, the evidence is uncontroverted that TIGC earned not one cent of interest, dividend, or return of any kind. Indeed, shortly after TIGC began what might pass as an investment program, its investments began defaulting at the rate of nearly three-quarters of a million dollars a month. It now appears likely that the Trustee will be unable to recover even the principal on these so-called investments, many of which are now frozen or shut down by federal law enforcement authorities.
TIGC also used over $ 2 million in so-called downline commissions to keep the engine of this enterprise humming like a new Mercedes on the autobahn.
In the time-dishonored tradition of Charles Ponzi, TIGC substituted new investors' money for real investment return on old investors' funds.
The rest of TIGC's expenditures were even less investment-related. More than $ 816,000 was spent on real estate, a significant portion of which went to the purchase and development of a personal residence for Geoffrey and Susan Benson. The Bensons also appear to have furnished and maintained their new house at TIGC's expense: $ 55,511.10 went to the purchase or lease of cars for their garage, including a new Ford Explorer for the Bensons' son; a $ 6,133.46 spending spree at Circuit City; more than $ 2,000 spent at television retailers; over $ 50,000 in "household expenses"; $ 5,000 to pay off a home mortgage; $ 10,000 to pay off personal credit card bills; $ 10,000 for school tuition for the Bensons' son; as well as hundreds for jewelry, bowling equipment and membership fees, groceries. In short, the Bensons used TIGC as their personal checking account.
In addition, Geoffrey Benson made an undisclosed donation of $ 1.265 million of investor funds to Lindsey K. Springer, d/b/a Bondage Breaker Ministries.
In addition to all this, defendants Geoffrey Benson and Geoffrey O'Connor paid themselves nearly $ 300,000 in cash from TIGC's funds, none of it reported to the Internal Revenue Service or even documented on TIGC's books -- which did not exist. Lastly, more than $ 1.9 million remains unaccounted for, due partly to the incomplete and irregular records defendants kept, and partly, we infer, from defendants' and relief defendants' lack of cooperation in the Trustee's tireless accounting efforts.
The parties, of course, differ over the legal consequences of this financial train wreck. Defendants argue that, whatever the ultimate consequences of their actions are, they do not include answering to the SEC in this forum. We disagree. Undoubtedly TIGC's members had faith in TIGC. They certainly had hope that its extravagant guarantees would be fulfilled. But TIGC was no charity -- investors were defrauded for defendants' and relief defendants' personal gain. For that, defendants must answer under the securities laws.
By Memorandum and Order yesterday, we found that TIGC's investment offerings were securities as defined by the Securities Act of 1933 and Securities Exchange Act of 1934. Thus, we move to the substantive securities violations charged in the complaint.
The SEC first claims that defendants TIGC, Geoffrey Benson, and O'Connor violated sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. § 77e, by using the means or instrumentalities of interstate commerce to solicit, sell, and convey their investment contracts. In order to establish a violation of section 5, the Commission must show that: (1) no registration statement was in effect as to the security; (2) defendants offered to sell or sold the security; and (3) defendants used the means of interstate commerce in connection with the offer or sale. See SEC v. Spence & Green Chemical Co., 612 F.2d 896, 901 (5th Cir. 1980), cert. denied, 449 U.S. 1082, 101 S. Ct. 866, 66 L. Ed. 2d 806 (1981); SEC v. Continental Tobacco Co., 463 F.2d 137, 155 (5th Cir.1972). Once the Commission has made this showing, the burden shifts to defendants to demonstrate that the securities were exempt from the registration requirement. See SEC v. Ralston Purina Co., 346 U.S. 119, 126, 73 S. Ct. 981, 985, 97 L. Ed. 1494 (1953).
The defendants admit that they did not file any such registration statement. Nor do they dispute the evidence of record which shows that (a) they mailed and faxed a blizzard of materials -- personally signed, at various times, by O'Connor and Geoffrey Benson -- soliciting investment contracts/capital units from potential investors, and (b) they received checks and other valuable assets that several thousand investors from all over the country mailed to them. Thus, the burden is on defendants to demonstrate that their securities offering was exempt from registration pursuant to Section 4 of the 1933 Act, 15 U.S.C. § 77d. Given the size of TIGC's offering (nearly $ 24.6 million), as well as its scope (more than 10,000 investors nationwide and abroad), and the means of offering -- a fax on demand line, voluminous mailings of marketing materials, a website linked to TIGC's offices, a nationwide network of telephone operators
and a proselytization program that rewarded TIGC members for snaring ...