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The Commission has had mixed results in court in recent months. The agency has prevailed in some cases. In others it has lost. Some losses raise troubling questions about the program (here).
In SEC v. Radical Bunny, LLC, Case No. 2:09-cv-01560 (D. Ariz. Filed July 28, 2009) however the Commission prevailed on its summary judgment motion. The court found that the four individual defendants violated the registration, antifraud and broker dealer registration provisions of the securities laws. Those defendants are Tom Hirsch, a CPA, Berta "Bunny" Walder, a grade school principal, her husband Howard Walder, a pharmacist and Harish Shah, a CPA.
The complaint claimed that from late 2005 through June 2008 the defendants raised over $197 million from at least 900 investors through a nationwide offer of unregistered securities in the form of promissory notes or investment contracts. Many of the investors came from the accounting practice of defendants Hirsch and Shah. Investor funds were pooled and loaned to Mortgages, Ltd., a Phoenix based commercial lender which made short term high interest loans to real estate developers.
The securities were sold based on false representations and omissions according to the SEC. Specifically, the Commission claimed investors were told that Radical Bunny held a secured interest in Mortgages Limited's assets despite the fact that their attorneys repeatedly told them there was no underlying documentation or it was defective. Investors were also told that the use of the loan proceeds was restricted to commercial development. In fact there were no restrictions on the use of the loan proceeds. Finally, investors were informed that the securities were not subject to the federal securities laws and that the defendants would carefully monitor their investments. Both claims were false. Indeed, attorneys for the defendants told them the securities were subject to the federal securities laws. Likewise, defendants were totally unaware of Mortgages Limited's deteriorating financial condition and that most of Radical Bunny's funds were being shifted to riskier projects to their detriment.
The final judgment entered in the case permanently enjoins each individual defendant from future violations of the registration, antifraud and broker dealer registration provisions of the securities laws. It also orders the payment of disgorgement by Mr. Hirsch of $1,245,220, by Mr. & Mrs. Walders of $1,245,217 and by Mr. Shah of $740,160 along with prejudgment interest. Each defendant was also ordered to pay a civil penalty of $120,000.
Radical Bunny, through its Chapter 11 trustee, consented to the entry of a permanent injunction which was entered by the court on November 4, 2009.
For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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