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SEC v. Cross Fin. Servs.

United States District Court for the Central District of California

September 5, 1995, Decided ; September 6, 1995, FILED; September 7, 1995, ENTERED

CASE NO. CV 94-4228 RAP (Ex)

Opinion

 [*720]  ORDER GRANTING SECURITIES AND EXCHANGE COMMISSION'S MOTIONS FOR SUMMARY JUDGMENT AGAINST DEFENDANTS FOX, FRANKLIN, CROSS, SIEMENS, AND RELIEF DEFENDANT COLELLO AND DENYING COLELLO'S [**2]  MOTION TO DISMISS OR FOR SUMMARY JUDGMENT

INTRODUCTION

This case illustrates the adage "if it sounds too good to be true, it probably is." From March 1993 through June 1994, defendants devised and participated in a scheme to raise money from investors by representing that they would use investors' funds to engage in factoring accounts receivable. 1 Defendants represented that investors would receive returns at an annual rate between fifteen and twenty percent and that their investments were low risk. Defendants never, however, factored even one account. Although defendant Cross Financial Services later changed its business focus from factoring to purchasing letters of credit, defendants continued to promise the same high rates of return and low risk and used the same means to solicit and obtain investor funds.

 [**3]  Defendants raised more than $ 21 million from over 700 investors nationwide. Defendants never complied with the securities registration requirements; misappropriated investor funds for their own purposes and without ever disclosing their duplicity to those investors; and operated a Ponzi scheme. CFS never loaned investor funds to entities secured by accounts receivable (the stated business purpose of CFS) and paid nearly $ 4 million to defendant Colello to buy "false" or uncollectible letters of credit.

After conducting an investigation, the Securities and Exchange Commission ("SEC" or "Commission") filed its Complaint for Temporary Restraining Order, Preliminary and Permanent Injunctions, Appointment of a Receiver, and Other Equitable and Legal Relief ("the Complaint") against Cross Financial Services, Inc. ("CFS"), Owen R. Fox, Carroll E. Siemens, Bruce Franklin, Michael J. Colello, and Douglas S. Cross on June 23, 1994. That same day, the SEC applied ex parte for a "Temporary Restraining Order, Temporary Orders: (1) Prohibiting the Transfer of Assets and Destruction of Documents; (2) Freezing Assets; (3) Appointing a Receiver; and (4) For an Accounting, Order to Show Cause [**4]  Why a Preliminary Injunction Should Not be Granted and the Temporary Orders Should Not Be Continued, and Request for Waiver of Notice Pursuant to Local Rule 7.18.2" ("the Ex Parte TRO Application"). The Commission submitted three volumes of exhibits supporting its application.

Judge Hatter entered an order granting the SEC's Ex Parte TRO Application on June 23, 1994, appointing Richard G. Shaffer the temporary receiver. The Court then issued a preliminary injunction with respect to two of the defendants, CFS and Franklin, on July 5, 1994. The Court also appointed a permanent receiver over Cross Financial Services, Inc. that same date.

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908 F. Supp. 718 *; 1995 U.S. Dist. LEXIS 20966 **; Fed. Sec. L. Rep. (CCH) P99,041

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CROSS FINANCIAL SERVICES, INC., et al., Defendants.

Subsequent History: Affirmed by SEC v. Colello, 139 F.3d 674, 1998 U.S. App. LEXIS 5016 (9th Cir. Cal., 1998)

Prior History: SEC v. Cross Fin. Servs., 1995 U.S. Dist. LEXIS 20266 (C.D. Cal., Sept. 5, 1995)

Disposition:  [**1]  The SEC's motions for summary judgment against defendants Fox, Franklin, Cross, Siemens, and nominal defendant Colello are granted and Colello's motion to dismiss or for summary judgment is denied.

CORE TERMS

investors, disgorgement, funds, prejudgment interest, severally liable, jointly, letter of credit, pre-bankruptcy, transferred, Receiver, consultants, factoring, material fact, brochure, amounts, summary judgment, promissory note, sales, deposited, invested, accounts receivable, interstate commerce, instruments, nominal, nominal defendant, loans, bank account, Securities Act, declarations, ill-gotten

Commercial Law (UCC), Secured Transactions (Article 9), Third Party Rights, Assignments, Civil Procedure, Summary Judgment, Motions for Summary Judgment, General Overview, Entitlement as Matter of Law, Genuine Disputes, Responses, Defenses, Demurrers & Objections, Motions to Dismiss, Discovery, Methods of Discovery, Judgments, Legal Entitlement, Materiality of Facts, Supporting Materials, Discovery Materials, Evidence, Burdens of Proof, Allocation, Movant Persuasion & Proof, Nonmovant Persuasion & Proof, Business & Corporate Compliance, Contracts Law, Types of Contracts, Investment Contracts, Securities Law, Blue Sky Laws, Offers & Sales, Exemptions & Exclusions, Excluded Transactions, Types of Securities, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Deceptive & Manipulative Devices, Torts, Standards of Care, Reasonable Care, Recognition of Risk, Investment Advisers, Material Misstatements & Prohibited Transactions, Express Liabilities, Misleading Statements, Subject Matter Jurisdiction, Jurisdiction Over Actions, Estate, Gift & Trust Law, Trusts, Constructive Trusts, In Rem & Personal Jurisdiction, In Personam Actions, Jurisdiction, Initial Offerings, Civil Liability Considerations, Preservation of Remedies & Rights, Parties, Real Party in Interest, Securities Act Actions, Civil Liability, In Rem Actions, US Securities & Exchange Commission, Administrative Proceedings, Privileges, Self-Incrimination Privilege, Fraudulent Interstate Transactions, Contracts Law, Defenses, Usury, Criminal Law & Procedure, Fraud, Securities Fraud, Elements, Theft & Related Offenses, Larceny & Theft, Acts & Mental States, Mens Rea, Recklessness, Remedies, Injunctions, Permanent Injunctions, Knowledge, Judgment Interest, Prejudgment Interest, Postjudgment Interest, Postoffering & Secondary Distributions, Recordkeeping & Reporting Requirements