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SEC v. George

United States Court of Appeals for the Sixth Circuit

June 6, 2005, Submitted ; August 30, 2005, Decided ; August 30, 2005, Filed 1

File Name: 05a0415p.06

Nos. 03-3791, 03-4472, 03-4580, 03-4582, 03-4583, 03-4608; 04-3063

Opinion

 [*788]  SUTTON, Circuit Judge. Steven Thorn, Derrick McKinney and Rick Malizia (the "defendants") appeal the district court's entry of summary judgment against them in this securities-fraud case. They argue that numerous material fact disputes prohibited the [**2]  district court (1) from imposing liability on them under several anti-fraud and unregistered-trading provisions of the federal securities laws and (2) from imposing a disgorgement remedy and several civil penalties on them. Durietha Dziorny, Allen George, Carl Jackson and Frederick Harris (the "relief defendants," so named because they profited from the defendants' scheme but did not facilitate it) also challenge the district court's entry of summary judgment, arguing that they should not be required to remit the entirety of their gains. We affirm.

In this civil-enforcement action, the Securities Exchange Commission (SEC) alleged that the defendants ran a Ponzi scheme. With the assistance of Malizia and McKinney, Thorn raised $ 75.8 million from individuals in the United States and abroad that purportedly would be invested in a secretive European securities market. As advertised by the defendants, the investment opportunity had all of the hallmarks of a "free lunch": The investments would be virtually risk-free and would generate lucrative returns. They also represented that the Federal Reserve Bank was involved in the investments and that the investments would benefit humanitarian [**3]  projects. As it turned out, the SEC alleged, the European market was not secretive; none of the money was ever invested in this market or any other; neither the Federal Reserve Bank nor any humanitarian project was involved in the programs; the only "returns" came from other individuals' initial investments; and the defendants took much of the other money (that was not used to pay fictitious returns) for their own use.

The SEC showed that the defendants used two investment programs to commit the fraud. The defendants started the first program, referred to as the "Global" or "GIG" program, in February 1998 and raised about $ 21.8 million under it through March 2001. They started the second program, referred to as the "Financial Ventures" or "FV" program, in November 1999 and raised about $ 53.5 million under it through November 2000. In both programs, the defendants told potential investors that their funds would be used to invest in, or finance the trading of, European fixed-instrument securities, including medium term notes. Thorn represented that these securities, traded in secretive markets, could be bought at discounts by unidentified traders. All three defendants represented [**4]  that the investors' money would be pooled together to reach threshold levels for preferred rates of return. And all three defendants represented that the investments would be risk free and that they would generate significant monthly returns. Thorn and McKinney also represented that the Federal Reserve Board was involved in the programs, and Thorn added that a humanitarian project would benefit from the trading. In the FV program, Thorn also told investors that the funds would remain in a United States bank, that the investors would retain control of the funds and that the funds would be used to "mirror" money at a European bank that would serve as collateral for the trader's line of credit.

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426 F.3d 786 *; 2005 U.S. App. LEXIS 19117 **; Fed. Sec. L. Rep. (CCH) P93,342; Fed. Sec. L. Rep. (CCH) P93,540; 2005 FED App. 0415P (6th Cir.)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. ALLEN GEORGE (03-3791); CARL E. JACKSON (03-4472); FREDERICK D. HARRIS (03-4580; 04-3063); DERRICK MCKINNEY (03-4582); RICK R. MALIZIA (03-4583); STEVEN E. THORN, DURIETHA DZIORNY (03-4608), Defendants/Relief Defendants-Appellants.

Prior History: ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO.

United States SEC v. Thorn, 2003 U.S. Dist. LEXIS 5709 (S.D. Ohio, Mar. 28, 2003)

CORE TERMS

investors, district court, funds, invested, trading, purported, material fact, profits, disgorge, programs, scienter, summary judgment, anti-fraud, provisions, returns, broker, personal expenses, challenges, registered, reckless, traced, prejudgment interest, sufficient evidence, investment program, legitimate claim, no evidence, deposited, asserts, argues, gains

Civil Procedure, Appeals, Standards of Review, De Novo Review, Securities Law, Blue Sky Laws, Offers & Sales, Summary Judgment Review, General Overview, Standards of Review, Criminal Law & Procedure, Fraud, False Pretenses, Elements, Securities Act Actions, Civil Liability, Securities Fraud, Commodities Futures Trading, Swap Agreements, Acts & Mental States, Mens Rea, Recklessness, Fraudulent Interstate Transactions, Knowledge, Registration Requirements, Registration of Markets & Market Participants, Broker-Dealers, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Deceptive & Manipulative Devices, Postoffering & Secondary Distributions, Exchanges & Other Markets, Judgments, Relief From Judgments, Independent Actions, Civil Liability Considerations, Preservation of Remedies & Rights, Joinder of Parties, Compulsory Joinder, Necessary Parties, Summary Judgment, Evidentiary Considerations, Entitlement as Matter of Law, Materiality of Facts, Equity, Maxims, Equality Principle, Investment Schemes, Ponzi Schemes, Subject Matter Jurisdiction, Jurisdiction Over Actions, In Rem & Personal Jurisdiction, In Personam Actions