The Securities and Exchange Commission filed a civil enforcement action against a defendant corporation and its principals seeking preliminary injunctive relief, a freeze of assets and the appointment of a temporary receiver. The SEC asserted that defendants engaged in the fraudulent and unregistered offer and sale of Secured Debt Obligations (SDOs) to the public, made misrepresentations and omissions to investors concerning the safety of the SDOs and the disciplinary record of the principals involved, and misappropriated investor funds in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934.
Noting that courts have broad equitable powers under section 20(b) of the Securities Act, the court granted the SEC’s application. After setting out the standard for granting preliminary injunctive and other equitable relief in a civil enforcement action – i.e., that there is a reasonable likelihood that defendants are engaged or are about to engage in violations of the federal securities laws – the court determined that the SEC had met its burden. Among other things, the court found that the evidence established a reasonable likelihood that defendants, acting with scienter, had misappropriated invested funds for their personal use and benefit and, in order to encourage investors, misrepresented that the SDOs were collateralized, guaranteed by a commercial bank and protected by multiple insurance policies, when, in fact, defendants knew that none of the representations was true. (SEC v. Amerifirst Funding, Inc., 2007 WL 2192632 (N.D. Tex. July 31, 2007))