This summer has been excruciatingly hot. I’ve been sweating so much I’m sure I have lost a lot of weight, my clothes seem to be just hanging loose on me. I’m certain that my house has turned into a Japanese Sauna. It’s time I look for HVAC installation in Manhattan, NY. I can’t take this heat anymore, as I’m sure I’m going to go crazy if I have to endure it much longer.
I want central air in my home, fans don’t do anything but move the hot air around which honestly doesn’t do anything to keep me cool. I stay at home all day long with my toddlers, and they complain constantly about being hot and sticky. The house smells like a sweat house, which is honestly really disgusting.
I remember years ago when we decided to put our business online. We wanted to take advantage of whatever the new medium of the Internet would offer as far as generating revenue. Back then, I had an employee who had built computers from kits in the early days of personal computing, and she was savvy with the new HTML that the World Wide Web was being built on. Selling online back then still required customers call or send a check. It was like fancy mail order. Now we use a marketing company in Thailand to manage our web presence and domains.
Years ago the online sales did not even account for one percent of the total revenue. Now the online sales are more than 50 percent of our revenue. I do not know about other industries that are similar to ours, but I do know we are planning for a future that has less brick and mortar stores and more online sales. It is just based on customer preference. They find it easier to use a credit card and point and click to buy.
I came home form work the other day and saw thousands and thousands of ants at the base of a tree that is next to the sidewalk leading up to our house. It is an old Maple that has given us much joy with its shade and seasonal colors. I called a tree service in Brooklyn NY to come out and see why there were so many ants.
It turns out that they were an ant species that was ruining the tree. We were going to have it treated by an exterminator, but the drilling of core samples revealed that it was damaged beyond saving from the inside. I asked how the tree could look so healthy and be in such bad shape. The company that provides the tree service in Brooklyn NY told me that the nutrients that feed the leaves and growth travels just under the bark. The inner part of the tree is supposed to be solid wood. The tree had big hollow spaces compromising its structural integrity.
We had to have the tree cut down and the stump removed.
I am going through he process of replacing a lot of the light bulbs in the house, in order to upgrade to LED lights, which use less power and also last for a long time. One of the last things on my list of light bulbs to look for are LED t8 tube bulbs and I hope that I can find them at a reasonable price. I do not think that they have made light bulbs of this type in a LED variety for very long, and so that is the main reason why I am worried that they might be kind of expensive.
However, overall, the price of LED bulbs has gone down a lot over the past couple of years.
I have been trying to learn about some of the homeopathic and medicinal qualities of some fairly typical garden plants, and flowers, to try to learn more about how to live healthy, and improve my quality of life. I am going to try to learn as much as I can, but I am starting with learning about flowers that are in my garden. So I am reading about Borage uses right now, because that is one of the first things on my list to learn about.
What I did was I went through my garden, and tried to figure out what each plant was. I had to do some research on some of them to figure it out, but I already knew what the majority of the plants were. So after I figured out what they all were, then I made a list of all of the plants and sorted it alphabetically.
Sometimes you just need a printer in Brisbane for your marketing campaign. It’s easy to forget about the physical world when we have so much focus aimed toward the digital one. With a Facebook, Twitter and Tumblr campaign bringing in plenty of new customers sometimes we just forget that the real world can bring in just as many new customers as a digital one can. It’s a different technique and one that millenials have forgotten to utilize. When starting your own business is accompanied by an overwhelming sense of ease thanks to the distinct lack of needing a physical space, it’s no wonder that those without any marketing experience are going to skip out on the physical world.
I was never any good at sports back in school. If you have ever seen a TV show where they show’s writers joke around by making a character on the show be the last one to be picked for a team sport, I was that kid in real life. It was pretty upsetting when I was just a little guy, but I soon learned that just because I am no good at sports does not mean I need to actually play them. I love watching them and observing. I ended up buying Madden 16 and a gaming console to play it on. I had never done this before and wondered if I would like it.
I purchased the game and set to play it on at a moving sale, so I did not have the usual instruction manual to use as I would have if I had purchased it new from a store.
For any type of garden to thrive, it is a must to have the essential gardening tools. The very important thing to remember is you should get tools that are durable and inexpensive. For a backyard gardener who’s growing plants in containers, there’s really no need to have all of those recommended gardening tools and equipment. The idea here is to get what you need. You can even improvise if you currently lack the budget.
Below are my actual backyard gardening tools. I use these regularly, so I had to buy them during the early days of our backyard garden.
Here are the plastic pots and rectangular planter that are now in use. The small basins are my sister’s. She used them during college when she was staying at the university. Right now, I use one of them when mixing up soil and compost, or when there’s a need to replant.
A plastic watering can or watering pot is a must for all gardeners. If you have a bigger garden, it’s best to have a dedicated watering hose attached to a nearby outdoor faucet.
[Items here, from the trowel going clockwise:]
– For your trowel, it does’t matter if you get a plastic or a metal one. As long as it’s durable, lightweight, and affordable.
– Pruning shears/pruning scissors are essential in the garden especially if you have plants that love being pruned. Keep your pruning shears clean and oiled to help them open and close properly when in use. You may use WD-40 on the middle section or adjoining parts of the shears.
Sharpen the blades from the bevel to the tip of each blade with a sharpening file. You may oil the metal parts after sharpening.
– Tweezers can be very useful in the garden especially if you don’t like picking out weevils, caterpillars, and other pests in your garden. I just have these pair of tweezers available at home, so might as well put them to good use.
But if you’re not iffy or afraid of handling insects and pests using your bare hands, then it’s okay if you don’t have tweezers. You just need to use rubber gloves to protect your skin from stains and stings.
– Scissors can also be handy especially when you are tying branches onto stakes or cutting out fertilizer and compost packets.
– Garden hand fork/cultivator is a must. You can use it for aerating soil, weeding, transplanting, and many others.
These seedling pots are must-haves in your backyard garden. Make sure to get reusable plastic seedling pots to save on cash. Those white sticks are actually seedling tags. You can also reuse them by sticking paper or masking tape over the wider part of the tag.
Plaintiff Securities and Exchange Commission (“Commission”), for its Complaint against defendants Merrill Scott & Associates, Ltd. (“MSA”), Merrill Scott & Associates, Inc. (“MSAI”), Phoenix Overseas Advisors, Ltd. (“Phoenix”), Gibraltar Permanente Assurance, Ltd. (“Gibraltar”), Patrick M. Brody (“Brody”), David E. Ross II (“Ross”) (collectively these defendants will be referred to as “Merrill Scott”) and Michael Licopantis (“Licopantis”) alleges as follows:
1. Merrill Scott is engaged in an ongoing scheme in which it has obtained investments of an unknown amount, but which exceeds $25 million, from clients to whom it provides offshore tax planning and asset protection advice and services. Merrill Scott provides its services in the form of a “Master Financial Plan” it sells to clients and implements on their behalf. The implementation of the plan involves the establishment of offshore entities and the execution of transactions through which its clients invest funds, securities and other assets. Merrill Scott promises its clients that, through the implementation of the Master Financial Plan, the clients will reduce their taxes by significant percentages, have their investments grow offshore in a tax free environment, and will be able to protect their assets from unwanted liabilities and encumbrances. Merrill Scott sells securities to its clients as part of its Master Financial Plan.
2. In fact, since in or about 1998, Merrill Scott has misappropriated investor funds and securities for uses contrary to representations made to investors. Investor funds have been used to pay for Brody’s personal expenses and extravagant lifestyle. Investor funds have been used for the obligations and expenses of Merrill Scott and to invest in start-up companies unaffiliated with Merrill Scott. This misappropriation of investor funds is ongoing. Recently, new funds coming to Merrill Scott from new clients and from the sale of securities have been used to pay Merrill Scott’s obligations to old clients and for obligations of other clients’ plans, rather than in accordance with the plans of the clients who invested the funds. In other words, Merrill Scott is currently operating a Ponzi scheme. In addition, Brody intends to misappropriate approximately $1.4 million of client money deposited in accounts controlled by Merrill Scott to purchase the stock of a start-up company unrelated to Merrill Scott or the plans of the clients.
3. The defendants, directly or indirectly, singly or in concert, have engaged, are continuing to engage, and are about to engage in, transactions, acts, practices, and courses of business that constitute, and would constitute, violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a); Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78j(b) and 78o(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and Sections 206(1) and (2) of the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-6 (1) and (2), and they are likely to repeat such violations in the future unless the Court enjoins them from doing so. Accordingly, the Commission seeks relief in the form of a temporary restraining order, injunctions, disgorgement, civil penalties and other appropriate remedies.
JURISDICTION AND VENUE
4. The Commission brings this action pursuant to the authority conferred upon it by Section 22(a) of the Securities Act, 15 U.S.C. § 77u(a), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), and Sections 209(d) and (e) of the Advisers Act, 15 U.S.C. §§ 80b-9(d) and (e), to restrain and enjoin, temporarily, preliminarily and permanently, MSA, MSAI, Phoenix, Gibraltar, Brody, Ross and Licopantis from future violations of the federal securities laws. The Commission also seeks disgorgement by MSA, MSAI, Phoenix, Gibraltar and Brody of their ill-gotten gains plus prejudgment interest, and such other equitable relief as may be deemed appropriate. In addition, the Commission seeks civil penalties from each of the Defendants pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), and Section 209 (e) of the Advisers Act, 15 U.S.C. §80b-9(e). The Commission also seeks specific ancillary relief as detailed in its Prayer for Relief.
5. This Court has jurisdiction over this action, and venue is proper, pursuant to Section 22(a), 15 U.S.C. § 77u(a),of the Securities Act and Sections 21(d) and 27 of the Exchange Act, [15 U.S.C. §§ 78u(d) and 78aa, and Section 214 of the Advisers Act, 15 U.S.C. § 80b-14.
6. The Commission, pursuant to authority conferred upon it by Sections 10(b) and 23(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), and 78w(a), has promulgated Rule 10b-5, 17 C.F.R. § 240.10b-5. Rule 10b-5 was in effect at the time of the transactions and events alleged in this Complaint and remains in effect.
7. The Defendants, directly or indirectly, singly or in concert, made use of the means or instruments of transportation and communication in, and the means or instrumentalities of, interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged herein. Certain of the transactions, acts, practices and courses of business alleged herein took place in the District of Utah, including, the offer, purchase and sale of securities, and acts and transactions involved in the misappropriation of investor funds and securities. Therefore, venue properly lies in this district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a); Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and Section 214 of the Advisers Act, 15 U.S.C. § 80b-14.
8. Merrill Scott & Associates, Ltd. is a Bahamian company. It used to maintain an office in Nassau, Bahamas, but it is has allegedly established an office in Hong Kong. Merrill Scott claims to be a leading firm in the business of providing tax reduction and asset protection through the establishment of offshore entities and accounts.
9. Merrill Scott & Associates, Inc., is a Utah corporation, incorporated in 1993. MSAI’s function is to provide the office space and the staff who provide services to Merrill Scott’s organization and its investors, and serves as the office through which investors are solicited. MSAI and MSA also regularly induce clients to purchase securities, including those issued by Gibraltar and Phoenix. MSAI is located in Salt Lake City, Utah.
10. Phoenix Overseas Advisors, Ltd., is a Bahamian entity that acts as an investment adviser and a “mutual fund company” for Merrill Scott investors. Phoenix manages “mutual funds” that have been sold to Merrill Scott investors. It also maintains accounts with brokerage firms into which investor securities are placed.
11. Gibraltar Permanente Assurance, Ltd., is an entity organized under the laws of Dominca, a Caribbean island. Gibraltar ostensibly acts as an issuer of many of the investment products sold to Merrill Scott investors. Gibraltar also controls the funds of Merrill Scott investors that are to be repatriated to those individuals from accounts located in the Bahamas.
12. Patrick M. Brody, age 37, is founder and control person of Merrill Scott. He is the sole signatory on all the accounts maintained by clients of Merrill Scott and its affiliated entities, including Phoenix and Gibraltar. Brody purportedly has exclusive control of Merrill Scott and its affiliated entities. Brody uses a Bahamian entity, Alex Jones & Associates, Ltd. and Alex Jones & Associates, Inc. as an alter ego.
13. David E. Ross II, has been associated with Merrill Scott since approximately 1998. Ross is an attorney licensed to practice in Utah, Kansas and Illinois, with experience in tax and insurance matters. Ross has functioned as General Counsel of MSA, and has been the Managing Director of Estate Planning Institute, a Bahamian law firm, and Gibraltar.
14. Michael Licopantis was associated with Merrill Scott functioning as the General Manager of Phoenix and Gibraltar from in or about 1998 until approximately June 2001. Licopantis had authority over the assets maintained or managed by Phoenix and Gibraltar. Licopantis purportedly has extensive experience managing investments for firms in the U.S.
15. Merrill Scott claims to have been in the business of advising and servicing clients in tax reduction and asset protection through offshore planning since at least 1993. The Merrill Scott organization offers services to clients in the United States that are designed to reduce taxes and protect assets through the creation and use of “offshore” legal entities.
16. In a brochure Merrill Scott provides to potential clients, MSA describes itself and the organization:
Headquartered in the Bahamas, Merrill Scott & Associates is organized as a parent company, charged with coordinating the actions of its subsidiaries, as well as our affiliated law firm. Merrill Scott & Associates consists of a mergers and acquisitions company, a domestic insurance agency, an offshore insurance carrier, an accounting firm, a mutual fund company, a mortgage company and a headquarters services company.
17. Wealthy individuals solicited by Merrill Scott are told that they can utilize loopholes in the Internal Revenue Code and other laws and regulations to minimize tax obligations and protect assets against litigation or other unwanted encumbrances. Merrill Scott offers a product known as a “Master Financial Plan” (“MFP”). One of the functions of the MFP is to provide a means by which the investor can invest cash and securities offshore, usually in the Bahamas or another Caribbean nation, and receive tax-free gains from the investment activity.
18. Merrill Scott also provides investors a means to repatriate assets through transactions that hide the actual ownership of the assets, thereby enabling the investors to utilize the untaxed funds without paying tax obligations. In its sales manual, MSA states:
Once money is invested offshore, there are several ways to repatriate part or all of it. These include such non-taxable methods as with secured credit cards, personal or corporate loans, mortgages, personal withdrawals or through insurance policies. Capital can also be repatriated through taxable means such as through salaries or annuities.
19. Merrill Scott advertises its services in publications such as The Robb Report, Celebrity Living, Tycoon, Departures, Boatshowing and The Wall Street Journal. Merrill Scott also retains financial advisers who solicit investors either through personal contacts or by referral from Merrill Scott and are there to sell the MFP. Merrill Scott solicits investors through its publications and through a website it maintains on the Internet. Most of Merrill Scott’s investors appear to have invested since 1998.
20. MSAI advertises the Merrill Scott organization’s services and employs the staff who solicit clients and design the investment plans. Merrill Scott’s other affiliated entities, including Phoenix and Gibraltar, are involved in structuring the individual details of a investor’s plan, issuing and selling the products recommended in the plan, and management of the investor’s assets offshore.
21. Merrill Scott retains professionals to provide “expert” advice on the clients’ financial plans. Those professionals include attorneys, accountants, financial planners, asset managers and persons with banking expertise.
22. The MFP essentially establishes the framework through which the Merrill Scott investor invests and protects cash and assets, avoids payment of taxes and repatriates his or her funds. The basic structure of the plan involves the transfer of an investor’s income and/or assets into offshore entities established on behalf of the investor. These funds and assets are then used to purchase investment and other products offered by MSA and its affiliates.
23. The primary source of revenue to Merrill Scott are the fees associated with the initial development of the MFP and the sale of various investment products, fees for the creation of offshore entities, and transactional and maintenance fees associated with the implementation of the plan.
24. In order to implement its MFP, Merrill Scott investors establish offshore entities in which they place assets and effect transactions. The main types of entities employed by Merrill Scott for its clients include International Business Corporations (IBCs) and Support Organizations (SOs).
25. Merrill Scott sales literature describes IBCs as corporations formed in a tax haven but not authorized to do business within that country. They are intended to be used as an investment or asset protection vehicle. The Merrill Scott investor transfers personal assets or an investment portfolio to the IBC.
26. Merrill Scott describes SOs as charitable organizations established for the benefit of an individual client. Among the stated benefits of an investor establishing an SO over using a domestic charitable organization is that investment funds transferred to the investor’s personal SO can grow tax free. These investment gains are available to the donor/investor through access to the offshore corporations that manage the investments of the SO.
27. Merrill Scott tells clients the offshore entities are not owned or controlled by the clients for tax purposes. Rather, nominee officers or directors act on behalf of the clients to control the entities and effect transactions. In fact, Merrill Scott personnel have authority to effect the transactions, with Brody retaining sole signatory authority over all accounts. Typically, in order to effect a transfer of funds, senior personnel at Gibraltar or Phoenix, such as Ross or Lipocantis, must authorize the transfer, which is then executed by Brody, using his signatory powers.
Sales of Investment Products to Clients
28. The types of investment products sold by Merrill Scott include Loss of Income Policies (“LOI”), Equity Management Mortgages (“EMM”), Foreign Variable Annuities (“FVA”) and mutual funds managed by Phoenix.
Loss of Income Policies and Equity Management Mortgages
29. MSA’s web site describes an LOI as an agreement between the client and Gibraltar whereby the client purchases a policy to insure against a future loss of income:
An LOI policy is usually purchased for coverage until the earlier of a specified term, such as 1 year, or the date of death of the insured . . . . The insurance company typically holds the net premium . . . in a separate account, along with the net premiums of other LOI insurance policies. Creditors cannot access policy reserves. The insurance company guarantees a fixed return on such premiums. . . . Most LOI policies provide that your premiums, plus a guaranteed return, will be paid back to the policy holder at the end of a specified period (usually 10 years).
30. The sales manual also states that investment decisions are made by the insurance company. The funds received by Gibraltar for the sale of LOIs are pooled in an account at Barclays Bank maintained by Gibraltar in the Bahamas.
31. In reality, LOIs are not purchased as insurance, but as a vehicle to make offshore and tax-free investments of funds which can be repatriated as desired by the investor. No Merrill Scott investor has ever filed a claim against an LOI for a loss of income. What, in fact, occurs is that the investor purchases the LOI from Gibraltar and then borrows back a percentage of the premium through a note or investment contract, usually in the form of a “mortgage,” called an Equity Management Mortgage or EMM.
32. The EMM is obtained through two affiliated entities of Merrill Scott, Fidelity Funding and Legacy Capital, which act as the mortgagee. The investor’s proceeds from the EMM are then placed in an IBC and invested offshore through Phoenix, or repatriated by the investor. The net effect of the LOI/EMM transaction is that the investor is able to deduct the premium paid for the LOI, encumber his property through a mortgage to himself and deduct the interest payments to himself on the mortgage. The investor can then invest the proceeds from the mortgage offshore through an IBC, with Phoenix managing the investment. The remainder of the premium left with Gibraltar is then invested to provide the investor with a fixed rate of return over the ten-year life of the policy.
33. Contributions by investors to SOs are treated in a similar way. Under Merrill Scott’s interpretation of the tax code, a certain percentage of the income derived from the funds contributed to the SO must be donated to charity, and the remainder may be loaned back to the investor through an EMM. The proceeds from the EMM are then invested in the same way as described in paragraph 32.
Foreign Variable Annuities
34. The FVA is a variable annuity issued by Gibraltar. The investor purchases the FVA by transferring cash or securities to Gibraltar; Gibraltar then pays the investor or his designees the principal and an agreed upon rate of return over the succeeding years. Merrill Scott markets the FVA as a means to repatriate a client’s assets without tax consequences. With respect to FVAs the MSA sales manual states:
You could purchase a Foreign Variable Annuity Contract between you and a Foreign Insurer. During the accumulation period of the Annuity Contract you could set aside money and have it grow on a tax-deferred basis [pending] withdrawal. At retirement, or another time selected by you, the payout period begins whereby the insurance company promises to pay a steady stream of income for a fixed period of time or for life.
35. Another investment opportunity offered to Merrill Scott investors are mutual funds managed by Phoenix. Formerly, Phoenix offered three separate funds to Merrill Scott investors. Of those three, however, the most popular was a fixed-income fund. The fixed income fund still exists but no purchases or sales into or out of the fund are currently taking place. The current value of that fund is purported to be $1.5 million.
36. Merrill Scott offered investors a mechanism to repatriate invested funds through what is referred to by Merrill Scott as a “Margin Fund.” A MSA sales manual describes the Margin Fund as follows:
An IBC may open a mutual fund account with Phoenix Overseas Advisors. Phoenix provides a margin line of credit at 9.5% interest rate. The IBC may simply borrow against its position in the funds up to 50% of the value of the fund. Access to the funds can be through the secured credit card. Finds can also be wired against the line of credit or proceeds forwarded to a Nevada Corporation. This transaction is not reportable and not taxable.
37. Phoenix acts as an investment adviser, and is retained by the offshore entities established by the Merrill Scott investors to operate as such for their offshore assets. Phoenix receives the securities contributed by the investors to their offshore entities and places them in brokerage accounts controlled by Phoenix, usually with TD Evergreen, a Canadian broker dealer. 38 Phoenix is charged with managing the investor accounts and executing transactions on instructions provided by the Merrill Scott investors. Phoenix’s fee for these services is approximately 1.5% of the funds it manages.
39. The Defendants are engaged in an ongoing fraud, the heart of which is the solicitation of investor funds through misrepresentations of material fact or omissions of material facts.
40. The misrepresentations made by the Defendants include:
a. The funds of MSA investors will be held in segregated accounts and will be held in trust on behalf of the investor.
b. That payments made to MSA investors are the proceeds of their own investment funds.
c. That the fees disclosed to MSA investors are the only funds used by the Defendants for their own purposes.
d. That even though the investor has, on paper, surrendered control of his assets to MSA, MSA investors will be able to direct the funds being held on their behalf offshore.
The Ponzi Scheme
41. The Merrill Scott organization has used newly invested client funds to pay principal and returns promised to earlier investors. Merrill Scott has not been able to honor its investors’ demands for funds for repatriation or other from the assets contributed by investors because those funds no longer exist. As a result, Brody and others have used funds provided by new clients or from the sale of additional investments to existing clients to pay obligations to clients demanding promised returns.
42. The Merrill Scott organization has obtained funds to pay earlier investors by margining brokerage accounts in which clients’ securities had been deposited and by simply liquidating funds maintained in accounts established by Gibraltar in connection with client purchases of LOIs and FVAs.
43. Internal communications among Merrill Scott employees discuss the payment of immediate obligations with new monies obtained from new clients. One internal Merrill Scott email, copied to Brody and Ross, states:
[Y]ou are proposing somewhat of a Peter/Paul scheme that funds one client from another’s funds. I am not comfortable with that system until we all have a conversation about the ramifications of that type of payment. It is my understanding that up to $1 Million is coming in before the end of the month. It would seem to me that the funding should come from that source, not client payments against notes ultimately due SO Organizations.
44. Internal Merrill Scott emails also make reference to threatened lawsuits against Merrill Scott by its clients because of Merrill Scott’s inability to meet its financial obligations due its clients.
Investor Funds are Used for Brody’s Personal Use
45. Since at least 1999, Brody has misappropriated approximately $9.5 million of client funds for his personal use, utilizing his alter ego, Alex Jones. Ross and Licopantis, who control the funds maintained by Gibraltar and Phoenix, have assisted Brody in the conversion of investor funds for Brody’s personal expenses.
46. Brody uses investor funds to pay for his extravagant lifestyle. Brody has boasted to a Merrill Scott associate that “I own nothing but live like a king.” As evidence of that maxim, Brody writes checks on corporate accounts to “cash” and uses the funds for personal expenses.
47. To pay his personal expenses, Brody has simply taken the funds, after having been authorized by Ross or Licopantis in many cases, from accounts maintained on behalf of clients over which he had signature authority.
48. Brody has used these funds to furnish a home, purchase art and on extravagant travel. Brody has also used client funds to lease expensive cars for Brody and his wife.
49. In response to objections to this conduct from associates at Merrill Scott concerning his appropriation of client funds, Brody stated Merrill Scott was his company, the funds coming to Merrill Scott were his, and that Brody could do whatever he wanted with the funds.
Investor Funds Have Been Used for Speculative Purposes
50. Brody has also used investor funds to purchase speculative securities, often to purchase stock in small, start-up companies.
51. Investors have not authorized the purchase of these speculative securities, and, in fact, have sometimes not been denominated as the owner of the securities once they are purchased.
52. Brody recently stated that he planned to use new funds recently obtained by Merrill Scott to purchase stock in a pre-IPO company because he believed the investment would result in significant returns when the company conducts its IPO.
Investor Funds Have Been Used to Pay MSAI Operating Expenses
53. Client funds have also been used to cover MSAI’s operating expenses. MSAI has operated at a loss for several years, and Brody and others have used funds in client accounts to cover operating expenses.
54. According to MSAI’s financial statements for the year ended December 31, 1999, MSAI’s income for the year was $2.24 million while its expenses totaled $4.77 million.
55. In order to help fund MSAI’s operational losses, POA loaned MSAI $1.5 million and GPA loaned $125,000.
56. For the years 2000 and 2001, MSAI’s books reflect as paid-in-capital from Alex Jones, funds taken from Gibraltar and Phoenix to cover MSAI’s losses. Brody has caused various persons with authority over client funds, including Ross and Licopantis, to authorize the withdrawal of funds from accounts maintained on behalf of clients and loan the funds to the Merrill Scott organization to cover operating expenses.
57. In recent months, in order for MSA to meet its payroll and other obligations, Brody, Ross and others margined securities maintained on behalf of Merrill Scott clients in accounts with a brokerage firm. The funds obtained from the margin transactions were then used to pay the obligations.
58. In addition, funds deposited in accounts maintained by Gibraltar on behalf of Merrill Scott clients were simply withdrawn from those accounts to meet similar obligations. Under those clients’ MFPs, the funds were to be used for the benefit of the clients pursuant to the plans’ instructions, not to pay Merrill Scott’s obligations.
59. Brody and Ross have told employees that the client funds were merely being borrowed by Merrill Scott to pay expenses and would be repaid to its clients.
CLAIMS FOR RELIEF
FIRST CLAIM FOR RELIEF
Violations of Section 10(b) of
the Exchange Act and Rule 10b-5
60. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 59 above.
61. From in or about 1998 through the present, the defendants, directly or indirectly, singly or in concert, by use of the means or instruments of transportation or communication in, or the means or instrumentalities of, interstate commerce, or of the mails, in connection with the purchase or sale of securities, knowingly or recklessly, have: (1) employed, and are about to employ, devices, schemes and artifices to defraud; (2) made, and are about to make, untrue statements of material fact, or have omitted, and are about to omit, to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (3) engaged, and are about to engage, in acts, transactions, practices and courses of business which have operated as a fraud or deceit upon purchasers of the securities and other persons.
62. By reason of the foregoing, the Defendants, have, directly or indirectly, singly or in concert, violated, and unless temporarily, preliminarily and permanently restrained and enjoined, will again violate Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
SECOND CLAIM FOR RELIEF
(Violations of Securities Act Section 17(a)(1))
63. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 59 above.
64. Defendants, with scienter, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly employed, and are employing, devices, schemes or artifices to defraud in violation of Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)].
65. By reason of the foregoing, Defendants have, directly or indirectly, singly or in concert, violated, and unless temporarily, preliminarily and permanently restrained and enjoined, will again violate Section 17(a)(1) of the Securities Act and unless restrained and enjoined will continue to do so.
THIRD CLAIM FOR RELIEF
[Violations of Securities Act, Section 17(a)(2) and (3)]
66. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 59 above.
67. Defendants, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly (a) obtained and are obtaining money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (b) engaged and are engaging in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities in violation of Section 17(a)(2) and (3) of the Securities Act [15 U.S.C. § 77q(a)(2) and (3)].
68. By reason of the foregoing, Defendants have, directly or indirectly, singly or in concert, violated, and unless temporarily, preliminarily and permanently restrained and enjoined, will again violate Section 17(a)(2) and (3) of the Securities Act and unless restrained and enjoined will continue to do so.
FOURTH CLAIM FOR RELIEF
[Violations of Advisers Act, Sections 206(1) and (2)]
69. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 59 above.
70. MSAI, Phoenix and Brody from at least 1998 engaged, for compensation, in the business of advising others as to the value of certain securities, or as to the adviseability of investing in, purchasing or selling certain securities. Consequently, MSA, MSAI and Brody were investment advisers.
71. As described in paragraphs 1 through 59, MSAI, Phoenix and Brody, directly or indirectly: (1) employed devices, schemes, or artifices to defraud clients or prospective clients; and (2) engaged in transactions, practices or courses of business which operated as a fraud or deceit upon clients or prospective clients.
72. Consequently, MSAI, Phoenix and Brody violated, and unless temporarily, preliminarily and permanently restrained and enjoined, will again violate Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2), and unless restrained and enjoined will continue to do so.
FIFTH CLAIM FOR RELIEF
(Aiding and Abetting Violations of Advisers Act)
73. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 59 above.
74. As described above in paragraphs 1 through 59, Ross and Licopantis were aware that investors were told that securities would be purchased for them. Licopantis managed the assets of Phoenix and authorized Brody to transfer client funds, knowing that he would misappropriate the funds or use them in a manner other than represented to investors. Similarly, Ross authorized Brody to transfer investor assets from Phoenix to Brody knowing that Brody would misappropriate those funds or use them in a manner other than represented to investors.
75. Ross and Licopantis aided and abetted conduct by MSAI, Phoenix and Brody which, directly or indirectly: (1) employed devices, schemes, or artifices to defraud clients or prospective clients; and (2) engaged in transactions, practices or courses of business which operated as a fraud or deceit upon clients or prospective clients.
76. Consequently, Licopantis and Ross aided and abetted, and unless temporarily, preliminarily and permanently restrained and enjoined, will again violate Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2), and unless restrained and enjoined will continue to do so
SIXTH CLAIM FOR RELIEF
(Violations of Exchange Act, Section 15(a))
77. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 59 above.
78. As part of their regular course of business, MSA, MSAI and Brody solicited investors to purchase securities, were involved in negotiations between issuers and investors, and received compensation related to the purchase of securities. Therefore, MSA, MSAI and Brody were acting as brokers.
79. Neither MSA nor MSAI has been registered with the Commission as a broker. Brody has not been associated with a broker or dealer registered with the Commission.
80. The activities of MSA, MSAI and Brody violated the registration provisions of Section 15(a)(1) of the Exchange Act, which requires that all brokers register with the Commission.
WHEREFORE, Plaintiff respectfully requests that this court:
Enter an Order temporarily restraining and preliminarily enjoining: (A) MSA, MSAI, Phoenix, Gibraltar, Brody, and Ross, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, (B) MSA, MSAI and Brody, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a), and (C) MSAI, Phoenix and Brody, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2), and (D) Ross, his agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, and each of them, from aiding and abetting future violations of Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2).
Grant a Final Judgment permanently enjoining: (A) MSA, MSAI, Phoenix, Gibraltar, Brody, Ross and Licopantis, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, (B) MSA, MSAI and Brody, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a), and (C) MSAI, Phoenix and Brody, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2), and (D)Ross and Licopantis, their agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from aiding and abetting future violations of Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2).
Grant a Final Judgment requiring Defendants MSA, MSAI, Phoenix, Gibraltar, and Brody to disgorge an amount equal to the funds and securities they obtained illegally as a result of the violations alleged herein, plus prejudgment interest on that amount.
Grant a Final Judgment assessing penalties against the Defendants pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), and Section 209 (e) of the Advisers Act, 15 U.S.C. §80b-9(e).
Issue an order directing MSA, MSAI, Phoenix, Gibraltar and Brody, jointly and severally, to prepare and present to the Court and the Commission, within thirty (30) days from the entry of said order, a sworn accounting of all of the proceeds collected by the defendants from the activities described in the Commission’s Complaint.
Issue in a form consistent with Rule 65(e) of the Federal Rules of Civil Procedure, orders preliminarily and permanently enjoining defendants MSA, MSAI, Phoenix, Gibraltar, Brody, and Ross, and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the orders by personal service or otherwise, and each of them, from:
A. transferring, changing, wasting, dissipating, converting, concealing or otherwise disposing of, in any manner, any funds, assets, claims, or other property or assets owned or controlled by, or in the possession or custody of such defendants or ;
B. transferring, assigning, selling, hypothecating, or otherwise disposing of any assets of as of the date of the Order.
C. directing them to:
1. take such steps as are necessary to repatriate to the territory of the United States of America, in a manner directed by the Court, all funds and assets of investors in MSA, MSAI, Phoenix or Gibraltar, or any affiliated entity, which are held under their direct or indirect control, jointly or singly; and
2. provide the Commission and the Court a written specification of the funds and assets so repatriated;
3. submit in writing to the Court and to the Commission, within two business days following service of the Order:
(a) an accounting of all securities, funds, and other assets held in their names or for their direct or indirect benefit, stating the location of the funds and assets;
(b) an identification of each account with any financial institution (including banks and securities and commodities brokerage firms) maintained in their names or held for their direct or indirect benefit; and
(c) information identifying all business and residence addresses, postal box numbers, telephone numbers and facsimile numbers.
Issue in a form consistent with Rule 65(e) of the Federal Rules of Civil Procedure, orders preliminarily and permanently enjoining the defendants, and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the orders by personal service or otherwise, and each of them, from destroying, mutilating, concealing, transferring, altering, or otherwise disposing of, in any manner, any books, records, computer programs, computer files, computer printouts, correspondence, memoranda, brochures, or any other documents of any kind, pertaining in any manner to the business of the defendants, including, without limitation, the sale of securities.
Grant such other and further relief as this Court may determine to be just, equitable and necessary, including, but not limited to, (i) a freeze of assets, (ii) the acceleration of discovery including the forthwith production of books and records, (iii) the appointment of a receiver, (iv) an order requiring repatriation of assets, and (v) an order requiring the execution of consent directives.
Retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be entered, or to entertain any suitable application or motion by the Commission for additional relief within the jurisdiction of this Court.
Grant such other and further relief as the Court may deem just and equitable.
Dated: January 15, 2002
__s/Thomas M. Melton____
Thomas M. Melton
William B. McKean
ATTORNEYS FOR PLAINTIFF
SECURITIES AND EXCHANGE
This page covers the MISUSE and ABUSE of living trusts — it does not knock Living Trusts as a legitimate planning tool. Living Trusts are great things to have, and in most instances it is hard to see how you could be harmed by a Living Trust. The problem is that there are quite a few promoters who hawk Living Trusts as an estate planning cure-all, when they are not.
What is a Living Trust? Well, the term “Living Trust” sounds pretty complicated, but these entities are really quite simple. The are nothing more than a revocable trust; that is, you convey property to a trustee for your benefit during your lifetime, and you retain the ability to cancel, or revoke, the trust at any time and get your property back. You can structure the trust in such a fashion that when you die, the trust changes so that the beneficiaries are your heirs, and the trust property passes to them outside of any probate proceeding.
Okay, having said that, let’s examine a couple of claims of promoters and weigh those claims against the truth:
“Living Trusts will reduce your income taxes.”
This is plainly false. Because the trust is for your benefit and you have the right to revoke the trust at any time, Living Trusts are treated for tax purposes as nullities; that is, all the income earned by the trust is attributed to you and you pay taxes on it just as if the trust didn’t exist in the first place. For this reason, you should not seek to get a seperate federal tax ID number for your living trust, as that will just cause you headaches trying to explain why both you and the trust should not pay tax on the same income.
“Living Trusts will reduce your estate taxes.”
This is equally false, as the trust property is considered part of your estate. You can structure Living Trusts to have some tax savings the same way you structure wills for this purpose, but not on the basis that you didn’t own the property at your death, as with an irrevocable trust.
“Living Trusts are cheaper than wills.”
Wrong, most of the time. The difference is that with a Living Trust you also have to pay to convey assets to the Trust, whereas with a will you simply state to whom you want the assets to go. Moreover, assuming you have enough wealth to qualify for federal estate taxes, when you die it will take about the same effort to file the federal estate tax return as with a will.
“You don’t need a will if you have a Living Trust.”
This is the most common claim, and it is also false. Your Living Trust will only cover what property you have conveyed into the Living Trust — you will still need a will for all other property, such as what you acquire after you form the Living Trust. No estate practitioner worth his salt would form a Living Trust without a “pour over” will, which is a will that transfers everything that you have when you die which is outside the trust, into the trust.
“Living Trusts avoid will controversies.”
Yes and no, but mostly no. First, as shown in the immediately preceding paragraph, you will need a pour-over will anyhow, and that will will certainly be subject to challenge. Second, in almost every states, trusts are challengeable for undue influence or lack or capacity on the very same grounds that wills are challengeable, so what’s the difference?
Federal Trade Commission Warnings
The U.S. Federal Trade Commission has recently issued warnings about certain Living Trust Promoters:
Living Trusts are good things to have, but you must understand how they should be properly formed, with a pour-over will in place, and then you should understand their limitations. If you are going to have estate tax headaches, the Living Trust is not aspirin.
“I’ll use bearer shares which nobody owns to own my corporation.” — The use of bearer shares by a U.S. citizen to obfuscate corporate ownership, where the corporation is receiving income, making investments, etc., is tax evasion, and anyone who tells you differently is probably lying. We see this varietal A LOT. Unfortunately, the IRS has been wise to this technique for about the last 30 years, and if they catch you using bearer shares (whether you hold them or not) to hide a corporation which is keeping assets or taking in income you will spend some serious Club Fed time.
But, you say, how will the IRS ever find out? There are a bunch of ways the IRS finds out, from spouses who were once trusted but now are mad, to disgruntled secretaries and staff, to folks who are just too dumb than to know better than to use their home or business telephone to call overseas, or to receive offshore bank statements at their home, or who are using someone offshore who is inept or can be bribed, or who fail to realize that all ATM machines use time-dated videocameras to . . . well you get the picture. There are a zillion possible ways for the IRS to find out about your offshore corporation, and they only need one. So just don’t use them, period.
We regularly deal with the very best licensed planners in the U.S., and they will all tell you that the use of bearer shares is a very, very bad idea. If someone suggests the use of bearer shares to you RUN-FAST-!-!-!- for they really don’t have the first clue about what they are doing, and are suggesting an act so amateurish as to belie even a hint of real competence on their part.
Notably, many of the offshore trust companies and offshore company formations company will advocate the use of bearer shares (so much so that even when we form a fully-disclosed offshore corporation and have specified the shareholders, that they will sometimes send us bearer shares simply because they are in the habit of sending bearer shares to their other clients). Keep in mind that these offshore “professionals” have no real knowledge of U.S. tax law, any more than a plumber understands a nuclear reactor because it has a lot of pipes. That they tell you bearer shares will protect you, will not keep you from going to the Big House.
Needless to say, we — and every other knowledgeable and experienced U.S. planner we know — avoids the use of bearer shares.
Bearer shares are corporation stock certificates which are owned simply by the person who holds them, the “Bearer”.
When corporations first came into existence, most shares were bearer shares. If you wanted to protect your interest in the corporation, you had to protect your bearer share certificates. To protect against theft and fraud, corporations starting keeping a register of the owners of the bearer shares which were issued, and notice had to be sent to the secretary of the corporation to record the change in ownership. Eventually, the corporation’s stock ledger determined ownership, and shares only facilitated the transfer of ownership (and, indeed, today few people ever see the stock shares they own). Eventually, most U.S. states even dropped the provisions allowing bearer shares.
But recently they have made a comeback, spurred on by the so-called asset protection sector and those seeking privacy. Nevada, for instance, has built a healthy incorporation industry because Nevada corporation law allows bearer shares.
And the offshore jurisdictions have always allowed bearer shares; indeed, almost all the offshore corporation providers presume that offshore corporations will be issued with bearer shares only (and often send our clients corporations with bearer shares even when we specifically request otherwise).
But does the fact that you can get a corporation with bearer shares both in the U.S. and in the offshore jurisdictions mean that you should use bearer shares? No — except in very specific circumstances you should avoid them like the plague.
For bearer shares suffer from a couple of very serious defects.
Of course, most structures utilizing bearer shares are for tax avoidance/evasion (or as Denver attorney Barry Engel says, “avoision”) purposes, and asset protection only plays a secondary role (if at all). However, sometimes bearer shares are utilized primarily for asset protection purposes.
In either case, this is discouraged. Our real-world experience both in attacking and defending bearer share structures is that judges eventually gravitate towards the position that if they can’t figure out who owns the corporation, they will presume that the defendant owns the corporation — then the bearer shares become counterproductive because the burden is on the defendant to prove that someone else owns the corporation.
The Upshot: You are much better off having some identifiable person own the corporation (even if only in a nominee capacity) than you are to have nobody own the corporation.
The first horrible tax trap for bearer shares is the IRS’s ability to make a jeopardy assessment that the entire value of a bearer instrument is income, if the IRS catches you in possession of the instrument and you have denied ownership.
For instance, let’s assume that you make $10 million on a stock deal, and like a good taxpayer pay your capital gains tax in that year. But then — because you fear divorce — you take your $10 million and you put it into a Bahamas IBC which is owned by bearer shares. The $10 million grow to $20 million in a couple of years. Unfortunately, your wife gets into your safe deposit box, and the IRS finds out about the bearer shares. Under IRC 6867, the IRS simply taxes the entire amount (not just the growth) at 39.6% plus penalties. And you will probably spend the remaining amount for criminal defense attorneys to fight the subsequent charges of tax evasion.
The second horrible tax trap is this: Every time bearer shares are handed over to and from a U.S. person — except for a bona fide sale for value — gift taxes must be paid! And, of course, if there is a sale then capital gains taxes must be paid.
For example, let’s say you have $10 million in the Bahamas IBC as set forth above. You think you are about to get divorced, so you give the shares to your brother to hold for awhile. In the divorce proceedings, you answer “no” when asked if you own any foreign stock interests. After the divorce proceedings are over, your brother gives the shares back to you. Easy enough, eh?
Not quite. From a federal gift tax standpoint, in approximate numbers here’s what happened:
- First, when you gave the bearer shares to your brother, you triggered a 55% gift tax, meaning that you now owe $5.5 million to Uncle Sam.
- Second, when your brother gave the bearer shares back, he triggered a 55% gift tax (again on the $10 million value), meaning that he now owes $5.5 million to Uncle Sam.
- Thus, your simple little transfer to your brother and back triggered a total of $11 million in federal gift tax liability to you and your brother — meaning that you and your brother are now $1 million in the hole! Needless to say, you would have done much better to split the $10 million with your ex-spouse in the divorce proceedings.
And if you don’t report and pay the taxes generated by handing these shares back-and-forth it is big-time tax evasion. So, if you hear someone talk about bearer shares, ask them whether giving the shares to someone triggers federal gift taxes. If they say either “no” or that they don’t know, then they have sufficiently displayed their ignorance in this area such that you should be quickly running away from them.
Additionally, the unreported transfer of bearer shares across the U.S. border can be argued to violate the Treasury Department requirements for transactions in excess of $10,000, i.e., if you hold bearer shares for a corporation having more than $10,000 in value, you must report the shares when you bring them into or take them out of the country, or else face steep fines and possible criminal penalties.
Notwithstanding the foregoing, bearer shares are a tool and in certain circumstances can serve their purposes. But they should be avoided most planning purposes, and when they are utilized the downside should be carefully discerned in advance.