The opinion of the court was delivered by: ACKERMAN
In this action, the Commodity Futures Trading Commission ("CFTC") and the States of Florida and New Jersey seek the issuance of injunctive and ancillary equitable relief against various persons and corporations allegedly engaged in conduct which violates the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1 et seq., N.J.S.A. 49:3-60, et seq., and Fla. Stat. Ann. § 517.100 et seq.
In July of 1987, the court granted such relief as against defendants American Metals Exchange ("AME"), Anglo Swiss Metals ("Anglo Swiss"), FC&M Investment Corp. ("FC & M") and Bill Frank. At that time, I also appointed Thomas Greelish, Esq. to serve as the temporary equity receiver for the corporate defendants.
Plaintiffs now seek to amend the complaint with new claims for violations of state and federal law and obtain similar equitable relief with respect to the newly named defendants Robert Maxwell a/k/a Robert Lebovich ("Maxwell"), Amalgamated Redemption Centers, Inc. ("ARC"), Michael Jebrock ("Jebrock") and Transworld Metals Corporation ("TWM"). Specifically, plaintiffs seek a court order which freezes defendants' assets, gives plaintiffs access to their books, enjoins defendants from offering, selling or accepting funds for the offer and sale of securities, appoints a receiver to marshall, account for and distribute assets for the benefit of the corporate investors, and requires the individual defendants to make an accounting of their assets. Defendants have vigorously opposed the issuance of such relief.
II. STANDARD FOR STATUTORY INJUNCTIVE RELIEF
Pursuant to U.S.C. § 13a-1, injunctive relief may issue upon a showing that the defendants "engaged in, [are] engaging in or [are] about to engage in any act or practice" which constitutes a violation of any provision of the CEA. Thus, in order to issue such relief, the court must consider past violations as well as whether or not there is a reasonable likelihood of continued and future violations. CFTC v. Hunt, 591 F.2d 1211, 1220 (7th Cir.), cert. denied, 442 U.S. 921, 61 L. Ed. 2d 290, 99 S. Ct. 2848 (1979), CFTC v. Commodities Fluctuations Systems, Inc., 583 F. Supp. 1382 (S.D.N.Y. 1984). Whether or not there is a reasonable likelihood of future violations depends upon a consideration of the totality of the circumstances and may be inferred, or even presumed, from past unlawful conduct, and the absence of proof to the contrary. Hunt, supra; CFTC v. British American Commodity Options, 560 F.2d 135, 142 (2d Cir. 1977), cert. denied, 438 U.S. 905, 57 L. Ed. 2d 1147, 98 S. Ct. 3123 (1978), CFTC v. Heritage Capital Advisory Services, Ltd., [80-82 Transfer Binder] Fed.Comm.Fut.L.Rep. para. 26, 627 (N.D. Ill. 1982), CFTC v. Morgan Harris & Scott, Ltd., 484 F. Supp. 669, 676-71 (S.D.N.Y. 1979). See also SEC v. Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir. 1975). Proof of irreparable harm is not required for the issuance of this statutorily provided injunctive relief. See e.g., Morgan, Harris, supra at 676 and cases cited therein.
Furthermore, under the CEA, the court may, in its sound discretion, appoint a receiver and order ancillary relief in the form of an accounting, disgorgement of profits, freezing of assets, and maintenance of the status quo based upon a consideration of violations of the CEA and the need to protect the public interest in preventing the diversion of corporate assets, detering future fraud, and impeding defendants from benefiting from their misconduct. CFTC v. Co. Petro Marketing Corp., 680 F.2d 573, 582-83 (9th Cir. 1982); Morgan, Harris, supra; CFTC ex rel Kelley v. Skorupskas, 605 F. Supp. 923 (E.D. Mich. 1985).
As the defendants asserted that there are issues of fact in dispute, see Hearing Transcript, dated February 10, 1988, the court conducted a series of evidentiary hearings on March 28, 29, 30, 31 and April 4 and 5, 1988, during which time testimony was heard and evidence was received in support of and in opposition to plaintiffs' application. Additionally, the Court accepted, pursuant to the stipulation of the parties, see e.g. Hearing Transcript dated April 5, 1988 at 72, depositions and documentary evidence in lieu of live testimony. Thus, in addition to the briefs and exhibits submitted to the court prior to the hearing, the court has considered the depositions of Rene Champagne, Richard Cowen, Barry Gladden, Michael Jebrock, Carol Kahan, Robert Maxwell, John McNamara, Helen Reynolds, James Stephens, Martin Stein, Shirley Stier and Daniel Weiner.
I have also considered all exhibits which were included with these depositions, those offered prior to and at the hearing,
as well as the "Report to Thomas W. Greelish, Esq., Temporary Equity Receiver for American Metals, et al " ("Accountants Report) and attachments thereto. I accepted all evidence mindful that hearsay materials and evidence other than live testimony are properly considered by the Court in preliminary injunction proceedings. Asseo v. Pan American Grain Co., 805 F.2d 23, 26 (1st Cir. 1986); Wounded Knee Legal Defense/Offense Committee v. FBI, 507 F.2d 1281, 1287 (8th Cir. 1974); National Organization for Reform Marijuana Laws v. Mullen, 608 F. Supp. 945, 950 n.5 (N.D. Ca. 1985); Bracco v. Lackner, 462 F. Supp. 436, 442 n.3 (N.D. Ca. 1978); SEC v. Vesco, 358 F. Supp. 1186, 1188 (S.D.N.Y. 1973). Thus, I considered evidence which is not necessarily the sort which would be admissible in a final trial on the merits since in the context of a request for emergent relief, the rules of evidence are relaxed so as to provide swift relief, avoid lengthy proceedings and prevent irreparable harm. Fed. R. Civ. P. 65(a)(2), and advisory committee note; Flynt Distributing Co. Inc. v. Harvey, 734 F.2d 1389, 1394 (9th Cir. 1984); Wounded Knee, supra at 1287 and cases from the Second, Fifth and Ninth Circuits cited therein; SEC v. General Refractories Co., 400 F. Supp. 1248, 1255 (D.C.D.C. 1975); Vesco, supra.
Having reviewed the record in light of this request for interlocutery injunctive relief, I make the following findings of fact, as required under Fed. R. Civ. P. 52 (a).
Before explaining the commodities program at issue, I shall first explain the corporations and individuals who established the challenged program.
Defendant Anglo Swiss was incorporated in the Republic of Panama on June 9, 1986, "for the explicit purpose and ownership of all outstanding and issued shares of American Metals Exhchange."
See Shareholders Agreement at 3, submitted as Reynolds Ex. 2, Maxwell Ex. 27, MJ 80; MJ 82. Among shareholders of Anglo Swiss are Robert Maxwell, Bill Frank, Michael Wallach, Michael Jebrock and Steven Kramer.
See Shareholders Agreement at 45, 46; Deposition of Michael Jebrock at 185, MJ 82; Accountants Report at 3; Deposition of Martin Stein at 40, 47. In addition, Messrs Frank, Maxwell and Jebrock are listed as directors of AME. Mr. Frank is also listed as its President and Mr. Jebrock as First Vice President.
Shareholders Agreement at 6; Accountants Report at 5, 35.
ii. ROLE OF ROBERT MAXWELL
While not named as an officer, the evidence reflects a perception as well as the reality that Mr. Maxwell controlled Anglo Swiss. Deposition of Martin Stein at 88-87. Reynolds Ex. 2. For example, the testimony reveals that Maxwell instructed his law firm, Phillips, Nizer, Benjamin, Krim and Ballon to incorporate Anglo Swiss in Panama. Deposition of Martin Stein, Esq., formerly a partner with that firm, at 85-87; Deposition of Michael Jebrock dated April 6, 1988 at 42; Deposition of Rene Champagne at 20; Statement of Michael Wallach, dated October 23, 1987 at 9; Hearing Testimony of Steven Kramer, dated March 31, 1988 at 52. See also Statement of Michael Wallach, dated October 28, 1987, at 2 in which he stated Maxwell formed Anglo Swiss to hold the stock of AME, TC&M and LIC. Moreover, his company, Contract Furnishing and Systems, Ltd. was billed for the incorporation. See MS 120. Most importantly, Maxwell and his associates agreed to contribute $ 5 million to establish Anglo Swiss.
Specifically by letter from Ronald Luzim, Esq., to Michael Jebrock, dated June 19, 1986, Mr. Jebrock was informed that there
. . . exists a financial committment from Messers Maxwell, Gold and Edson of $ 4,800,000.00 for the above described corporation which is made up of a $ 50,000.00 cash capitalization, $ 250,000.00 bank account located in the country of Panama, and a letter of credit issued through Citibank for $ 4,500,000.00 contributed by Messrs. Maxwell, Gold and Edson.
Maxwell 30; Accountants Report at 30, Statement of Michael Wallach, dated October 23, 1987, at 9. See also MJ 70, a letter dated May 20, 1987 to Robert Maxwell in which Mr. Jebrock wrote that he relied on this representation which he entered the business. Mr. Jebrock also recalled Mr. Maxwell stating that since he was investing the capital, he would have full control and that he would make decisions with the assistance of his lawyers and accountants. Deposition of Michael Jebrock at 69-72. Thus, the facts reveal that Anglo Swiss is the corporate parent of AME, the shareholders and directors of the part and directors include defendants Frank, Maxwell and Jebrock, and the controlling force behind Anglo Swiss was Mr. Maxwell.
iii. AMERICAN METALS EXCHANGE
AME, which was incorporated in the State of Delaware on February 24, 1986, and located in 1600 square feet
of office space in Millburn, New Jersey, is the wholly owned subsidiary of Anglo Swiss. Maxwell 27, Reynolds Ex. 2, Plaintiffs' Ex. 214, MJ 82, Hearing Testimony of Steven Kramer, dated March 30, 1988, at 96 and April 4, 1988, at 53.
iv. ROLE OF BILL FRANK AND ROBERT MAXWELL
Defendant Bill Frank is listed as president of AME. Accountants Report at 35; Deposition of Carol Kahan at 46-47, in which she stated that "Frank was in charge of AME."
Frank had daily contact with Maxwell and met with Maxwell each Thursday in Maxwell's New York Offices.
Deposition of Carol Kahan at 80-81; Hearing Testimony of Carol Kahan, dated March 28, 1988, at 53 and March 29, 1988, at 101-02. Although Frank made the day-to-day decisions, I find that Mr. Maxwell made all major decisions, especially those which involved large sums of money. Deposition of Helen Reynolds at 138-39, 158, 160; Hearing Testimony of Steven Kramer, dated March 31, 1988 at 5; MJ 74, a letter on TWM stationery from Jebrock to Maxwell, attached to a projected profit and loss statement for AME.
At his deposition, Jebrock stated that while he did not know if Maxwell was a shareholder or officer of AME, he stated "I know he controlled the company." Deposition of Michael Jebrock at 725. Jebrock also testified that Maxwell informed him that all management, accounting and legal decisions were to be made in Maxwell's offices. Id. at 92, 398, in which he stated that all offices of AME were responsible to report to Maxwell as to all operations. Similarily, Maxwell monitored the operations himself. See, for example, Hearing testimony of Carol Kahan, dated March 28, 1988, at 49 and her deposition testimony at 82, in which she stated that Maxwell required her to contact AME on a daily basis regarding closing prices on the metals market, AME's sales figures, contracts sold, value of the contracts and money received.
The documentary record clearly supports a finding that Maxwell controlled AME. For example by letter to Bill Frank, Mr. Maxwell informed him that:
. . . any memos to American Metals, Lead Investment Corp., or FC&M Corp. are to be sent in draft form to this office for approval.
RM 21. "This office" refers to Maxwell's New York office. In addition, by memorandum from Hilarie Frank to Bill Frank, dated September 22, 1986, Ms. Frank wrote that:
1. A copy of all internal memos referring to corporate policy must be approved by [Mr. Maxwell].
RM 22 (emphasis in original).
Finally the exhibit marked RM 46 reflects Mr. Maxwell's control with regard to Anglo Swiss and AME. After Jebrock and Maxwell sold their 10% share of Anglo Swiss,
see MJ 99; MJ 100; Deposition of Michael Jebrock at 323, by letter dated April 10, 1987, written on AME stationery, Mr. Maxwell informed Mr. Jebrock that:
The Board of Directors had decided, based on your continued committment to American Metals Exchange, Ltd. (Anglo Swiss) to re-issue five (5) shares of the Anglo Swiss stock back to you that were returned from the Lead Investment Transaction.
Thus, the wholly owned subsidiary of Anglo Swiss offered a program whose daily operations were controlled by Bill Frank but whose major decisions were made by Robert Maxwell.
v. THE SALES AGENTS: TRANSWORLD METALS AND FC&M
Since May 2, 1986, AME itself and through its sales agents engaged in the business of offering and selling investments in precious metals pursuant to a sales contract known as the "Equity Building Program" ("EBP"). Hearing Testimony of Steven Kramer, dated April 4, 1988, at 14. The mechanics of this program will be discussed infra in Part B. This program was sold through sales agents in New Jersey, Florida and California. Reynolds Ex. 2; MJ 68; Deposition of Michael Jebrock at 682-83.
Defendant FC&M was the New Jersey sales branch of AME, located in the Millburn, New Jersey, offices. Hearing Testimony of Steven Kramer, dated April 5, 1988, at 14-18. In addition, at least five sales agents had offices at 3111 University Drive, Coral Springs, Florida. These entities were: Defendant Transworld Metals,
American Capital Preservation, Richard E. Marchant, Inc., Kashouty & Associates, and Bob Barouxis, Inc. TWM and American Capital shared suite 710, Bob Barouxis, Inc. was next door, Marchant was in suite 514, and Kashouty was in suite 610.
See letter to Rene Champagen from Michael Jebrock, dated June 9, 1983, on TWM stationery; Gladden Ex. 4; Deposition of Michael Jebrock at 625-26; Hearing Testimony of Steven Kramer, dated April 5, 1988, at 17-18, 23, 25.
vi. THE ROLE OF MICHAEL JEBROCK
Michael Jebrock is president
and 100% owner of TWM,
which started business in April of 1986. Maxwell 27; Accountants Report at 29, 35; and Ex. L thereto; MJ 180; Deposition of Michael Jebrock at 487; Ex. F to Deposition of Robert Maxwell. In addition, although he contends that he was never an employee of AME or Anglo Swiss, there exists employment agreements signed by Mr. Jebrock. MJ 84; MJ 198, Deposition of Michael Jebrock at 256-57; Accountants Report at 30. While these agreements were not executed by either corporate entity, other evidence suggests that Jebrock had some control over the activities of AME. For instance, there exists AME stationery with the address "3111 University Drive, Suite 300, Coral Springs, Florida,"
a suite once occupied by TWM. MJ 189. See also MJ 83, a memorandum from Michael Wallach to all managers and account executives, dated September 5, 1986, on TWM stationery instructing that all documents regarding investment rollovers were to be xeroxed and sent to AME at the Coral Springs address it shared with TWM. Relatedly, a photograph of the building located at 3111 University Drive in Coral Springs appears on the cover of the AME sales brochure. Hearing Testimony of Steven Kramer, dated April 4, 1988, at 54.
Not only was AME located in the exact location as TWM, but various documents suggest that Mr. Jebrock was perceived as an officer of AME. First, in a promotional brochure developed for the solicitation of new sales agencies, Mr. Jebrock was listed as treasurer of AME. Ex. 6 to the Declaration of Helen Reynolds, which is attached as Ex. L to Accountants Report. Second, on a letter prepared on AME stationery with the 3111 University Drive address, in which new clients were welcomed, Mr. Jebrock signed as the Vice President of American Metals.
MJ 94; Accountants Report at 35. Third, in a memorandum of understanding between Maxwell and Jebrock, which Jebrock asserts never came to fruition, see Deposition of Michael Jebrock at 74, Mr. Jebrock was to have agreed to serve as President of Ameican Metals as well as receive 5% of the ownership of AME upon execution of the agreement and 5% would have been placed in reserve for later distribution.
Fourth, the record reveals that Mr. Jebrock prepared and forwarded the projected profit and loss statement of AME for the period of August 1, 1986 through December 31, 1982, to Mr. Maxwell in care of Contract Furnishing & Systems, Inc.
Fifth, Mr. Jebrock was in daily contact with the New Jersey headquarters of AME as a result of his presidency of AME's largest sales agent as well as his role in AME itself. Deposition of Helen Reynolds at 77.
Thus, the above demonstrates not only Mr. Jebrock's control of TWM, but also his role in AME.
vii. AMALGAMATED REDEMPTION CENTER
is a New York corporation which was established to act as an "independent" third party agent for liquidating the investment contracts.
viii. ROLE OF ROBERT MAXWELL
The record establishes that Mr. Maxwell controlled ARC.
Statement of Michael Wallach, dated October 28, 1987, at 8; Deposition of Michael Jebrock at 508; Deposition of Helen Reynolds at 141. First, his signature as Robert Lebovich appears as the signatory on AC's checking account, Plaintiff's Ex. 209, as well as on an ARC check to the Internal Revenue Service, dated January 30, 1987.
Second, his signature appears on an application for a safe deposit box, dated October 12, 1986, and related correspondence, including a letter regarding the placement of metals therein. SS 146B. Third, Ms. Kahan testified, and the documentary evidence reflects, that Maxwell signed numerous letters to ARC clients under the name Robert Lebovich. RM 24; Hearing Testimony of Carol Kahan, dated March 28, 1988 at 39. Fourth, the law firm of Baron & Baron billed Robert Maxwell for the incorporation of ARC. SS 147; see Hearing Testimony of Carol Kahan, dated March 29, 1988, at 33. Fifth, not only did the Lebovich signature appear on such documents, but Maxwell was also listed as the contact person for those interested in hiring ARC as a third party delivery agent. See MJ 73.
Sixth, Carol Kahan, who was hired by Maxwell as his personal assistant in response to an advertisement placed by RPM,
another one of Maxell's endeavors, was placed on ARC's payroll.
She was primarily responsible for facilitating all liquidations. Deposition of Carol Kahan at 12, 14-19; Affidavit of Shirley Stier, at paras. 3, 6; Deposition of Shirley Stier, dated March 21, 1988, at 33, 46, 90; Plaintiff's Ex. 211; Hearing Testimony of Carol Kahan, dated March 28, 1988, at 32 and March 29, 1988, at 174; Maxwell 19.
Seventh, in June of 1987, Maxwell offered to sell ARC to Ms. Kahan as he perceived his association with the company to have been inappropriate. Deposition of Carol Kahan at 130-31; Hearing Testimony of Carol Kahan, dated March 29, 1988 at 3. Ms. Kahan also asserts that as part of his offer to sell ARC to her, he promised to indemnify her for any legal liabilities she may have suffered as its owner. Deposition of Carol Kahan at 132.
Mr. Frank also had a relationship with ARC. Specifically, he trained Ms. Kahan to perform the liquidations and frequently assisted her with inquiries received from ARC clients. Deposition of Carol Kahan at 37-39, 51-52, 58.
Thus, Mr. Frank also had a significant relationship with the operations of ARC.
Pursuant to this investment scheme, from May of 1986 through June of 1987, approximately 2000 investors purchased a specific quanitity of precious metals at a set price per ounce, which was established when the investment contract was entered.
In order to participate in the program, customers initially paid AME 30% of the total contract purchase price. Half of this amount, or 15% of the total constituted an administrative fee,
retained by AME. The other half of the amount served as a down payment which was applied toward the total purchse price. See, e.g., Deposition of Michael Jebrock at 401.
AME sold this investment program over the telephone through sales offices located in New Jersey, California and Florida.
I note that approximately 78% of the contracts were sold by TWM. See, e.g., Deposition of Michael Jebrock at 219; MJ 78; Hearing Testimony of Steven Kramer, dated April 4, 1988, at 14.
In addition to telephone solicitations, AME and its agents distributed a brochure that described the program and the alleged risk free nature of the investment. See. e.g., Exhibits attached to Brief of State of Florida; Plaintiff's Hearing Ex. E; RM 60. The record reveals that Messers. Maxwell, Jebrock, Frank, and a representative of an advertising agency, James Farrell, met in Maxwell's New York office to develop the brochure. Statement of Michael Wallach, dated October 23, 1987, at 16-17; Deposition of Michael Jebrock at 91.
While Mr. Jebrock mimimizes his role in the development of the brochure, it appears that his corporation, TWM was aware of the need for "a credible brochure" and that he introduced Mr. Farrell to Mr. Maxwell. Deposition of Michael Jebrock at 393, 505. Moreover, Mr. Jebrock did participate in discussions about its general makeup.
Id. at 100, 575-76. It appears, however, that Mr. Maxwell made the ultimate decision as to the contents and design of the brochure. Id. at 98. Specifically, the brochure states that:
The Equity Building Program from American Metals Exchange offers a proven method for gaining financial leverage . . .
The Equity Building Program is not a futures contract . . . so you don't have to worry about margin calls or forced liquidations during temporary market declines . . . . It is not a finance program . . . you pay no interest charges on your unpaid balance . . .
Although this type of purchase program has been available for less than five years, thousands of Americans across the ...