Article

Note: In 2010 Frank L. Pavlico created the Milan Group, Inc. and recruited attorney Brynee Baylor (Fraudsters) in a scheme that defrauded 13 investors (Victims) out of USD 2.665 million between August 2010 and November 2011. Fraudsters convinced Victims to invest with Fraudsters, who claimed they could purchase or "lease" bank instruments, including standby LCs, bank guarantees and medium term notes, then leverage and monetize the investments to achieve 180-2400% annual returns. In reality, the money was never invested and was almost entirely pocketed by Fraudsters and certain other recipients, including, among others, Patrick Lewis (Relief Defendant 1) and Brett Cooper (Relief Defendant 2) and their respective companies.

The Securities and Exchange Commission ("SEC") sued Fraudsters and Relief Defendants for violations of a number of securities laws, including Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 10(b), 15(a) and 20(e) of the Exchange Act and Rule 10b-5. SEC filed a motion for summary judgment, which the U.S. District Court for the District of Columbia, Collyer, J., granted against certain defendants.

In its motion, SEC submitted an Expert Report of Professor James E. Byrne, "an expert on commercial and financial investment fraud, banking operations, and standby letter of credit practice." Professor Byrne noted that the scheme employed terms with legitimate financial definitions such as "Prime Bank", "High Yield" and "SWIFT", which Fraudsters misused to lull investors into providing contributions. He clarified that "some of the instruments described in the materials such as standby letters of credit and bank guarantees are not traded . . . [Standbys] are specialized promises that only run to the named beneficiary, are not transferable unless they expressly so state and then only with the consent of their issuer." The report noted that standbys are not investments, do not pay interest, and are not discounted. Banks do not issue standbys unless there is dependable means of reimbursement, and their issuance is treated like a loan.

The Judge granted summary judgment against Relief Defendant 1, who represented that his function was to bring his clients a standby or bank guarantee "that represented the client's collateral 'such as a hard asset like gold or diamonds.'" Relief Defendant 1 claimed that his company contracted with Fraudsters to use a USD 375,000 transfer to secure leases of standbys and bank guarantees, which were to be delivered to a purchasing company. In so ruling, the Judge noted inconsistencies between Relief Defendant 1's testimony and contract documents, and agreed with Professor Byrne's report which established that no such "leased instruments" ever existed.

The Judge did not, however, grant summary judgment against Relief Defendant 2, who alleged that he attempted to procure a bank guarantee or LC in the amount of USD 200 million pursuant to the terms of a contract with Fraudsters. Relief Defendant 2 alleged that the deal fell through only after Fraudsters could not get an undertaking letter required to obtain the bank guarantee or LC. Relief Defendant 2's company was to be compensated, regardless of success, in the amount of USD 225,000 by Fraudsters according to their contract. The Judge found that Relief Defendant 2's description of his efforts to obtain a bank guarantee or undertaking did not, on its face, demonstrate fraudulent conduct. The Judge also accepted Relief Defendant 2's argument that he was merely an employee of his company, and that SEC had provided no basis for piercing the corporate veil.

[KCM/mjb]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.