Article

Prime Bank Instrument Scams.

Type of Lawsuit:

Action by SEC against alleged scamsters for violation of antifraud provisions of US securities laws, for disgorgement of illicit profits, and permanent injunction against future violations.

Parties:

Plaintiff- SEC

Defendant/Alleged Scamsters- Joseph Bremont; Jimmy B. Sanchez; Comcar International, Ltd; Commercial Capital Resources, Inc.

False Instruments:

Purchase Orders for Prime Bank Instruments.

Activities:

The allegations are that:

1) On 25 July 1993, Bremont agreed to provide a Purchase Order for a $8 million PBI and on August 6 delivered what appeared to be a Purchase Order from First Federal Bank, an admittedly non-existent entity, to the escrow agent who paid him $150,000 deposited in the account by victims.

2) On 29 March 1994, Bremont undertook to provide a $44 million Purchase Order and on 1 April an escrow amount of $175,000 was released upon delivery of another First Federal Purchase Order.

3) On 15 February, 1995, Bremont agreed to provide a $100 million Purchase Order and subsequently delivered a Purchase Order purportedly from Turkiye Halk Bankasi (which denied that it issued it), receiving $350,000 from the escrow account.

4) On 14 April 1994, Bremont received $250,000 from the escrow account established by a group of West Point cadets even though no Purchase Order was delivered, blaming the non delivery on a technical error by the cadet leader. The P.O. was to have been issued by the Bank of Ireland which denied involvement.

Decision:

The U.S. District Court for the Southern District of New York, Kaplan, J., granted the SEC's Motion to Freeze Assets Pending Trial and For a Verified Accounting, finding that the defendants acted, at the least, recklessly and with the requisite intent.

Notes:

1. As to the existence of prime bank instruments, the court noted that:

Fraud in connection with PBIs, which often are referred to by other names, has become rife in recent years. While the details of these schemes vary, all or most rest on the premise that major international banks buy and sell PBIs said to be high yield bank instruments on a secret market that offers large and essentially risk free profits. Brokers or promoters, by one means or another, offer to cut victims in on these profits for a fee. In fact, there is substantial evidence that no such market and no such instruments exist. In any case, banks whose names are used in these schemes often deny any knowledge of the instruments and transactions.

2. In response to the argument that the antifraud securities laws do not cover fraud involving non-existent instruments, the court stated, "Extending the protection of the securities laws to the victims of schemes so fraudulent that the underlying paper does not exist logically follows, as fraudsters would have a perverse incentive to magnify their deceptive conduct."

3. Although the use of an escrow agent provided the appearance of safety, the structure of the arrangement permitted disbursement against receipt of a "Purchase Order", an instrument without value or legitimacy. As a result, the escrow arrangement provided no effective protection.

©1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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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.