(CN) – A federal judge in Atlanta tossed the SEC’s lawsuit against Merchant Capital and chided the agency for “studiously ignoring Bernard Madoff and the largest Ponzi scheme in American history” while relentlessly pursuing a case that involved, at worst, mere negligence.
In 2002, the SEC sued Merchant and its principals, Steven C. Wyer and Kurt V. Beasley, for allegedly raising $20 million through the sale of interests in Colorado registered limited liability partnerships. Those partnerships were formed to buy and collect pools of charged-off consumer debt.
The SEC claimed Merchant failed to disclose the partnerships’ poor performance and Wyer’s personal bankruptcy. It also accused Merchant of selling unregistered securities.
U.S. District Judge Marvin Shoob said the partnerships, though ultimately unprofitable, had been based on a reasonable business model and were operated as viable businesses.
“Unlike the investors who trusted their life savings to Mr. Madoff, those who purchased interests in the partnerships at issue here were fully informed of the substantial risks involved, including the possibility that they might lose their entire capital contribution,” Shoob wrote.
He added that Merchant’s partners recovered two-thirds of their investments, and only one out of 500 said they were dissatisfied with the partnerships’ performance.
The SEC nonetheless demanded disgorgement, penalties and more than $10 million in interest, refusing to settle the case unless the defendants admitted to intentional wrongdoing.
The 11th Circuit briefly revived the case for a determination of whether the alleged omissions were made knowingingly or intentionally.
Shoob said they were not, and rejected the SEC’s call for a permanent injunction.
The judge noted that the defendants were forced to spend “untold amounts” of money defending the case, while investors recovered most of their capital.
“The Court finds the conduct of the SEC in this matter much more egregious than the conduct of defendants,” Shoob wrote.
He added that future violations were highly unlikely, as “defendants would have to be crazy to risk incurring the wrath of the SEC again.”
He ordered the SEC to pay Merchant Capital a penalty of $50,000. Wyer and Beasley were awarded $6,000 and $2,000, respectively.
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