SEC Delay Extinguishes $300M Ponzi Allegations

(CN) - Finding that the Securities and Exchange Commission "failed to meet its serious duty to timely bring" an enforcement action, a federal judge closed the case it brought over an alleged $300 million Ponzi scheme.

The SEC filed its complaint over a year ago in Miami, claiming that five individuals took more than $300 million from 1,400 investors, "directly and through Cay Clubs Resorts and Marinas," claiming they were selling "units in purported five-star luxury resorts at 17 locations nationwide."

Cay Clubs was not named as defendant in the action against its CEO Fred Davis Clark Jr. aka Dave Clark; Clark's wife, Cristal Coleman aka Cristal Clark; sales director Barry Graham; investor-relations director Ricky Lynn Stokes; and CFO David Schwarz.

Each individual held the job title in question at the time of the alleged scam: from November 2004 or earlier until at least July 2008.

But U.S. District Judge James King found Monday that the five-year statute of limitations has clearly lapsed, depriving the court of jurisdiction over the case.

He dismissed the action with prejudice, noting that "the SEC waited" despite an exhaustive seven-year investigation. Some investors have even brought their own civil lawsuits against the defendants over the years, the 25-page ruling states.

"In essence, the SEC's argument in this case is that because the words 'declaratory relief,' 'injunction,' and 'disgorgement' do not appear in Section 2462, no statute of limitations applies," King wrote.

Finding otherwise, the judge cited the U.S. Supreme Court's decision last year in Gabelli v. SEC.

"Penalties, 'pecuniary or otherwise,' are at the heart of all forms of relief sought by the SEC in this case," King wrote. "First of all, by its very terms, the SEC's complaint seeks to have the court, by way of a declaration that the defendants have violated the federal securities laws, 'label defendants wrongdoers.' Similarly, the injunctive relief sought by the SEC in this case forever barring defendants from future violations of the federal securities laws can be regarded as nothing short of a penalty 'intended to punish,' especially where, as here, no evidence (or allegations) of any continuing harm or wrongdoing has been presented. Finally, the disgorgement of all ill-gotten gains realized from the alleged violations of the securities laws - i.e., requiring defendants to relinquish money and property - can truly be regarded as nothing other than a forfeiture (both pecuniary and otherwise), which remedy is expressly covered by Section 2462. To hold otherwise would be to open the door to government plaintiffs' ingenuity in creating new terms for the precise forms of relief expressly covered by the statute in order to avoid its application." (Parentheses in original.)

The ruling also looks at whether any of the defendants could be said to have acted in a way giving rise to the SEC's claim within "the red zone," within the five years prior to the SEC's filing of its complaint.

"Having not carried its burden of showing by a preponderance of the evidence that any of the defendants committed any acts giving rise to the SEC's claim - the offering or selling of alleged securities - after the critical date of January 30, 2008, the court is left to conclude that it is without subject-matter jurisdiction over this case, and therefore it must be dismissed," King wrote.

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