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U.S. judge tosses SEC case over alleged Ponzi scheme
05/13/2014 Email this story  |  Printable Version

By Nate Raymond

May 13 (Reuters) - Five former real estate executives do not have to face a U.S. Securities and Exchange Commission lawsuit accusing them of engaging in a $300 million Ponzi scheme, a U.S. judge has ruled, saying the agency waited too long to sue.

U.S. District Judge James King in Key West, Florida, on Monday dismissed the 2013 lawsuit against executives of the now-defunct Cay Clubs Resorts and Marinas because it was filed after a five-year statute of limitations.

"This is a case in which the SEC - the agency whose principal mission is to 'protect investors and the markets by investigating potential violations of the federal securities laws - failed to meet its serious duty to timely bring this enforcement action," King wrote.

Defense lawyers say the ruling goes further than others have, following a 2013 U.S. Supreme Court decision holding a five-year statute of limitations for the SEC to seek civil penalties begins when the fraud occurs, rather than when it is discovered.

While the Supreme Court did not reach the question of whether the statute of limitations covered injunctive relief and disgorgement, King concluded the "long-held policies and practices" underpinning the ruling required that conclusion.

A spokesman for the SEC said it was reviewing the decision.

The lawsuit was brought against Cay Club's former chief executive officer, Fred Davis Clark; the company's ex-chief accounting officer, David Schwarz; and three sales executives, Cristal Coleman, Barry Graham and Ricky Lynn Stokes.

The SEC said the executives defrauded upwards of 1,400 investors with claims they were funding the development of five-star resorts in Florida and Las Vegas.

Clay Clubs ultimately raised more than $300 million, the SEC said, promising investors a guaranteed 15 percent return and future income stream via a rental program the company managed.

But the SEC called it a Ponzi scheme, saying any returns investors received came from funds of later investors.

The SEC launched an investigation that lasted seven years before filing its lawsuit. The defendants, who said they ended involvement with Clay Clubs in 2007, moved to dismiss on statute of limitations grounds.

Russell Weigel, a lawyer for Stokes, said the ruling could "have profound implications for the defense of SEC cases nationwide" by finding the court lacked jurisdiction over the SEC's claims due to the statute of limitations.

"Therefore, any untimely case - regardless of the equitable or legal nature of the remedies sought by the government - cannot be entertained by the court," he said.

The statute of limitations issue could arise in the case of Texas tycoon Samuel Wyly and the estate of his deceased brother, Charles, whom a jury in New York found liable for engaging in a $550 million fraud Monday.

The Wylys' lawyers have contended the amount of profits their clients might need to disgorge should be limited, citing the statute of limitations.

Other Clay Clubs defendants and their lawyers did not respond to requests for comment.

The case is Securities and Exchange Commission v. Graham et al, U.S. District Court, Southern District of Florida, No. 13-10011. (Reporting by Nate Raymond in New York; Editing by Noeleen Walder and Tom Brown)


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