GA District Court Finds Ghods and RUSA Cap, Inc. Liable for Securities Fraud

Holding:

The U.S. District Court for the Northern District of Northern Georgia has granted the Securities and Exchange Commission’s (“SEC”) motion for summary judgment on its claims against Zahra Ghods ("Ghods"), and RUSA Cap., Inc. ("Rusa Cap"). Ghods and Rusa Cap, a company that she controls, were found to have defrauded investors in connection with Ghods's false promises to earn generous returns for investors in "prime bank" instruments. In so doing, the district court ordered Ghods to pay disgorgement of $4,045,736, prejudgment interest of $810,121, and a $120,000 civil penalty. In addition, the district court ordered Rusa Cap to pay a civil penalty of $600,000. The district court also enjoined Ghods and Rusa Cap from further violations of the federal securities laws. In ruling in favor of the SEC, the district court held that no reasonable juror could find for the defendants because of the overwhelming evidence in the record that Ghods and Rusa Cap violated the antifraud provisions of the federal securities laws as alleged in the complaint.

Detailed Summary:

The SEC alleged in its complaint that from as early as February 2004 through May 2006, Ghods and RUSA actively participated in a fraudulent prime bank scheme perpetrated by Geoffrey Gish (“Gish”) and several entities that he controlled. That prime bank scheme involved the sale of approximately $29.6 million of securities to more than 300 investors located throughout the United States. The SEC previously filed an emergency action against Gish and his affiliated companies on May 17, 2006. SEC v. Geoffrey Gish, et al., Case No.1:06-cv-1171-CC (N.D. Ga.).

The complaint also alleged that Ghods and RUSA participated in one of the three fraudulent prime bank schemes that Gish offered, Zamindari Capital, LLC, and received approximately $9 million of investor funds. Zamindari was represented to be a high yield investment program that generated lucrative profits by purchasing debt instruments from major international banks at a discount and quickly reselling them at face value. RUSA was the entity that would supposedly trade these debt instruments for Zamindari investors.

The SEC asserted that to entice investors to invest in Zamindari, Ghods represented that all investor funds would remain in a blocked account, from which no withdrawals could be made. In truth, no such blocked account existed. Ghods transferred approximately $830,000 of investor funds to Unisource Cap, LLC, another company that she owned and controlled, and then used those funds to pay miscellaneous personal expenses. Ghods also claimed that she used $2.2 million of investor funds for the development of an iron ore mine in Mexico that Unisource purportedly owns. Ghods transferred the remaining $5 million of investor funds to an offshore bank account, and those funds were then transferred to a third party.

The complaint further alleged that, to create the false appearance that their investments were safe, Ghods told Gish and several investors that RUSA guaranteed all investments with a $100 million certificate of deposit that RUSA held at Canadian Imperial Bank of Commerce, a Canadian financial institution. In fact, no certificate of deposit existed.

The SEC claimed that Ghods and RUSA violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that relief defendant Unisource, directly or indirectly, obtained funds or other assets to which it has no legitimate claim, and has been unjustly enriched thereby.

The SEC sought (i) permanent injunctions enjoining defendants Ghods and RUSA against future violations; (ii) disgorgement of ill-gotten gains plus prejudgment interest; (iii) imposition of civil penalties against defendants Ghods and RUSA; and (iv) an order appointing a receiver for defendant RUSA.

In ruling in favor of the SEC, the district court noted that in opposing the SEC’s motion, defendants filed an affidavit by Ghods that attempted to shift the blame in this case to Gish and others . After reviewing Ghods’s affidavit, the district court found “that, even assuming the truth of the nonconclusory, noncontradictory, and otherwise not improper statements in Ghods’s affidavit, and upon viewing the evidence in the light most favorable to the Defendants, the affidavit does not establish the existence of a genuine issue of material fact that precludes the entry of summary judgment in favor of the SEC.” Order, p. 8.

The district court found that no reasonable juror could find for defendants because of the overwhelming evidence in the record that Ghods and Rusa Cap violated the antifraud provisions of the federal securities laws as alleged in the complaint.

Moreover, the district court found that defendants failed to present significant probative evidence in contravention of the proof offered by the SEC.

The district court thus concluded that there is no genuine issue as to whether Ghods made material misstatements in connection with the purchase and sale of securities, and as to whether she acted, at a minimum, with severe recklessness in making such misstatements.

On the basis of the foregoing, the district court granted the SEC’s motion for summary judgment.

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