Monday, October 31, 2016

No. 184: The SEC's Fraud Charges Against Torchia—An Update

On November 10, 2015, the Securities and Exchange Commission (SEC) filed a 39-page, eight-count civil complaint against James A. Torchia, who is a Georgia resident, and five entities he controlled. The SEC alleged securities fraud, including operation of a Ponzi scheme. The two aspects of the case are the marketing of unregistered promissory notes arising from subprime automobile loans, and the marketing of unregistered interests in viatical and life settlements. In No. 128 (November 19, 2015), I reported on the case and offered readers a complimentary PDF containing the SEC complaint. (See SEC v. Torchia, U.S. District Court, Northern District of Georgia, Case No. 1:15-cv-3904.)

An Unsolicited Email
On October 3, 2016, I received out of the blue an email message from "Jim Torchia." The text of the email consisted of two sentences:
Read your article about the charges against me. You may want to get the real truth behind this action by the sec [sic].
I follow the practice of refraining from contact with litigants. Therefore I reported the email to Torchia's attorney and the SEC's lead attorney, and invited them to provide any information they might wish to share. I received no reply. However, I decided to prepare this update.

Early Developments
The case was assigned to U.S. District Judge William S. Duffey, Jr. President George W. Bush nominated him in November 2003, and the Senate confirmed him in June 2004.

When the SEC filed its complaint, it also filed an emergency motion for a temporary restraining order, an asset freeze, and the appointment of a receiver. On November 19 Judge Duffey ordered the SEC to file a motion for a preliminary injunction, and he ordered the parties to engage in expedited discovery. On December 1 the SEC filed a motion for a preliminary injunction, and the defendants filed a motion to dismiss the complaint. On December 15 the SEC opposed the motion to dismiss the complaint, and the defendants opposed the motion for a preliminary injunction. On December 18 the SEC responded to the defendants' opposition to the motion for a preliminary injunction. On January 7 and 8, 2016, Judge Duffey held a preliminary injunction hearing. On January 19 the parties filed a joint report and discovery plan.

Judge Duffey's Order
On April 25 Judge Duffey issued an 87-page opinion and order. He outlined the background of the case and his findings of fact. He described the defendants' businesses, the procedural history of the case, and the testimony at the preliminary injunction hearing. He denied the defendants' motion to dismiss the complaint. He granted the SEC's motion for a preliminary injunction, a freeze on the defendants' assets, and the appointment of a receiver. He appointed Al B. Hill of the Atlanta law firm of Taylor English Duma LLP as receiver.

Judge Duffey also ordered financial institutions and others to file statements describing assets they hold in the name of or for the benefit of the defendants. In response to that component of the order, many life insurance companies filed statements. Among them are Allstate Life, American General, American National, Athene Annuity & Life, Bankers Life & Casualty, Conseco Life, John Hancock, Liberty National, Lincoln National, Manufacturers Life, Massachusetts Mutual, Nationwide Life, Pacific Life, Primerica Life, Protective Life, ReliaStar Life, Transamerica, United of Omaha, USAA Life, and Voya Financial.

Some Other Developments
On May 9, 2016, the defendants filed an answer to the SEC complaint. Later in May the receiver filed several emergency motions relating to the handling of certain assets of the defendants, and Judge Duffey generally granted the motions. On July 15, the parties filed another joint preliminary report and discovery plan. On July 27, the receiver filed a status report. At this writing discovery is continuing, including a deposition by Torchia. A trial date has not been announced, but discovery is to be completed by December 30, 2016, with no further extensions.

General Observations
The details of the case, as described in Judge Duffey's April 25 order, are troubling. The allegations against the defendants and the judge's findings are very serious. Whether the case goes to trial remains to be seen. I plan to report further on the case.

Available Material
I am offering a complimentary 87-page PDF containing Judge Duffey's April 25 order. E-mail and ask for Judge Duffey's order in the case of SEC v. Torchia.