ENGAGEMENT: Lincoln Funds Case Summary

On June 19, 2008, the Securities and Exchange Commission obtained a preliminary injunction against Lincoln Funds International, Inc., and its predecessor, Brookstone Capital, Inc., both based in Costa Mesa, California, and its three principals, Robert L. Carver, age 53, his son Robert L. Carver II, age 34, both of Irvine, California, and James L. DeMers, age 64, of Cerritos, California. The defendants raised at least $21 million from nearly 400 investors nationwide in an alleged securities fraud scheme. The Honorable Cormac J. Carney, United States District Judge for the Central District of California, also granted additional relief that the Commission sought, including orders freezing the defendants' assets and the appointment of James H. Donell as permanent receiver over Lincoln Funds, Brookstone Capital, and their related entities.

The Commission's complaint, filed on June 6, 2008 in federal court in Santa Ana, California, alleges that from April 2004 through late May 2008, the defendants sold securities in Lincoln Funds, Brookstone Capital, and three Lincoln Biotech Venture funds created purportedly for making biotechnology-related investments. The defendants enticed investors by dangling the prospect of an upcoming initial public offering (IPO) in Brookstone Capital and later, Lincoln Funds, when no steps had been taken for that purpose. The complaint alleges that the defendants made baseless predictions of an eight- to ten-fold appreciation in the entities' projected stock price, and engaged in a sham transaction designed to hold Lincoln Funds out as a company with no connection to Brookstone Capital or Carver, which were subjects of various state regulatory orders. The complaint alleges that the defendants also concealed Carver's prior criminal record and failed to invest investor funds in biotechnology ventures, as promised.

The Commission's complaint alleges that all of the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 206(1) and (2) of the Investment Advisers Act of 1940, and the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. Additionally, the complaint alleges that Carver, Carver II, and DeMers violated the broker-dealer registration provisions of Section 15(a) of the Exchange Act. Finally, the Commission alleges that Lincoln Funds and DeMers violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. In addition to the relief already granted by the Court, the Commission seeks permanent injunctions, disgorgement, and civil penalties.