SEC accuses Md. man of swindling

Daily Record, The (Baltimore), Oct 1, 2003 by Kathleen Johnston Jarboe

A defense lawyer insists the Securities and Exchange Commission erred in suing a Poolesville man Monday for bilking his own Bethesda face-certificate company of $2 million.

The SEC's complaint alleges John J. Lawbaugh, 38, misrepresented periodic financial statements for 1st Atlantic Guaranty Corp. and its subsidiary SBM Certificate Co. and hid secret money transfers from regulators and 1st Atlantic's management. The scheme was alleged to have allowed Lawbaugh to pocket $1 million of company money and $1 million of investor money for personal use.

Face-certificate companies like 1st Atlantic act as a sort of savings and loan, giving investors promissory notes with fixed returns and expiration dates in exchange for their deposits. The SEC regulates the rare form of investment business, requiring face- certificate companies to protect principal deposits by restricting investing to the type of limited conservative investments allowed to insurance companies.

Regulators allege Lawbaugh skimmed from the top in such deals by inflating transaction charges. One example involved a September 2001 agreement to purchase $702,029 of Prince George's County tax lien certificates.

SBM paid a title company $235,000 more than the listing price to complete the purchase, according to the complaint. While some of the extra money was returned to SBM, regulators allege Lawbaugh kept $188,744 in a secret bank account he opened in 1st Atlantic's name and falsified tax lien certificates to cover for the fraud.

Similar transactions from 1998 to 2002 allowed Lawbaugh to skim more from company accounts, they said.

But Lawbaugh's attorney said the fees paid to Lawbaugh's clients or outside companies were transaction costs that any company would have paid for such work. He earned it, said Henry S. FitzGerald. Lawbaugh is the sole owner of 1st Atlantic and its affiliates.

The SEC said the fraud extended further. Lawbaugh overstated SBM's qualified assets by more than $1 million for 2000 and by about $290,000 in 2001, the commission said. The qualified asset statements are used to ensure face-certificate companies hold enough capital to protect a depositor's principals. SBM said as a result, it misrepresented its financial stability to investors and regulators.

Regulators also said Lawbaugh later took about $1 million from three investors desiring to purchase face-amount certificates, but never deposited the monies. The complaint says instead he misappropriated 1st Atlantic and SBM funds to pay some of the investors' monthly interest payments, while telling others the payments were being reinvested in their account.

Lawbaugh's attorney called the charge a scurrilous lie, saying Lawbaugh eventually returned the money to the three investors rather than allowing them to buy certificates.

SBM's chief financial officer uncovered the alleged skimming scheme in spring 2002, and Lawbaugh resigned as chairman of the board and chief executive on Aug. 16, 2002. He filed for personal bankruptcy this May.

The complaint alleges Lawbaugh violated securities laws and seeks to bar him from serving as an officer or director on a public company or as an investment adviser or underwriter. The SEC said it would also seek reimbursement for ill-gotten gains.

The legal battle is not the first for 1st Atlantic and SBM. The SEC sued the company in April to return about $4 million it transferred from 1st Atlantic to SBM's balance sheet. The move was necessary to maintain SBM's asset requirements to continue to sell face-amount certificates.

Company executives have claimed in court that the transfer was a legal 1st Atlantic investment. But regulators say 1st Atlantic can't invest in its own company and meet asset requirements. Now 1st Atlantic only has about $500,000 should any of its certificate holders choose to redeem their deposits early.

The SEC insinuated in court papers that Lawbaugh's skimming caused the SBM losses that required the company to need the capital injection.

But Lawbaugh's defense attorney said such insinuations are false.

SBM needed the capital because SBM's junior money managers lost a bundle in stock market investments in 2001 and 2002, said Henry S. FitzGerald.

He called Lawbaugh's profit-shifting actions acceptable, and ridiculed the SEC's efforts to turn regular business into a fraud investigation.

After scandals happen, FitzGerald said, The SEC always comes onto battlefield and bayonets the survivors.