Securities And Exchange Commission v. City Capital Corporation et al

Filing 1

COMPLAINT filed and summon(s) issued. Consent form to proceed before U.S. Magistrate and pretrial instructions provided., filed by Securities And Exchange Commission. (Attachments: # 1 Civil Cover Sheet)(fap) Please visit our website at http://www.gand.uscourts.gov to obtain Pretrial Instructions.

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

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SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
vs.
CITY CAPITAL CORPORATION,
EPHREN W. TAYLOR, II and
WENDY JEAN CONNOR,
Defendants,

COMPLAINT
Plaintiff United States Securities and Exchange Commission (“Commission”)
alleges:
SUMMARY
1.

Self-proclaimed “Social Capitalist” and former CEO of City Capital

Corporation (“City Capital”), Ephren W. Taylor, II (“Taylor”), operated a Ponzi
scheme to swindle over $11 million, primarily from African-American
churchgoers. Taylor promoted two distinct, fraudulent offerings. First, he sold
promissory notes issued by City Capital and various affiliates, bearing annual
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interest rates of 12% to 20%, telling investors their funds would be used to
purchase and support various small businesses – such as a laundry, juice bar or gas
station – that City Capital had identified as good opportunities for the investors.
For the second offering, Taylor sought the assistance of City Capital’s Chief
Operating Officer, Defendant Wendy Jean Connor (“Connor”), in selling
“sweepstakes machines,” basically computers loaded with various games, many of
which resembled those found at casinos. Taylor claimed the sweepstakes
machines would generate investor returns of as much as 300% or more in the first
year. To tap into the investors’ largest source of available funds, Taylor
encouraged investors to roll-over retirement portfolios to self-directed IRA
custodial accounts, which he facilitated, and then invest those funds with Taylor
and City Capital.
2.

In reality, City Capital never generated significant – if any – revenue

from actual business operations, but instead was wholly dependent upon a
continuous stream of new investor funds just to stay open. Investor funds
supposedly targeted for specific investments were used to pay unrelated expenses,
including “returns” to other City Capital investors, salaries and commissions to
City Capital executives and employees, and payroll, rent and other basic operating
expenses at City Capital’s various affiliates. When new investor funds dried up
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during the latter half of 2010, the entire operation ground to a halt, leaving
hundreds of swindled investors.
JURISDICTION AND VENUE
3.

This Court has jurisdiction over this action under Section 22(a) of the

Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 78u(a)] and Section 27 of
the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78aa].
4.

Defendants have, directly or indirectly, made use of the means or

instruments of transportation and communication, and the means or
instrumentalities of interstate commerce, or of the mails, in connection with the
transactions, acts, practices, and courses of business alleged herein.
5.

Venue is proper here because certain of the acts, practices,

transactions and courses of business alleged herein occurred within the Northern
District of Georgia.
DEFENDANTS
6.

City Capital Corporation is a Nevada corporation with its last-known

headquarters in Cypress, California. City Capital is an OTC-link quoted company.
It does not have a class of securities registered under Section 12 of the Exchange
Act, but it is subject to Exchange Act Section 15(d) reporting requirements. City
Capital’s last-filed periodic report was its delinquent 2009 Form 10-K, filed June
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15, 2010. The company now purports to be in the roofing and solar panel business,
through a recently acquired subsidiary called ERX Energy.
7.

Ephren W. Taylor, II is 29 years old. His last known residence was in

New York City. He failed to respond to a number of Commission investigative
subpoenas, including a subpoena requiring his appearance for testimony. His
current whereabouts are unknown. He served as City Capital’s CEO and Chairman
until October 22, 2010, when he abruptly resigned.
8.

Wendy Jean Connor, age 43, resides near Raleigh, North Carolina.

She was City Capital’s COO from mid-2009 until approximately November 2010,
when she left the company.
FACTS
I.

Background
9.

Taylor strenuously cultivated an image of a highly successful and

socially conscious entrepreneur. Marketing himself as “The Social Capitalist,” he
touted equally his status as the youngest black CEO of a public company and the
son of a Christian minister who understands the importance of “giving back.”
Taylor has authored three books and made public appearances on such television
programs as The Montel Williams Show and The Donnie Deutsch Show. Taylor
became City Capital’s CEO in May 2006 and served in that role until October
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2010. In early 2009, he asked Connor to run City Capital’s daily operations,
including the company’s new focus on sweepstakes machines.
II.

Taylor’s Promotional Activities
10.

Taylor promoted his investment opportunities through three principal

media: live presentations, internet advertisements, and radio advertisements.
A.

Live presentations at churches and ‘wealth’ seminars

11.

Taylor conducted a multi-city “Building Wealth Tour,” on which he

spoke to church congregations – including Atlanta’s New Birth Church – or at
wealth management seminars featuring other speakers. Taylor promoted the
Building Wealth Tour on his personal website, through City Capital press releases,
and in conjunction with the churches and civic groups that hosted him. Taylor
heavily emphasized his Christian background (his father is a minister) and, indeed,
was at times referred to as “Minister Taylor.” He also touted his “socially
conscious” investment focus and successful entrepreneurial history. Taylor
devoted considerable time to denigrating traditional investment vehicles, such as
CDs, mutual funds and the stock market, labeling them as “foolish” and “money
losers.” He told audiences they could make far greater returns using self-directed
IRAs with investments in small businesses and sweepstakes machines.

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12.

After the presentations, interested investors met with Taylor or other

City Capital employees, learned about current investment opportunities, and
received paperwork, including forms to establish self-directed IRAs at certain
custodians City Capital used. Investors subsequently established and funded these
accounts, usually liquidating other investments to do so. City Capital employees
then confirmed with those investors which particular programs they wanted to
pursue. Once investments were chosen, funds would be wired from the selfdirected IRA custodian to City Capital or its affiliates.
B.

Internet and radio ads

13.

Taylor also offered investments through internet presentations called

“webinars,” which were essentially videotaped versions of his live presentations.
He also set up numerous websites describing his background, success and socially
conscious approach to investing. The webinars and websites provided email
addresses and toll-free numbers for interested investors to contact City Capital.
Once investors made contact, they typically were directed to establish self-directed
IRAs and given the same information as investors who attended the live meetings.
14.

After starting the sweepstakes machine offering in late 2009, Taylor

and City Capital launched websites specifically promoting these investments. One
of these websites, sweepstakesincome.com, described the investments as “the
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brainchild of self-made millionaire Ephren Taylor” and featured Taylor’s lengthy
dissertation about “How You Can Create a Zero-Maintenance, Residual Income
Using the Sweepstakes Empire!”
15.

Taylor also touted the sweepstakes machines on radio stations across

the country. He purchased air time – typically in weekly blocks – from over 30
stations. These stations collectively played Taylor’s one-minute advertisement
several thousand times. The ads repeated many of the same false claims about the
sweepstakes machines, detailed below.
III.

Investments offered
A.

Promissory notes

16.

From 2008 until summer 2010, Taylor, City Capital and their affiliates

raised at least $7 million from the issuance of promissory notes to over one
hundred investors around the country, including investors from Atlanta’s New
Birth Church. The notes were offered either directly by City Capital, or through
various City Capital affiliates Taylor controlled throughout the relevant periods.
These notes normally had a one-year term and bore interest rates of 12-20%.
Though Taylor and his staff collected information about income and net worth, no
effort was made to limit the offering to accredited or sophisticated investors.

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17.

Taylor and other City Capital employees advised investors, either in

person or on the phone, that note proceeds would be used to acquire and operate
the particular City Capital affiliate that issued the notes. Investors sometimes were
provided offering documents describing the business that was issuing the notes,
including financial reports on past and expected future operations. These
documents were drafted by Taylor, or by others at his direction.
18.

While some of the funds raised were used as promised, the majority of

funds were spent on unrelated items, such as promotion for Taylor’s book,
consultants for Taylor’s speaking engagements and public relations, studio time for
his wife’s music career, credit card bills, car payments, and rent for Taylor’s New
York apartment. The businesses typically floundered – or outright failed, as in the
case of City Juice – as soon as City Capital acquired them. In fact, City Capital
sold one laundry back to the original owner just one month after selling City
Laundry promissory notes to a Houston investor. These details were not disclosed
to investors.
19.

Payments on the notes were sporadic at best, and City Capital rarely

repaid any notes in full. Most commonly, City Capital pressed investors to roll
their notes over for another year (or longer) by promising to increase the rate of
return. The roll-over solicitations typically touted the supposed “great things” –
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usually of a socially conscious nature – City Capital was doing with the investor’s
money, which were all untrue. Investors who renewed were issued new
promissory notes with the new term and interest rate. Any investor who resisted
was subjected to an endless cycle of unreturned phone calls and emails, empty
promises of imminent action, and claims that the investor had in fact already
agreed to roll over his note. To the extent investors survived this gauntlet to still
insist on repayment, any funds they received invariably came from new investor
money.
20.

By early 2010, City Capital’s bookkeeper regularly emailed Taylor

and Connor with updates on the company’s cash flow struggles. Put simply, City
Capital could not pay its bills, and Taylor sought to generate new revenue by
offering the sweepstakes machines. Meanwhile, Taylor established a settlement
trust to force note investors to accept equity – in either City Capital or its affiliates
– in satisfaction of the notes. Yet when City Capital and its affiliates thereafter
sold new notes, or issued new notes as part of roll-over transactions, investors were
not told of this plan. Not surprisingly, the settlement plan did not comply with
applicable securities laws.

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B.

Sweepstakes machines

21.

Offering materials stressed that the sweepstakes machines did not

involve gambling, comparing them to McDonald’s “Monopoly” prize game.
Investors were not told about the risks of illegality of the machines, or that several
law enforcement agencies had taken action against City Capital’s and other parlors.
City Capital claimed to have purchased and established several “internet cafes”
featuring the machines. Investors paid up to $4,997 per machine to invest. City
Capital paid 10% commissions to employees who sold the sweepstakes investment,
and paid Taylor and Connor overriding commissions of 10% per machine. City
Capital raised at least $4 million from the sale of sweepstakes machines to over
250 investors in multiple states. Like the promissory notes, Taylor, Connor and
their staff collected information about income and net worth, but made no effort to
limit the sale of the sweepstakes machines to accredited or sophisticated investors.
22.

Taylor drafted the sweepstakes’ offering materials – indeed, the front

page identifies the author as “Ephren Taylor, City Capital Corporation, CEO” and
includes his picture -- and Connor reviewed them before they were disseminated to
investors. The sweepstakes’ materials emphasized the wholly passive nature of the
investment, stating in bold letters, “We do EVERYTHING including but not
limited to” placing the machines where City Capital “ensure[d]” they would be
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“used around the clock”; managing, marketing and providing security for the
locations; maintaining and servicing the machines; and collecting and distributing
the revenues. These materials repeatedly stressed the “easy” and “risk-free” profits
of the investment, in which “top-earning machines” generated 2400% returns per
year, “average” machines returned 300% per year, and even “bottom 10%”
machines generated returns of 72% per year. These alleged returns supposedly
were based on City Capital’s “years” of experience with “over 3,000 machines.”
To bolster these claims, Taylor inserted into the offering materials an actual
“receipt” claiming that a “single sweepstakes machine” generated $2,149.30 “net”
over a “MERE 10-DAY PERIOD.” Investors even received a “100% risk-free,
money-back” guarantee, under which City Capital would return to investors the
purchase price, less any returns received, if the sweepstakes machines failed to
make “a substantial return … in the first year.” This guarantee was void if the
investor placed his own machine. The materials also claimed that City Capital
would donate a percentage of revenues to charity, which dovetailed with Taylor’s
overarching sales pitch of “socially conscious” investing.
23.

The offering materials were fraudulent. Among many falsehoods, the

“actual receipt” featured in the materials was bogus; it actually reflected the gross
proceeds from all 26 machines in a particular location, not the net proceeds from a
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single machine. In truth, City Capital’s track record with sweepstakes machines
was abysmal, and this operation stayed alive only by conning new investors into
the scheme. Investor funds were pooled into the operating account of a now
defunct City Capital subsidiary, Clean Sweeps Holding Group LLC, and then used
for a variety of purposes unrelated to buying, placing, maintaining or servicing
sweepstakes machines or locations. For instance, sizable sums were transferred to
City Capital’s general operating account to fund its expenses, as well Taylor’s
personal credit card expenses. Plus, in most instances, Defendants never
purchased new machines for investors, but instead simply assigned existing
machines from sweepstakes parlors they had purchased. Moreover, Defendants
failed to send any portion of the proceeds to charity, as promised.
24.

To the extent machines were placed for (or assigned to) customers,

they uniformly lost money. To conceal this from investors, Taylor and Connor
authorized payment of phantom monthly returns to investors starting at least as
early as April 2010. That month, City Capital’s bookkeeper alerted Taylor and
Connor to the weak performance of the company’s recently acquired North
Carolina and Texas parlors, explaining that the locations each suffered a loss after
deducting operating expenses. Rather than tell investors assigned to machines in
those locations that they would get no distributions – perhaps to avoid an investor
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backlash – Taylor and Connor instructed the bookkeeper to pay simulated returns
essentially pulled from thin air. The bookkeeper had to divert funds received from
new sweepstakes machine investors – and from investors’ funds in other City
Capital ventures – to make these payments. As the parlors continued to lose
money over the ensuing months, Taylor and Connor instructed the bookkeeper to
continue making these simulated payments, telling her simply to make the same
payment “as last month.” These payments ended after August 2010, when City
Capital ran out of money.
FIRST CLAIM
Violations of Securities Act Section 17(a)(1), (2), and (3)
(Against Defendants City Capital, Taylor and Connor)
25.

Paragraphs 1 through 24 are realleged and incorporated by reference.

26.

Defendants, in the offer or sale of securities, have (a) employed

devices, schemes or artifices to defraud; (b) made untrue statements of material
facts and omitted to state material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading;
and (c) engaged in acts, practices and courses of business which operate as a fraud
or deceit upon purchasers, prospective purchasers, and other persons.
27.

As part of and in furtherance of the scheme, Defendants, directly and

indirectly, prepared, disseminated or used contracts, written offering documents,
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promotional materials, investor or other correspondence, and oral presentations,
which contained untrue statements of material facts and misrepresentations of
material facts, and which omitted to state material facts necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading, including, but not limited to, those set forth above.
28.

Defendants engaged in the conduct described in this claim knowingly

or with severe recklessness. In addition, Defendants were negligent as they
engaged in the conduct described in this claim.
29.

By reason of the foregoing, Defendants violated, and unless enjoined,

will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q].
SECOND CLAIM
Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder
(Against Defendants City Capital, Taylor and Connor)
30.

Paragraphs 1 through 24 are realleged and incorporated by reference.

31.

Defendants, in connection with the purchase or sale of securities,

have: (a) employed devices, schemes or artifices to defraud; (b) made untrue
statements of material facts and omitted to state material facts necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading; and (c) engaged in acts, practices and courses of business

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which operate as a fraud or deceit upon purchasers, prospective purchasers, and
other persons.
32.

As part of and in furtherance of the scheme, Defendants, directly and

indirectly, prepared, disseminated or used contracts, written offering documents,
promotional materials, investor or other correspondence, and oral presentations,
which contained untrue statements of material facts and misrepresentations of
material facts, and which omitted to state material facts necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading, including, but not limited to, those set forth above.
33.

Defendants made these misrepresentations and omissions knowingly

or with severe recklessness.
34.

By reason of the foregoing, Defendants violated, and unless enjoined,

will continue to violate Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule
10b-5 [17 C.F.R. § 240.10b-5] thereunder.
THIRD CLAIM
Aiding and Abetting City Capital’s and Taylor’s Violations of
Exchange Act Section 10(b) and Rules 10b-5
(Against Taylor and Connor)
35.

Paragraphs 1 through 24 are realleged and incorporated by reference.

36.

Based on the conduct alleged herein, City Capital and Taylor violated

Exchange Act Section 10(b) and Rule 10b-5 thereunder by making public
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misrepresentations and omissions directly to investors, and in the documents
accompanying the promissory notes describing the various City Capital affiliates
and the sweepstakes machines offering materials.
37.

Defendants Taylor and Connor, in the manner set forth above,

knowingly or with severe recklessness provided substantial assistance to City
Capital in its violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder.
In addition, Connor provided substantial assistance to Taylor in his violations of
Exchange Act Section 10(b) and Rule 10b-5.
38.

By reason of the foregoing, Defendants Taylor and Connor aided and

abetted City Capital’s violations of, and unless enjoined, will aid and abet further
violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Moreover, Connor aided and abetted Taylor’s violations of, and unless enjoined,
will aid and abet further violations of Section 10(b) of the Exchange Act [15
U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
FOURTH CLAIM
Violations of Sections 5(a) and 5(c) of the Securities Act
(Against Defendants City Capital, Taylor and Connor)
39.

Paragraphs 1 through 24 are realleged and incorporated by reference.

40.

Defendants, directly or indirectly, singly and in concert with others,

have been offering to sell, selling and delivering after sale, certain securities, and
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have been, directly and indirectly: (a) making use of the means and instruments of
transportation and communication in interstate commerce and of the mails to sell
securities, through the use of written contracts, offering documents and otherwise;
(b) carrying and causing to be carried through the mails and in interstate commerce
by the means and instruments of transportation, such securities for the purpose of
sale and for delivery after sale; and (c) making use of the means or instruments of
transportation and communication in interstate commerce and of the mails to offer
to sell such securities.
41.

As described herein, Defendants City Capital and Taylor offered and

sold promissory notes allegedly to fund various small businesses, and all
Defendants offered and sold sweepstakes machines to the public through a general
solicitation of investors. No registration statement has been filed with the
Commission or is otherwise in effect with these securities.
42.

By reason of the foregoing, Defendants violated, and unless enjoined,

will continue to violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§
77e(a) and 77(e)(c)].
FIFTH CLAIM
Violation of Section 15(a)(1) of the Exchange Act
(Against Defendants Taylor and Connor)
43.

Paragraphs 1 through 24 are realleged and incorporated by reference.
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44.

Defendants Taylor and Connor, directly or indirectly, singly and in

concert with others, made use of the emails or means or instrumentalities of
interstate commerce to effect transactions in, or to induce or attempt to induce, the
purchase or sale of securities, without being registered as a broker or dealer, or
being associated with a registered broker or dealer.
45.

By reason of the foregoing, Defendants Taylor and Connor, directly or

indirectly, have violated, and unless enjoined, will continue to violate Section
15(a)(1) of the Exchange Act [15 U.S.C. § 78o-5].
RELIEF REQUESTED
For these reasons, the Commission respectfully requests that the Court enter a
judgment:
(a)

permanently enjoining City Capital Corporation from violating,
directly or indirectly, Securities Act Sections 5(a), 5(c), and 17(a) and
Exchange Act Section 10(b) and Rule 10b-5 thereunder;

(b)

permanently enjoining Ephren Taylor from violating, directly or
indirectly, Securities Act Sections 5(a), 5(c), and 17(a) and Exchange
Act Sections 10(b) and 15(a)(1), and Rule 10b-5 thereunder, and from
aiding and abetting further violations of Exchange Act Section 10(b)
and Rule 10b-5 thereunder;
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(c)

permanently enjoining Wendy Connor from violating, directly or
indirectly, Securities Act Sections 5(a), 5(c), and 17(a) and Exchange
Act Sections 10(b) and 15(a)(1), and Rule 10b-5 thereunder, and from
aiding and abetting further violations of Exchange Act Section 10(b)
and Rule 10b-5 thereunder;

(d)

prohibiting Taylor and Connor under Section 20(e) of the Securities
Act [15 U.S.C. § 77t(d)] and Section 21(d)(2) of the Exchange Act
[15 U.S.C. § 78l], from acting as an officer or director of any issuer
that has a class of securities registered under Section 12 of the
Exchange Act [15 U.S.C. § 78l] or that is required to file reports under
Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)];

(e)

ordering Defendants City Capital, Taylor and Connor to disgorge an
amount equal to the funds and benefits they obtained illegally, or to
which they are otherwise not entitled, as a result of the violations
alleged, plus prejudgment interest on that amount;

(f)

ordering Defendants City Capital, Taylor and Connor to pay monetary
penalties under Section 20(d) of the Securities Act [15 U.S.C. §
77t(d)] and Sections 21(d)(3) and 21A of the Exchange Act [15
U.S.C. §§ 78u(d)(3) and 78uA]; and
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(g)

granting such other and further relief as the Court deems just and
proper.

Dated: April 12, 2012

Respectfully submitted,

/s/ Jennifer D. Brandt
Jennifer D. Brandt
(Pro Hac Vice Application Pending)
Texas Bar No. 00796242
James E. Etri
(Pro Hac Vice Application Pending)
Texas Bar No. 24002061
United States Securities and Exchange
Commission
Burnett Plaza, Suite 1900
801 Cherry Street, Unit #18
Fort Worth, Texas 76102-6882
Phone: [phone]
Fax: [phone]
[e-mail]
ATTORNEYS FOR PLAINTIFF
/s/ M. Graham Loomis
M. Graham Loomis
Georgia Bar No. 457868
United States Securities and Exchange
Commission
50 East Paces Ferry Road, Suite 900
Atlanta, Georgia 30326
Phone: [phone]
Fax: [phone]
[e-mail]
LOCAL COUNSEL FOR PLAINTIFF

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