Case: 08-11816-JMD Doc #: 1037-1 Filed: 02/25/14 Desc: Declaration of Attorney Stephen W.

Simpson US Securities & Exchange Commission Page 1 of 8

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW HAMPSHIRE In re:

USA SPRINGS INC.,

Case No. 08-11816-JMD Chapter 7

Debtor.

DECLARATION OF STEPHEN W. SIMPSON U.S. SECURITIES AND EXCHANGE COMMISSION DIVISION OF ENFORCEMENT I, Stephen W. Simpson, am over 18 years of age and declare the following: 1. I am an attorney with the U.S. Securities and Exchange Commissions Division of

Enforcement (the Commission) 2. On December 18, 2013, the Commission filed a lawsuit, Securities and Exchange

Commission v. Malom Group AG, 2:13-cv-2280 (D. Nev.), alleging that Malom Group AG (hereinafter Malom) and several other individuals and entities violated several of the federal securities laws by luring investors into fraudulent advance-fee investment schemes with fictitious prime bank instruments and exotic high-yield trading programs. The lawsuit specifically alleges that the LTNs purportedly held by Malom and that Mr. Paul Papas of WBPFOR Group Trust seeks to sell are fraudulent. 3. Exhibit A. A true and correct copy of the Complaint filed in that matter is attached as

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The Letras Tesouro Nacional (LTNs) Purportedly Held By Malom Are Fraudulent 4. Among other allegations, the Commission alleges that Malom sought to defraud

investors using LTNs, Brazilian sovereign bonds from the 1970s that the Brazilian government has publicly and unequivocally disclaimed as worthless. See, e.g., Complaint at 8, 61-65. 5. Attached as Exhibits B and C to this declaration are true and correct copies of

English-language websites from Brazils Tesouro Nacional (equivalent to the U.S. Dept. of the Treasury)1 and the Banco Central do Brasil (equivalent to the Federal Reserve Bank).2 These websites generally warn that 1970s-era LTNs are worthless and that official-looking documents purporting to authenticate or value these instruments are fraudulent. 6. For example, the Tesouro Nacional states that [a]ll LTNs issued in the 1970s . . .

are no longer valid, and that [a]ny documents about rescheduling these papers are an imitation intended to be passed off fraudulently or deceptively as genuine, attempting to give credibility to transactions that the National Treasury considers deceit with public securities, see Exhibit B. 7. The Tesouro Nacional further states that it does not recognize the LTN featured

as purple, blue, green, gold or any letter (H-series) or another color offered by the market. The LTNs in question are purportedly part of the H-Series. See Warras Depo., Exhibit 2 at 1 (showing Serie H); id. at Exhibit 3 at 2, 4 (translation showing H series); id. at Exhibit 5 at 1. Moreover, according to the law firm that purported to verify the bonds, Campos e Campos Advogados, the LTNs are of the Purple series. See Warras Depo., Exhibit 6 at 2. 8. The Banco Central do Brasil states that BCB has received frequent requests of

information regarding supposed bonds or documents called Certido Conjunta de Valor

The Tesouro Nacional website is available at: https://www.tesouro.fazenda.gov.br/en/about-the-federal-publicdebt/frauds-related-to-public-bonds. 2 The Banco Central do Brasil website is available at: http://www.bcb.gov.br/textonoticia.asp?codigo=626&idpai=NEWS.
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Atualizado, Certificado de Repactuao and Declarao de Autenticidade, that shows BCBs logo and signatures pretending to be of its directors or of directors of other Brazilian entities. . . . [These] documents are fake and do not represent debts of the Central Bank or of the Brazilian government, see Exhibit C; see also Banco Central do Brasil, FRAUD WARNING http://www.bcb.gov.br/pre/alerta/port/alerta_titulos_falsos.asp(first posted July 24, 2009). 9. The Banco do Brasil states that all bonds issued by the National Treasure and

kept in custody at the Special System for Liquidation and Custody, managed by the Central Bank, exist only in book-entry form, i.e., they dont exist as paper documents. They are issued, traded and safeguard in electronic systems. See id. 10. Despite these warnings, which have been continuously available on the Tesouro

Nacionals and Banco Central do Brasils websites since 2009, Malom and its agents sought to convince many people, including those involved with USA Springs, that these LTNs were legitimate and extraordinarily valuable using several forged documents, including a Cert Repac (or Repac Certificate) from the Tesouro Nacional, dated November 19, 2010, Complaint at 65; a Certido Conjunta de Valor Atualizado from the Banco Central do Brasil, dated October 24, 2008; a Safe-Keeping Receipt and attachment thereto allegedly provided by Merrill Lynch, Complaint at 1153; and a contractual document purporting to show how Malom originally acquired the LTNs, id. at 113-114. 11. I have attached as Exhibit D to this declaration true and correct copies of the

Repac Certificate4 and the Certido Conjunta de Valor Atualizado from the Banco Central do Brasil as Exhibit D for the Courts convenience. Further, I have attached as Exhibit E to this

The Safe-Keeping Receipt (or SKR) is referenced in the WBPFOR Group Trusts February 14, 2014 Motion to Purchase Judgment. See Motion to Purchase Judgment at 20. 4 The Repac Certificate was also attached as Exhibit 2 to the December 5, 2011 Deposition of Maloms James C. Warras (hereinafter Warras Depo.), which WBPFOR Group Trust attached to its Motion for 28 U.S.C. 157(b) Relief and Offer to Purchase Judgment, filed February 14, 2014 (hereinafter WBPFORs Motion).
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declaration a true and correct copy of the Merrill Lynch Safe-Keeping Receipt and that forged attachment that accompanied it.5 12. As demonstrated by the clear and unambiguous warnings by two Brazilian

institutions, these official-looking documents that purport to authenticate the LTNs are forgeries. The Banco Central do Brasil is even more specific, stating that the Certido Conjunta de Valor Atualizado and Certificado de Repactuao which carry its logo or are signed by members of its Board are fraudulent. Compare Exhibit C and Exhibit D. These are both documents Malom used in furtherance of its fraud. 13. forgery. 14. Attached as Exhibits F and G are true and correct copies of declarations from a Furthermore, the attachment to the Merrill Lynch Safe-Keeping Receipt is a

custodian of records at Merrill Lynch and the purported signatory of the Merrill Lynch SafeKeeping Receipt and the attachment thereto. 15. The custodian of records states that the attachment, which purports to be a Merrill

Lynch document valuing and authenticating the LTNs and related paperwork, is fraudulent. He further states that Merrill Lynch only issues receipts to depositors, not attachments like the one purportedly provided to Malom, and that no employee would be authorized to sign a document making legal and other claims about documents deposited with the company. 16. The purported signer of the Safe-Keeping Receipt, a Vice President at Merrill

Lynch, states that while the signature resembles his, his name is misspelled in the document, he would have never signed this document, and he would have never authorized anyone to sign such a document on his behalf.

The attachment to the SKR is also attached as Exhibit 7 to WBPFORs Motion.

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The Transaction Proposed by Papas Bears Red Flags of Fraud 17. The transaction proposed by WBPFOR Group Trust reflects significant red flags

indicating that either the transaction itself is not legitimate or the mysterious purchaser is attempting to secure these LTNs (along with a court order that may be used to legitimize them) to defraud other investors. 18. To aid in evaluating the transaction proposed by WBPFOR Group Trust, I have

attached as Exhibit H a true and correct copy of the Expert Report of James E. Byrne, which the Commission filed in support of a successful motion for summary judgment in a case involving high-yield investment schemes that utilized prime bank instruments such as the LTNs at issue. See Exhibit H, Expert Report of James E. Byrne at 64, filed in SEC v. Wilde, No. 8:11cv315, 2012 WL 6621747, *10-11 (C.D. Cal. 2012), at Dkt. 31-15 (hereinafter Byrne Report). Professor Byrne is a noted expert in international banking and finance and has given expert testimony in over 20 federal and at least 8 state courts. In connection with his work, he has examined more than 2,000 prime bank or high yield investment schemes. 19. A significant red flag in this proposed transaction is the secrecy. Byrne Report at

64 (citing unnecessary or excessive secrecy as a characteristic of prime bank schemes). That the buyer is unwilling to deal with the Court and, apparently unwilling to be identified is troubling, especially when this buyer may be seeking a court order that would assist him or her in defrauding other investors in that such an order would seemingly legitimize the instruments in question. 20. Other red flags include WBPFORs assertion that the Buyer is ready, willing,

and able, see WBPFORs Motion at 11. This phrase is not used in legitimate transactions, but is frequently used in high-yield and prime bank investment scams. See Expert Report of James
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E. Byrne at 61, in SEC v. Wilde, No. 8:11cv315, 2012 WL 6621747, *10-11 (C.D. Cal. 2012), at Dkt. 31-16 (hereinafter Byrne Report). 21. They also include the assertion that the Buyer has a necessary and proper

relationship with the Central Bank of Brazil, see WBPFORs Motion at 65, which suggests that redemption of a public debt is reliant on a secretive insider connection with a government institution. 22. Further, the references to bank messages appear to implicate the use of the

SWIFT messaging system. See WBPFORs Motion at 65. As alleged in the Commissions Complaint against Malom, the SWIFT messaging system is often used in prime bank frauds such as that perpetrated by Malom to give an illusion of sophistication. See Complaint at 38; see also id. at 97; Byrne Report at 42. 23. The use of an unnamed Paymaster is also a red flag. See WBPFORs Motion at

65-66. Although WBPFOR Group Trust is willing to identify this person as someone who is a Partner of an international Law Firm that is over 100 years old and has over 100 attorneys on staff as well as someone who served as a judge in the past, he is not willing to identify this person by name. In prime bank schemes, paymasters, who are often retired lawyers, are often used to lull unsuspecting investors into a sense of security. See, e.g., SEC v. Wilde, 2012 WL 6621747, *10-11 (C.D. Cal. 2012); SEC v. Milan Group, Inc., 2013 WL 4505714, *11-12 (D.D.C. 2013); Byrne Report at 68-71. Potential Violations of the Federal Securities Laws 24. Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities

Exchange Act of 1934 generally prohibit fraud in the offer and sale of securities. Further, Section 20(e) of the Exchange Act makes it unlawful to recklessly aid and abet violations of
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these antifraud provisions by providing others with substantial assistance in furtherance of their primary violations. One who knows or who is reckless in not knowing that these LTNs are fraudulent and offers or sells them, especially in light of the clear evidence that they are in fact fraudulent, may be in violation of these antifraud provisions. 25. The Court should also note that the federal securities laws makes it unlawful for a

person who is not registered with the Commission as a broker-dealer to effect any transaction in, or induce or attempt to induce the purchase or sale of a security. Securities Exchange Act 15(a) [15 U.S.C. 78o(a)]. Mr. Papas asserts that he has already engaged a buyer, WBPFORs Motion at 50, and has agreed to sell the LTN, WBPFORs Motion at 51. However, neither Mr. Papas nor WBPFOR Trust are registered with the Commission in any capacity. 26. Furthermore, the federal securities laws prohibit any person, directly or indirectly,

from offering or selling a security in interstate commerce unless a registration statement is in effect as to that security or one of several exemptions to registration apply. Securities Act 5 [15 U.S.C. 77e(a) and (c)]. The LTNs at issue are not registered with the Commission and no exemptions apply. Conclusion 27. In sum, there is significant evidence that the LTNs are worthless and/or fraudulent

and the documents used to verify and/or value them are forged. 28. Further, there is a significant likelihood that the transaction proposed by Mr.

Papas is not legitimate and will only serve to perpetuate a fraud with this Courts imprimatur. 29. Finally, there is a serious risk that additional securities laws have already been

broken in the brokering and purported sale of these LTNs.

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Case: 08-11816-JMD Doc #: 1037-1 Filed: 02/25/14 Desc: Declaration of Attorney Stephen W. Simpson US Securities & Exchange Commission Page 8 of 8

I declare under penalty of perjury that the foregoing is true and correct.

Dated: February 21, 2014

Respectfully submitted, By: /s/ Stephen W. Simpson Stephen W. Simpson U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Phone: (202) 551-4513 Fax: (202) 772-9228 simpsons@sec.gov