A US District Court has ordered Lines Overseas Management and its managing director Scott Lines to comply with four subpoenas issued by the US Securities and Exchange Commission. However, the Bermuda-based company announced yesterday that it will appeal the court's order.

Magistrate Judge Alan Kay of the US District Court for the District of Columbia made the order for obedience on Friday in regards to four administrative subpoenas which the SEC served on Mr. Lines at the Miami International Airport on April 20 last year. The magistrate judge gave a deadline of Valentine's Day to produce documents wanted by the SEC in relation to its investigations of alleged securities fraud involving Sedona Software Solutions Inc. and HiEnergy Technologies Inc. He also ordered LOM and Mr. Lines to follow up the release of the documents by appearing at the SEC's offices to testify to all matters "for continuous days until released by the staff of the SEC".

Lawyers for Mr. Lines and LOM had opportunity to show cause why the subpoenas should not be enforced at a hearing that took place before Magistrate Judge Kay on December 10 last year. Among their arguments, the lawyers said that the subpoenas were not enforceable because the court "lacks personal jurisdiction" over them.

In his written judgment last Friday, however, the magistrate judge rejected this argument. He pointed to the aggregate evidence presented by the SEC that showed LOM "makes routine telephone and wire communications with US businesses for the sole purpose of trading in hundreds of thousands of shares of securities over the US markets, engages in targeted solicitation of US citizens and businesses for future business relationships and establishes contracts with US entities for the conduct of future business dealings".

Of Mr. Lines, he wrote: "Mr. Lines and his brother, Brian Lines, jointly control Largo Flight Limited and Monashee Limited and sold close to a million shares of SHEP Technologies Inc. over the US market. Furthermore, Brian and Scott Lines were apparently the brokers on the two LOM accounts which sold over 2 million SHEP shares over the US market. In addition, the two people who controlled the two LOM accounts paid the US SHEP touters by wiring $600,000 into the US from the two LOM accounts. The same two people who controlled these accounts also transferred from the two LOM accounts approximately 130,000 SHEP shares into US brokerage accounts to compensate SHEP touters."

The SEC contends that Scott Lines is the broker on the two LOM accounts. The magistrate judge pointed to other SEC evidence which discusses an account with LOM called ICH Investments Limited. The SEC said that account was used to pool together resources of the various companies and shell companies making up the Sedona Group "towards the purchase price of the Sedona shell, to distribute the purchase price to the sellers of the Sedona shares, and subsequently, to sell 143,000 Sedona shares into the US market". SEC exhibits showed that Scott Lines contributed over $200,000 towards the purchase of 99 percent of Sedona Shares by ICH Investments Limited.

Magistrate Judge Kay wrote: "Shortly after acquiring Sedona, ICH began selling its shares over the US market. As soon as proceeds were generated from the sale of Sedona shares over the US markets ICH made money transfers to Largo, Monashee and Golden Accumulator totalling $384,999 an amount equal to the capital contribution needed for the initial purchase of the Sedona shell. Because the evidence indicates that Scott Lines controls Largo and Monashee, as well as ICH company, the SEC believes Lines could be liable for several securities violations. In addition to contacts derived from his control of these entities, personally Scott Lines sent a letter directly to Renaissance in the United States regarding the withdrawal of LOM's offer to assist Renaissance in raising capital."

The magistrate judge wrote: "As with LOM, Scott Lines has clearly made numerous contacts with the United States in directly facilitating and executing securities transactions with US businesses and as managing director of LOM. His actions were 'purposefully directed' at the US securities market. The Court concludes that his actions make the prospect of being 'haled' into a United States court foreseeable and the Court so holds."

The magistrate judge noted that the Securities Exchange Act permitted world-wide service of process in cases of the enforcement of subpoenas issued by the SEC. He also dismissed LOM's argument that the Sedona subpoena was invalid because it was addressed to the LOM Group of Companies rather than to Lines Overseas Management Limited.

The judge said: "LOM is incorrect in this assertion because LOM holds itself out on its own website as 'LOM Group of Companies' thus it is entirely reasonable that the SEC subpoena would be addressed in the same name."

The lawyers also said that the subpoenas could not be enforced because disclosure would subject Mr. Lines and LOM to liability in foreign jurisdictions. Magistrate Judge Kay wrote in his ruling that Government evidence had shown there was a foreign legal mechanism by which LOM and Lines could lawfully comply with the US subpoena:

"In the instant case, the government has, at length provided argument and witness testimony challenging LOM's assertion that compliance would necessarily constitute a violation of foreign law."

The company and its managing director also told the court they had previously disclosed the documents requested in the subpoenas. Magistrate Judge Kay noted that the Government disagreed and argued that the information provided to the SEC contained a significant number of redactions and that the information redacted comprised the bulk of the information it seeks.

This is relevant to SEC investigations concerning significant sales of the shares of Sedona SHEP and Hienergy stock to unsuspecting US investors.

The judge wrote: "LOM is careful to state that it has already produced 'many of the documents that are responsive to the subpoenas'.

"LOM, the target of an administrative subpoena, cannot pick and choose the information that it wants to produce. The decision with regard to what information will be disclosed is made by the administrative agency, in its sound discretion pursuant to express authorisation by the Congress."

A LOM spokesman responded to the order yesterday by stating that the company and Mr. Lines planned to appeal the ruling to a higher court.

He said: "Under the applicable procedures, LOM is permitted to seek review by a federal judge in the federal district court in Washington, D.C. that supervises decisions by federal magistrates. LOM intends to request such a review of this decision, which LOM and its attorneys believe reflects significant errors of law and fact."

Michael K. Lowman, assistant chief litigation counsel for the US Securities and Exchange Commission, told The Royal Gazette yesterday that the SEC was "quite pleased" with the ruling and "we're quite sure that the subpoenas are going to hold-up even if they chose to seek to appeal". He said: "We think the court got the right answer, reached the right results and it just confirmed that if LOM is going to transact business in the US markets it is going to have to own up to its obligations and respond to inquires regarding its actions in the US securities markets."

Mr. Lowman said that while an appeal may affect the timing of what happens, the SEC intends to pursue the matters "as promptly and quickly and vigorously as possible".

LOM's spokesman said they "will seek to abide with the final decision of the US federal court, whichever way it is ultimately decided."