A US district court has reserved judgment on whether the US Securities and Exchange Commission will be able to enforce four subpoenas against Lines Overseas Management and Scott Lines.

The subpoenas stem from an SEC investigation of alleged securities fraud involving Sedona Software Solutions Inc. and SHEP Technologies Inc., both of Vancouver, Canada, and HiEnergy Technologies Inc., of Irvine, California. The SEC says that it has asked LOM to provide information such as account statements relating to trades in the shares of these companies, but the Bermuda-based firm has refused on grounds that it is restricted by confidentiality laws. The Bermuda Monetary Authority has submitted evidence in support of the SEC's action.

Last Friday's hearing was scheduled to allow LOM and its managing director Scott Lines the opportunity to show cause why they should not be ordered to comply with the investigative subpoenas that SEC staff personally served on Mr. Lines in Miami International Airport on April 20, 2004.

The hearing before Magistrate Judge Alan Kay of the US District Court for the District of Columbia went ahead despite a request from Mr. Lines for leave to file an additional reply to SEC evidence.

Mr. Lines' counsel said in court documents that the SEC made "numerous additional allegations against Scott Lines" in its reply memorandum and submitted "over 3 inches of documents purportedly in support of these allegations". Counsel said Mr. Lines needed time to review and digest the documents and new information in the SEC's allegations.

The judge denied the request for the sur-reply (secondary reply) on the basis that these are only granted, "if the last pleading filed, the reply raises new matters." He said that in this case no new factual allegations, nor legal arguments have been made.

Yesterday a spokesperson for LOM said that the "denial was a procedural issue. Mr. Lines' counsel was able to provide the same information to the court during his verbal presentation".

The spokesperson went on to say that during Friday's two hour hearing: "LOM's counsel set forth arguments as to why the subpoenas should not be enforced, and advised that the proceedings are improper because there are existing, legal mechanisms for the SEC to request any remaining information it is seeking. It should be noted that this is a civil matter only, and that no charges have been filed in connection with the investigation."

Documents filed with the court show that Mr. Lines' and LOM's status in the US are among the issues in dispute. Counsel asserts that the court does not have personal jurisdiction over Scott Lines because it would "offend traditional notions of fair play and substantial justice for this Court to exercise "tag" jurisdiction over a foreign national who has handed a subpoena while in the country to see a doctor". Counsel also argues that the SEC does not have statutory authority to seek documents and information from outside the US through an administrative subpoena and the SEC has not provided facts to establish that Scott Lines, as an individual had minimum contacts with the United States "sufficient to drag him into federal court in Washington, D.C".

Mr. Lines lawyer Ivan B. Knauer wrote in another document filed with the court: "Scott Lines did not lie in his Declaration and in fact did not stay overnight in Miami as the SEC claims he did. Scott Lines deserves the opportunity to respond to these defamatory assertions."

Mr. Lines declared in an October 29 statement filed with the court that he went to the United States for the purpose of seeing a heart doctor in Boston, arriving in Miami on April 20, 2004.

"As a favour I made arrangements for a friend to stay at the Mandarin Oriental hotel in Miami. I went from the airport to the Mandarin Oriental hotel to sign in and pay for the room.

"After securing the hotel room for my fiend at the Mandarin Oriental hotel, I made arrangements to leave her the key to the room. I then returned to the airport and left for the Bahamas," Mr. Lines said adding that he did not spend the night of April 20, 2004 in the Mandarin Oriental hotel nor did he have spa service at the hotel.

"The calls made from the hotel room were not made by me. I recognise some of those calls as being to my cellular phone number.

"I departed Miami on American Airlines flight #5125 on the same day I arrived ? April 20, 2004 at approximately 7:30pm."

The SEC argues otherwise.

"Upon clearing US customs in Canada, [Mr. Lines told the customs agent that he planned to spend one day in Boston and two days in Miami," Branch Chief with the Division of Enforcement of the SEC Michael Ungar said in a declaration filed with the court. "Mr. Lines stayed at the Mandarin Oriental on the night of April 20, 2004 and did not depart Miami until April 21, 2004. While he was at the Mandarin Oriental, Mr. Lines found the time to receive a spa treatment and to make several business calls to his office."

Mr. Ungar's declaration also sought to show that LOM solicits and conduct business throughout the US through such things as its US-registered website www.LOM.com and US brokerages.

In his evidence to the court he submitted many account statements including those from LOM's account with vFinance in Florida that allegedly tie LOM to the securities the SEC is investigating.

Mr. Ungar said the vFinance account sold "significant amounts of shares in Sedona Software Solutions Inc. and SHEP Technologies Inc. during the period of January through June 2003. Scott Lines had trading authority on this LOM account at vFiancne. Ex. C."

He highlighted a single week of trading in January which "reflected communications between LOM and vFinance concerning orders to sell approximately 100,000 shares of Sedona on behalf of customers (including Brian Lines and Scott Lines".

Mr. Ungar said that LOM was trading millions of shares of stock over the US markets through its accounts at various brokerage firms. vFinance Trader Ryan Leeds who was responsible for the LOM account at vFiance earlier filed a declaration that LOM's trading over the US markets was "more than the trading of most US regional banks" and that he "either accumulated or liquidated millions of shares a day for them[LOM."

Mr. Ungar's evidence further alleges LOM's contacts with the US relating to the SEC's Sedona Investigation. For instance, Sedona share certificates that LOM sent to Mellon in New York purport to show that they are owned by five different companies - Gateway Research Management Group Limited, Clyde Resources Ltd. Warwick Ventures Ltd. Iguana Investments Ltd. and ICH Investments Limited. Mr Ungar said that a staff investigation shows that all these companies were acting as nominees for Scott and Brian Lines and one LOM customer. The SEC alleges that these companies were held by nominees Kevin Winter, Graham Redford, Stuart Smith, Richard King and Kevin Way and the Lines brothers "compensated these nominees by selling Sedona shares to them at $4 per share when the current market price was $9/share." The SEC also alleges that some of these very same entities or people were used by LOM/Brian Lines to acquire the SHEP shell company.

Magistrate Judge Kay has reserved his judgement on the matter, however the SEC has already said that it is committed to pursuing its investigation no matter what the decision.

Meantime a panel for Canada's British Columbia Securities Commission (BCSC) has yet to issue its decision in a separate hearing involving parent company LOM (Holdings), LOM Securities (Bahamas) Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Cayman) Ltd., Lines Overseas Management, Donald P. Lines, Brian N. Lines, Scott G.S. Lines, Malcolm Moseley, David McNay and J. Scott Hill.

The BCSC panel is considering whether the companies and individuals have failed to comply with request for information in its investigation of San Telmo Energy.

LOM argues that it has been seeking to co-operate with the BCSC "in as expeditious a manner as possible" that does not put LOM in jeopardy of breaching the laws of Bermuda, Bahamas and the Cayman Islands, its operating jurisdictions. LOM's representatives also say sanctions are not appropriate since LOM was not the target of the investigation itself.