SALT LAKE CITY -- The Securities and Exchange Commission is suing three men who allegedly bilked investors of $33 million in sales of fraudulent promissory notes backed by an offshore insurer.

The SEC complaint, filed earlier this month, says convicted felon Pete J. Buffo and two other men sold the notes, purportedly to finance companies in the oil and gas drilling and medical equipment leasing business. The SEC charges in its complaint that the companies operated as Ponzi schemes, in which new investors' money was used to pay earlier investors and in which large sums were diverted to companies that Mr. Buffo controlled.

The three men sold the notes as "no risk" investments guaranteed by New England International Surety Inc., a Panamanian insurer with a history of regulatory trouble in the United States.

NEIS is not named as a defendant in the SEC action. However, dozens of defrauded investors have filed a proposed class-action suit against the insurer, charging it with breach of contract for failing to pay off on the guarantees.

NEIS is trying to negotiate a settlement of the claims, lawyers involved in the case say.

Hendrik Rienstra, president of NEIS, said he first learned of the alleged fraud in January, after the SEC initially shut down one of the companies issuing the notes.

"We are making it good to them," Mr. Rienstra said of settlement talks with the investors.

Neither Mr. Buffo nor his lawyer could be reached.

Mr. Buffo is expected to surrender to federal authorities this month to begin serving a 41-month prison sentence for an unrelated surety bond fraud.

In 1995, he was indicted on charges of conspiring to sell worthless corporate and individual sureties secured with bogus or grossly overvalued collateral. The sureties included bonds covering contractors working for the U.S. military and government agencies (BI, Jan. 8, 1996).

Mr. Buffo pleaded guilty in January to three charges of wire fraud and making false statements and was sentenced in May to 41 months in prison and 36 months of supervised release, according to Joel E. Leising, an attorney with the fraud section of the U.S. Department of Justice in Washington.

While under indictment in the surety case, the SEC alleges, Mr. Buffo began operating the Ponzi schemes that led to the SEC suit filed this month in U.S. District Court in Salt Lake City.

In addition to Mr. Buffo, the amended complaint names:

* Capital Acquisitions Inc. and Laser Leasing Inc., the two companies that issued a total of $33 million in three-year promissory notes.

The SEC originally obtained a temporary restraining order against Capital Acquisitions last December. After filing its amended complaint, the agency on Sept. 2 obtained a receivership order against both Capital and Laser Leasing.

* Wayne C. Notwell, president of Capital Acquisitions and vp of Laser Leasing.

Mr. Notwell's Salt Lake City lawyer, Edward Montgomery, said, "We deny any allegation of wrongdoing on his part."

* Clealon B. Mann, who allegedly organized a network of agents to sell the notes through his Utah company, The Somerset Group Inc.

In an interview, Mr. Mann denied that the note offerings were a Ponzi scheme and angrily promised to ignore the SEC lawsuit.

"If it's a Ponzi scheme, it's the only Ponzi scheme in the history of the world that was guaranteed," he said, referring to the NEIS guarantees.

"We do not file answers to people who are the reincarnation of the Gestapo," he added, referring to the SEC. "I'm going to tell them I do not answer people who are escapees from a mental hospital."

* Several companies controlled by Mr. Buffo that allegedly received millions of dollars from the note sales. They include Surety Underwriters & Control Corp. of Utah; Capitol Investment Partners Inc., a Bahamas partnership that is the purported parent company of Capital Acquisitions; and Ute Cal Auto Sales, Best Rate Rent-A-Car Inc., High-Line Medical Instruments Inc. and Fund Line International Inc., all Utah companies.

* Two companies headed by Mr. Mann that received more than $1 million in note proceeds. They are Spectrim International Inc. and Genie Total Products Inc., both Nevada corporations.

According to the complaint, Laser Leasing and Capital Acquisitions both raised money by selling three-year notes that promised a guaranteed annual return of 20% to more than 600 investors in several states.

Laser Leasing, which claimed to be in the business of purchasing laser eye surgery equipment for lease to medical clinics, started selling notes in 1995 and raised at least $9 million, the SEC says.

Capital Acquisitions, which claimed to operate more than 225 oil and gas wells in Kansas and California, began selling its notes in 1996 and took in about $24 million.

Both note offerings were replete with misrepresentations and omissions, the SEC charges.

Laser Leasing investors, for example, were told that their money was secured by interests in the company's laser equipment but were not told that the value of the equipment was far less than the amount of the debt and that income from the leases was too low to cover the note payments.

Capital Acquisitions investors were falsely told they would receive a "100% tax write-off" on their investment income, the suit says. They were not told that income from the company's oil and gas properties was not sufficient to cover the note payments or that securities regulators in several states had already ordered the company, Mr. Mann and Somerset to stop soliciting investors.

The defendants also failed to inform investors that 46% of the note proceeds would go to pay commissions to agents selling the notes and that another 20% was to pay for the guarantees from NEIS.

Of the money purportedly earmarked for the guarantees, less than half actually went to NEIS, with the balance diverted to Mr. Buffo's Surety Underwriters, which received a total of $10 million, the SEC says.

The offerings also failed to disclose Mr. Buffo's role with the companies or his pending criminal indictment.

Charging the defendants with securities fraud, the SEC is seeking an injunction barring them from similar actions in the future and an order requiring them to disgorge illegal profits from the sales.

Meanwhile, dozens of mostly elderly investors are suing NEIS in state court in Salt Lake City.

The complaint says that both Capital Acquisitions and Laser Leasing stopped making monthly interest payments on their promissory notes in January and that NEIS has failed to honor the guarantees covering principal and interest on the notes.

After Capital's default, for example, NEIS wrote to investors noting that the SEC had frozen Capital's assets and expressing hope "that the freeze order soon will be lifted. . .so that Capital's business activities, including payments to note holders, may resume."

"Continued patience on the part of note holders is appropriate," NEIS wrote.

David B. Watkiss, a lawyer representing NEIS in Salt Lake City, said the insurer is trying to negotiate a settlement with the investors for a "substantial eight-figure" amount. He would not comment further on the settlement proposal.

"New England has been cooperating from the outset with the SEC," added Mr. Watkiss, with the firm of Watkiss, Dunning & Skordas.

The lawsuit is the latest in a long line of legal troubles for NEIS, which is incorporated in Panama but operates from offices in Brussels, Belgium, and Geneva.

Insurance regulators in several states hit the insurer with cease-and-desist orders in the mid-1980s over its role insuring Dyna Span Corp., a purported risk purchasing group, and the now-defunct Insurance Corp. of America of Boca Raton, Fla.

In 1989, NEIS dumped the records and business of its Louisiana-licensed underwriting unit, New England International Surety of America, on Louisiana regulators after they disallowed millions of dollars of its reported assets and found it insolvent. In a faxed letter, Mr. Rienstra accused Louisiana regulators of political bias and said simply that "we have decided to turn the Louisiana company's business over to you."

The unit was ordered liquidated, and a Louisiana judge issued an arrest warrant for Mr. Rienstra after finding him in contempt of court for failing to turn over the insurer's assets.

In an interview, Mr. Rienstra said he was unaware of the arrest warrant and said that the insurer resolved all of its problems with Louisiana regulators.

In a 1996 financial statement, NEIS reported total assets of $177.8 million, including $46.5 million in real estate and a $50 million "European investment." Net earned premiums in 1996 totaled $17.3 million, the statement said.

NEIS appears to be a smaller company that it was in 1985, when it reported $301 million in assets, including $250 million in Brazilian real estate.