A legal battle pitting Chicago’s BCI Aircraft Leasing and its chief executive Brian Hollnagel against attorneys from the Securities & Exchange Commission (SEC) has continued to escalate over the past several months.

It all started in August when the SEC filed a civil lawsuit in the U.S. District Court for the Northern District of Illinois alleging BCI was nothing more than a complex Ponzi scheme with Hollnagel at the helm.

In court filings, the SEC alleges that Hollnagel and BCI sold membership shares in limited liability corporations purportedly set up to lease aircraft; but while investors were told they would profit from lease revenues generated by the deals, in fact Hollnagel “often used investor money of one LLC to pay investors in another LLC,” creating the perception that the deals were turning a profit.

Hollnagel has denied all the charges, though he admitted the company suffered from inadequate accounting procedures.

In responding to the SEC’s claims, BCI’s attorneys were less conciliatory. “This is not a Ponzi scheme. I vehemently object to that characterization; it’s flat-out wrong,” BCI attorney William Holmes told the Chicago Tribune.

The problem with the SEC’s case so far appears to be their inability to find anyone — other than its own investigators — to complain about the aircraft lessors’ financial practices.

In denying an SEC motion to freeze BCI’s assets and appoint a receiver to manage the company, even the judge overseeing the case — U.S. District Judge Elaine Bucklo — reportedly asked the SEC whether it could show that BCI had actually cheated investors out of a specific amount of money.

So far the SEC has not, and it’s not likely it will since some 110 BCI investors have said they plan to invoke the Fifth Amendment rather than testify in the case should they be subpoenaed — a move that would seem to suggest the existence of some wrongdoing.

Nonetheless, Bucklo gave BCI 60 days to buy out remaining investors, which Hollnagel says he completed on Oct. 9.

But the SEC challenged that assertion, arguing that Hollnagel and BCI were misleading the court about the nature of the repayment because only a portion of the repayment was made in cash; the remainder was comprised of “aircraft or promises of proceeds from contingent sales of aircraft under defendants’ control,” the SEC claims.

In a court filing dated Oct. 11, the SEC argued that under those conditions, the repayment was little more than a “continuation of the original Ponzi scheme” and asked the judge to find BCI in contempt of court.

To bolster its claims, the Commission added to their contempt charge BCI’s failure to disclose that one of its major lenders, GMAC Commercial Finance, foreclosed August 23 on loans secured by six aircraft owned by BCI.

In their response to the contempt motion, BCI’s attorneys pointed out that, contrary to the SEC’s assertions, the court did not require BCI repay investors in cash.

“The SEC has attempted to expand the terms of the court’s order far beyond what the court actually said, and then to argue that because defendants have not done what the SEC wants them to do — as opposed to what the court directed — they should be held in contempt,” the defense response reads.

BCI went on to call the SEC claims “overheated,” and added that it would have been able to repay investors in cash had not the negative publicity generated by the SEC’s action led to the collapse of a $36-plus million buyout deal with Bridgeview Bank.

At press time, a status hearing on the contempt motion was set for Nov. 5.