Regulatory Issues
After living through the Internet Bubble of the 1990's, most investors are familiar with the traditional IPO. It's the most widely recognized form of taking a company from private to public. However, what many people don't realize is that there are numerous other ways for private company to become publicly traded. PCMC consults with and advises businesses that seek to go public through a private placement and registration under the Securities Exchange Act of 1934 or a fully registered self-distribution of their stock tot the public. PCMC does nto engage in reverse mergers, reverse take overs, or shell company transactions.
There is a thriving cottage industry of merchant bankers and entrepreneurs who specialize in orchestrating reverse mergers. Unfortunately there are no barriers to entry in this field. Therefore, scams are commonplace. Some have developed methods to accumulate large positions in the free trading shares of shell companies. A Reverse in consummated with a marginal private company and the agents of the deal put together a massive publicity campaign designed to create activity in the stock. Unrealistic promises and absurd claims of corporate performance find their way to the public. The enhanced trading volume allows the scam artist to dump his shares on the unsuspecting public most of whom eventually lose their money once the newly formed public company fails. This scam is commonly known as a "Pump and Dump". Here are some examples of prohibited transactions.
Pump and Dump Cases
http://www.sec.gov/litigation/litreleases/lr17673.htm
Securities and Exchange Commission v. Environmental Solutions Worldwide, Inc. et al., Cause No. 02-1575 JDD (D.C.)
Litigation Release No. 17673/ August 9, 2002
The SEC alleges that defendants perpetrated a massive stock fraud in the Nasdaq Over-the-Counter securities market, by issuing ESWW stock to various insiders through a sham private offering, and then "pumped" the market with a fraudulent promotional campaign, including press releases, spam e-mails, and a paid analyst report, all designed to artificially prime the market for ESWW stock. The promotional campaign had the intended effect, when ESWW stock jumped from $2 to $7 per share. Defendants then concurrently sold approximately $15 million of ESWW stock into the unsuspecting market.
The Commission's complaint alleges that based on the conduct set forth above, the defendants violated the following provisions of the federal securities laws, including Sections 5(a), 5(c), 17(a), and 17(b) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13b2-1, 13b2-2, 13d-1, and 16a-3.
The complaint seeks injunctions, officer and director bars, and disgorgement of ill-gotten gains plus pre-judgment interest as well as civil penalties.
http://www.sec.gov/litigation/litreleases/lr17305.htm
Securities Exchange Commission V. Max C Tanner et al, 02 CV 0306(S.D.N.Y.) (WHP) (January 14, 2002)
Litigation Release No. 17305/ January 14, 2002
The complaint alleges that the Defendants engaged in a pump and dump scheme involving the stock of Maid Aide, Inc. ("MDAN"), a shell company trading on the Over-the-Counter Bulletin Board ("OTC-BB"). And that as a result of this scheme, MDAN traded at artificially inflated prices ranging between $5.00 and $9.35 per share, allowing the Defendants to dump more than 475,000 MDAN shares into the market for proceeds of over $3.7 million.
The Commissions complaint charges violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder.
In addition, the complaint charges violations of Sections 5(a) and 5(c) of the Securities Act and violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act.
Commission seeks injunctions prohibiting future violations of the securities laws, disgorgement, and civil penalties. The Commission is also seeking an order barring Tanner and Evans from serving as an officer or director of any public company.
http://www.sec.gov/litigation/admin/34-49073.htm
United States of America before the Securities and Exchange Commission
Securities and Exchange Act of 1934
Release No. 49073/January 14, 2004
Admin. Proc. File No. 3-11355
In the Matter of LUIS F. LORIE
ORDER MAKING FINDINGS AND IMPOSING SANCTIONS BY DEFAULT
This Order bars Luis F. Lorie (Lorie) from participating in an offering of penny stock, he will thus be barred from acting as a promoter, finder, consultant, or agent; or otherwise engaging in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock. Lorie was previously convicted of securities fraud and enjoined against violations of the securities laws based on his wrongdoing in a pump-and-dump scheme.
http://www.sec.gov/litigation/litreleases/lr18328.htm
Securities and Exchange Commission v. New Energy Corp., Tor Ewald, Geneva Financial Ltd., Marcelino Colt aka Marcelino Colt Vasquez, Magnum Financial, LLC, Michael S. Manahan, BLD Trust, Barclay Davis, Loretta Davis, Burke T. Maxfield, York Chandler, and Hector Campa Acedo, Civil Action No. CV-02-989-MMM (CWx) (C.D. Cal.)
Litigation Release 18328 / September 8, 2003
The Commission's complaint alleged that New Energy and Ewald were part of a "pump and dump" scheme to manipulate New Energy's stock price during a one-month period ending on January 18, 2002, when the Commission suspended trading. The scheme, included the hiring of Magnum to post a false and misleading buy recommendation, the distribution of mass e-mails or spam containing fraudulent statements, issuing a false and misleading press release, and placing the release onto New Energy's website.
Judgments were entered against New Energy, Ewald, Magnum, and Manahan that enjoin them from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Furthermore, pursuant to the consent of the parties, the Court entered a limited asset freeze which represent alleged ill-gotten gains from trading New Energy shares.
http://www.sec.gov/litigation/litreleases/lr18586a.htm
The Sec complaint alleges that defendants fraudulently promoted Aqua Vie's common stock by means of millions of one-page tout sheets faxed to homes and businesses. Millions of shares of Aqua Vie's common stock were offered publicly, without any registration statement in effect as to the offering. Defendants dumped millions of shares into a market reflecting demand created by the fax promotion, without disclosing the increase in the public float of Aqua Vie securities.
The Commission is seeking injunctive relief; disgorgement, pre-judgment interest, civil monetary penalties and penny-stock bar and an officer and director bar.
http://www.sec.gov/litigation/litreleases/lr18381.htm
Litigation Release No. 18381 / September 30, 2003
Securities and Exchange Commission v. 2DoTrade, Inc., George Russell Taylor, Barry William Gewin aka Barry Peters, Eric T. Landis, Dominic Roelandt, Michael D. Karsch, L. Van Stillman, David A. Wood, Jr., Clinton Walker, Oxford and Hayes, Ltd., FG & P Consulting, Ltd., Hackney Holdings, Ltd., Weston Partners, Inc., Infiniti Corporate Services, Ltd., Argo Financial, Ltd., 21st Equity Partners, Inc., MCG Partners, Inc., and LMR, Ltd., Civil Action Number 3:03-CV-2246-N (Godbey) (N.D. Texas, Dallas Division)
According to the SEC's complaint, from July to November 2001, the defendants engaged in a fraudulent scheme in which they artificially pumped 2DoTrade's stock with false press releases, spam e-mail, and a fraudulent website and then illegally dumped millions of shares into the inflated market.
The Commission's complaint alleges that defendant 2DoTrade violated sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") and sections 10(b) and 13(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
It alleges that defendants Gewin, Roelandt, and Landis, and the defendant companies they controlled, violated sections 13(d) and 16(a) of the Exchange Act and Rules 13d-1, 16a-2, and 16a-3 thereunder.
The SEC seeks, among other relief, permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest, and civil money penalties against all the defendants well as other specific remedies against specific defendants.
Securities and Exchange Commission v. Craig J. Shaber, Stephen R. Wright, and Bonaventure Capital, Ltd., defendants, and Aspen International Marketing, Inc. and Wright & Geis, Inc., relief defendants. Civil Action No. 3:03-CV-2247-G (Fish) (N.D. Texas, Dallas Division).
In a separate civil lawsuit filed on the same day, the SEC alleged securities fraud and other violations against a California attorney and accountant who created and sold the public shell company used in the 2DoTrade scheme.
The violations refer specifically to sections 5(a), 5(c), and 17(a) of the Securities Act and sections 10(b), 13(d), and 16(a) of the Exchange Act and Rules 10b-5, 13d-1, 16a-2, and 16a-3 thereunder, as well as sections 13(a) of Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The SEC seeks disgorgement with prejudgment interest from each defendant and relief defendant and further seeks permanent injunctions, an accounting, and officer-and-director bars against defendants Shaber and Wright.
Creating Phony Shells
http://www.sec.gov/litigation/litreleases/lr19017.htm
The Securities and Exchange Commission announced that on December 28, 2004, United States District Judge Fern Smith in San Francisco entered judgment against Hershey Moss of St. Louis. The judgment enjoined Moss from future violations of the antifraud provisions of the securities laws and imposed a $25,000 civil penalty.
On July 6, 2004, the Commission filed a civil complaint against Moss, alleging that he misrepresented the business plan for his company, National Pizza Corporation, in the company's registration statement for its initial public offering. The Commission alleged that Moss falsely portrayed National Pizza as a legitimate start-up company, when in fact Moss intended to merge the company with a privately-held company for compensation. Moss consented to the entry of judgment against him without admitting or denying the allegations of the Commission's complaint.
The Commission's complaint was brought under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
Reverse Merger Cases
http://www.sec.gov/litigation/admin/34-44388.htm
From around August 1999 until at least February 2000, the Respondents arranged reverse mergers between reporting companies that they controlled and issuers that might not otherwise satisfy the eligibility rule. The Respondents then arranged reverse mergers with issuers that faced possible delisting. The target companies paid TPG Capital a substantial fee for each transaction, and in some cases provided the Respondents with warrants to purchase shares of their stock. In the course of providing these services, the Respondents repeatedly made false or misleading disclosures in documents filed with the Commission. Between May 26, 1999 and November 18, 1999, the Respondents filed amended registration statements for five blank check companies ("the blank check companies") that falsely stated that the companies had not engaged in negotiations with specific entities regarding a possible business combination. Three of these companies also filed periodic reports falsely stating that they had not engaged in merger negotiations. The Respondents thereby violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused the blank check companies to violate Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder.
http://www.sec.gov/litigation/admin/34-43711.htm
Defendant created and maintained a website located at adargroup.com, offering advice regarding alternative methods for privately held companies to become public and begin trading. One of the methods described on the website is a reverse merger transaction with an existing shell company. Website claims "hands-on supervision" with respect to, among other things, locating shell companies and buyers, preparing the reverse merger transaction, performing due diligence, restructuring the corporation, and assisting with negotiation. Defendant is not registered as a broker dealer as required for such transactions
http://www.sec.gov/litigation/litreleases/lr17665.htm
The Commission alleges the defendants participated in a scheme to sell stock to the public without registering with the Commission, thus allowing the defendants and other corporate insiders to sell millions of shares of stock into the public market without disclosing their control over the companies. The defendants, without admitting or denying the allegations in the Commission's complaint, consented to the entry of permanent injunctions against them and agreed to pay disgorgement, prejudgment interest and civil penalties.
The defendants were in the business of creating shell companies -- also known as blank check companies -- with no operations and no existence aside from publicly traded stock that the defendants controlled. These shell companies were created for the purpose of merging them with privately held companies in a process known as a reverse merger. Through the reverse mergers, the privately held companies became publicly traded without registering with the Commission. While such mergers are not illegal, stock held by insiders or affiliates after the merger generally cannot be resold absent registration.
http://www.sec.gov/litigation/litreleases/lr18546.htm
Securities and Exchange Commission v. Capital Acquisitions, Inc, et al., Civil Action No. 2:97-0977B (D. Utah)
U.S. v. Clealon B. Mann, Criminal Action No. 2:02-0741TC (D. Utah)
Both cases alleged that Mann was primarily responsible for selling interests in the Capital Acquisitions program, and raised approximately $24 million from investors nationwide. It was further alleged that Mann represented to investors that the money would be used to finance acquisition of properties to produce oil and gas, but was instead used to make interest payments to earlier investors and to finance other ventures that Mann or co-defendant Peter J. Buffo controlled.
http://triangle.bizjournals.com/triangle/stories/1998/03/16/daily3.html
SEC suspended trading in IHI's stock for a period of 10 business days, one day after a reverse merger placed it on the over-the-counter markets. The SEC alleges that International Heritage is operating a pyramid scheme, and has sold more than $150 million in unregistered securities over its three-year history. The SEC is asking for the reimbursement of all such funds and the levying of unspecified civil fines against founders.
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