UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION
DOUGLAS W. COLT
CV-1:00CV00423 (D.C.D.C) (EGS)
Plaintiff Securities and Exchange Commission ("the Commission") alleges:
NATURE OF THE ACTION
1. During February and March 1999, defendant Douglas Colt, a student at a Washington, D.C. area law school, carried out an illegal scheme to manipulate the price of four stocks using a free subscription internet website called "Fast-Trades.com."
2. Through his scheme centered on recommending stocks, Colt drove up the short-term price for each stock by as much as 700%. By trading in advance of the stock recommendations, Colt generated more than $345,000 in total profits for himself, four individuals who assisted him in the scheme, and two of Colt's friends. At times, some of them garnered profits exceeding 500% within one hour. Within a few hours after the recommendations were disseminated to subscribers, the price of each of the four stocks decreased significantly from its intraday high.
3. Colt targeted low priced, thinly traded stocks knowing that his trades and trades by subscribers would artificially increase the price of the stocks selected. For each of the four manipulated stocks, Colt and the other participants collectively purchased a significant volume of the selected stock -in three cases more than 150% of the total average daily volume [the average number of shares bought and sold each day for approximately 200 business days immediately preceding the selection of the stock by the Fast-Trades.com website]. For all four stock selections, Fast-Trades purchases were made shortly before the website disseminated the recommendations to its subscribers.
4. After making these purchases and before the recommendations to purchase the stock were e-mailed to subscribers, Colt and the other participants entered sell limit orders or had orders entered on their behalf. Colt expected that unwitting subscribers would buy the recommended stock. Colt further expected that the purchases would drive the price higher still, triggering the sell limit orders. This is precisely what happened.
5. Subscriber purchases were essential to the scheme. Thus, Colt constantly needed to maintain and expand Fast-Trades subscriber rolls. To attract new subscribers, Colt recruited and trained his roommates, Kenneth Terrell and Jason Wyckoff, along with Adam Altman -- all law school classmates -- to help him promote the site by posting false and misleading messages on hundreds of publicly accessible internet message boards. These messages disguised the authors' connection with the site and misrepresented the investment success they achieved from following Fast-Trades' recommendations. Partly through these postings, the subscriber base grew to more than 9,000 people over a two month period.
6. Colt also included a false "track record" on the Fast-Trades.com website, where he touted the performance of several stocks that he claimed were past Fast-Trades selections. In fact, several of these stocks had not been selected by Fast-Trades.
7. The Fast-Trades.com website also contained a misleading disclaimer crafted by Colt, Terrell, Wyckoff and Altman that misrepresented their trading intentions to their subscribers. The disclaimer stated that Fast-Trades representatives "may" trade Fast-Trades selections "at any time." In fact, for each of the four stocks, Colt had already purchased the selected stock and entered sell limit orders before Fast-Trades even distributed the selection to its subscribers.
8. By engaging in the transactions, acts, practices and courses of business alleged herein, defendant Colt violated the antifraud provisions of the federal securities laws.
9. The Commission brings this action pursuant to Section 21(d)(1) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78u(d)(1)].
10. This Court has jurisdiction of this action pursuant to Section 27 of the Exchange Act [15 U.S.C. §78aa].
11. The defendant, directly or indirectly, has engaged in, and unless restrained and enjoined by this Court will continue to engage in, transactions, acts, practices, and courses of business that violate Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. §240.10b-5].
12. In connection with the transactions, acts, practices, and courses of business described in this Complaint, the defendant, directly or indirectly, has made use of the means and instrumentalities of interstate commerce, of the mails, and/or of the facilities of national securities exchanges.
13. Defendant Douglas Colt, age 24, is a permanent resident of Colorado Springs, Colorado, and a third-year law student at a Washington, D.C. area law school. During the time of the violations alleged herein, Colt resided in Arlington, Virginia, in an apartment he shared with two law school classmates, Kenneth Terrell and Jason Wyckoff.
CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act
COLT LAYS THE GROUNDWORK FOR THE
14. Douglas Colt began trading stocks in the summer of 1998, when he opened a margin account at Charles Schwab & Co. Through 1998 and early 1999, he predominantly traded technology and penny stocks, holding most positions for only a few days or weeks. In total, he bought and sold approximately thirteen positions before he began making recommendations on the Fast-Trades website. Colt's trading in these thirteen stocks yielded a total net profit of approximately $24.
15. In late January 1999, Colt created Fast-Trades.com, an internet stock selection subscription website. Fast-Trades offered a free "six month trial period," which the website represented was a "limited time" offer, and no subscriber ever paid a fee. Subscribers received the stock selections from Fast-Trades in one of two ways: either through a password protected area of the Fast-Trades website that allowed subscribers to learn the selection twenty-four hours before it was available to the public; or by having the selection e-mailed to them at the same time it became available to subscribers on the website.
16. The website consisted of an introduction page describing the site, a page that allowed visitors to the site to register as subscribers, and a page listing the current stock selection and providing information about the company selected, and displaying a disclaimer. The introduction page also included a "track record" that listed alleged previous stock picks, the highest price the stock reached after that pick, and a "stable high" price purportedly showing a price at which the stock settled after Fast-Trades selected it.
17. The "track record" of alleged previous stock picks that Colt included on the Fast-Trades website was materially false and misleading. In his posted track record, Colt included the names and short term performance of some stocks that had never been selected by Fast-Trades. He did this in order to artificially enhance Fast-Trades stock-picking credibility with potential subscribers. In fact, in an April 27, 1999 online message board posting, Colt revealed his understanding of this part of the scheme when he accused a competing stock picking website of doing the same thing. Using an alias, Colt attacked the other website's track record, calling it an "extremely fraudulent practice." Colt noted that on the first day the competing site appeared, "they somehow had a `track record' of about five picks." The posting continued: "Hmmm . . . think they just made those up so that investors would be fooled into thinking [the unrelated stock picking website] actually knew something about picking stocks? You bet."
18. Colt created the website and selected all of Fast-Trades' recommendations, purportedly after researching various companies. Colt's "research," however was illusory. In an April 29, 1999 online message board posting criticizing an unrelated stock picking website, and again using an alias, Colt set forth an eleven-point blueprint for a price manipulation scheme. Colt's blueprint posting stated: screen for thinly traded stocks in the $1 to $2 range; get rid of all the oil and gas stocks because "they're nottrendy"; modify the screen to find companies that have shown revenue increases in the last quarter, "so you can justify this gem to the world"; of the remaining stocks, look for one with very low average volume and low float; pull together information from optimistic company press releases; "throw in some bull**** about the company being an internet wonder"; "buy a bunch of this garbage stock"; "tell your idiot subscribers about how great the stock is, and, like sheep, they will run out and buy it"; "dump the shares you bought a few hours ago to all of these suckers"; "watch the stock steadily tank for the next month"; and "laugh all the way to the bank."
19. Before investing, Colt conducted a test to determine what impact dissemination of his stock recommendation would have on the market. On February 1, 1999, Colt recommended the test selection, Electrosource, Inc. (ticker: ELSI). Colt observed ELSI's price increase by thirty-five percent after the selection was announced.
COLT ENLISTS HIS ROOMMATES TO JOIN FAST-TRADES
20. During the 1998-99 academic year, Colt shared an apartment with two other law students, Kenneth Terrell and Jason Wyckoff. Shortly after Colt started the Fast-Trades website in late January, Colt offered his roommates the opportunity to participate in Fast-Trades. Colt told them he had posted a selection on the website and monitored the market to see how his selection affected the stock. If they agreed to help, Colt would allow them to trade on Fast-Trades selections through his account.
21. Terrell and Wyckoff agreed to participate with Colt, and during February and March 1999, the two spent numerous hours posting materially false and misleading messages on several hundred different Yahoo! internet message boards promoting the site to potential subscribers. Colt's roommates each gave Colt money to purchase shares on their behalf in Colt's brokerage account. Neither Terrell nor Wyckoffhad any prior experience investing in stocks.
THE FAST-TRADES.COM SCHEME
22. After observing the upward price movement stemming from his recommendation of Electrosource, Colt began purchasing stock in advance of Fast-Trades selections. From February 16 through March 10, Colt, one or more Fast-Trades participants, and as many as two friends purchased shares in the next four Fast-Trades selections before they were provided to subscribers. As the chart below illustrates, participants in the Fast-Trades scheme and their two friends collectively purchased an increasing number of shares with each selection.
23. For all four stock selections, Fast-Trades purchases drove up the price and volume of the stock selected even before the selection was sent out to subscribers. Non-subscribing investors who observed the increase in price and volume of the selected stock and purchased shares -- both before and after the release of the stock pick -- also helped create a price increase. The rising price usually triggered the sell limit orders that Colt and the other Fast-Trades participants who traded had previously entered. Colt, his mother Joanne Colt (who was a participant in the Fast-Trades scheme), Terrell and Wyckoff monitored the run up by watching real time market quotes.
COLT, TERRELL AND WYCKOFF
24. Apache Medical Systems, Inc. (ticker: AMSI) was the first Fast-Trades selection in which Fast-Trades participants traded. The AMSI selection was sent out to subscribers at approximately 2:45 p.m. on February 16, 1999.
25. Less than an hour before sending out the selection, Colt purchased 5,000 shares at $1.0625 per share in his account: 4,000 for himself and 500 each for his two roommates. Colt then entered a sell limit order of $4.00 per share just before the message recommending the stock was sent to subscribers. Colt set the sell limit order based on his observing the extent of the price movement on ELSI.
26. Colt's purchase of 5,000 shares spurred an increase in the price and volume of AMSI stock. Colt's purchase represented more than 40% of the 11,700 share total average daily volume of AMSI. In addition, between 2:25 p.m., the time that Colt's purchase was reported, and 2:45 p.m., when the Fast-Trades selection was sent out, an additional 44,600 shares of AMSI were traded, and the price rose to $1.50, a 41% increase over a twenty minute period.
27. After the Fast-Trades selection was sent to subscribers, the trading volume and price of AMSI increased significantly. The stock had a reported one day trading volume of 1,085,600 shares and reached an intraday high of $7.9375 per share -- a price movement of $6.875, more than 600% higher than the price of Colt's first purchase. As the price of AMSI rose far above Colt's $4.00 sell limit price, Colt, watching the real-time price movement on a computer, chased the market, raising his sell price twice in a matter of minutes just after the selection went out to subscribers. Colt finally set his sell limit price at $6.00 per share, and his order was filled in 1000 share lots at prices ranging from $6.00 up to $7.75 per share. In the end, Colt, Terrell and Wyckoff reaped a collective profit of $27,937.50 on their AMSItrading in just thirty minutes. Within just a few hours after the recommendation was distributed to subscribers, the price of AMSI collapsed. Within a few days, AMSI was back to trading within pennies of its price at the time the recommendation was disseminated.
COLT, TERRELL, WYCKOFF AND
28. Fast-Trades' next selection was Option Care, Inc. (ticker: OPTN). The OPTN selection went out to subscribers shortly after 11:00 a.m. on February 24, 1999. Through his account, Colt purchased twice as many shares -- 10,000 -- of OPTN as he had of AMSI. Colt purchased these shares at a price of $1.625: 8000 for himself and 1,000 for each of his two roommates, just minutes before he sent out the selection to subscribers. Colt then entered a sell limit order of $5.00 for the shares -- more than 200% above his purchase price. Colt believed that there was a "strong possibility" that OPTN would increase in price after the selection was announced.
29. Before Colt's 10,000 share purchase around 11:00 a.m., there were no trades in OPTN on February 24. The 10,000 share purchase represented approximately 70% of the roughly 14,000 share total average daily volume of OPTN.
30. After the Fast-Trades selection went out to subscribers, the price and volume of OPTN climbed rapidly. On February 24, OPTN had a reported one day trading volume of 1,290,100 shares and reached an intraday high of $5.875 -- a price movement of $4.25, more than 250% higher than the price of Colt's first purchase. Colt's sell limit order was filled at $5.375 shortly after the Fast-Trades announcement. Colt, Terrell and Wyckoff reaped a collective profit of $37,500. Within just a few hours after the recommendation was distributed to subscribers, the price of OPTN collapsed. Within a few days, OPTN was back to trading within pennies of its price at the time the recommendation was disseminated.
31. Joanne Colt, the defendant's mother, purchased 14,000 shares of OPTN in the same manner as other subscribers: she waited until she received the Fast-Trades e-mail, then placed her purchase orders. Joanne Colt lost more than $24,000 in approximately twenty-five minutes trading on the recommendation from the Fast-Trades website. After losing more than $24,000 in one day trading in OPTN, Joanne Colt withdrew $15,000 from her individual retirement account at a penalty and borrowed $11,000 from her life insurance policy to replace her losses and accumulate funds in her brokerage account to use to buy the next Fast-Trades selection.
COLT, THE PARTICIPANTS, AND
32. The next Fast-Trades selection was American Education Corporation (ticker: AEDU), which Fast-Trades sent to subscribers at approximately 2:45 p.m. on March 5. The total average daily volume for AEDU as of that date was approximately 3,500 shares. Starting around four hours before the selection was sent out, Colt purchased a total of 19,000 AEDU shares in his account: 10,000 for himself, 4,000 each for his two roommates, and 1,000 for Adam Altman, another law school classmate who had agreed to become a participant in Fast-Trades. The shares were purchased in six separate market orders at ascending prices: the first 1,000 shares were purchased at $1.25, while the last 3,000 shares were purchased at $1.62. Colt then entered a sell limit order at $6.50 per share.
33. At Colt's direction, one of his friends, another fellow law student, purchased an additional 2,000 shares. Colt then instructed this friend to enter a sell limit order at $5.00 per share. Both Colt's and his friend's sell orders were entered before the message recommending AEDU was sent to subscribers.
34. Shortly before sending out the AEDU selection, Colt told Joanne Colt that AEDU wouldbe the March 5 selection. Joanne Colt then called her friend. Joanne Colt then purchased 10,750 shares of AEDU and quickly placed sell limit orders staggered between $4.50 and $7.00 per share. Joanne Colt's friend -- who had not purchased a stock on the open market in approximately eight years --purchased 4,533 shares, and quickly entered sell limit orders ranging from $4.00 to $5.00 per share.
35. These purchases spurred a dramatic increase in the price and volume of AEDU stock. The 36,283 shares bought by Fast-Trades participants and their friends represented over 1000% of the 3,500 share total average daily volume of AEDU. On March 5 there was only one trade reported for 1,000 shares at $1.25 per share before Colt and the others began buying. From 10:47 a.m., Douglas Colt's first trade, through the 2:45 p.m. dissemination of the Fast-Trades recommendation, over 100,000 shares of AEDU changed hands, and the price of AEDU rose to $1.625, a 30% increase in three and a half hours of trading.
36. Moreover, Colt knew that his purchases, along with those of the other Fast-Trades participants and friends, were impacting the price of AEDU, because as his multiple purchase orders were filled over the course of the day, he paid progressively higher prices for the stock. Colt paid $1.25 for his first 1,000 shares at around 10:45 a.m., and paid incrementally higher prices until his last purchase of 3,000 shares at 2:19 p.m. at $1.625 per share.
37. After Fast-Trades recommended AEDU to subscribers, the price and volume of the stock rose dramatically. On March 5, AEDU had a reported one day trading volume of 842,600 shares and reached an intraday high of $10.00 -- a price movement of $8.75, 700% higher than the price at Colt's first purchase. Colt's account reaped a profit of $41,093.75, and Colt's friend made a profit of $3,500. Joanne Colt made $59,984.37, and her friend made $15,899. Within just a few hours, the price of AEDUcollapsed, plummeting several dollars. Within a few days, AEDU was back to trading within pennies of its price at the time the recommendation was disseminated.
COLT, THE PARTICIPANTS, AND
38. The fourth and final Fast-Trades selection purchased by Colt and the other participants was Artecon, Inc. (ticker: ARTE). The ARTE selection went out to subscribers at approximately 11:30 a.m. on March 10. Starting an hour and twenty minutes before the selection was sent out, Colt used six separate orders to purchase a total of 18,282 ARTE shares in his account: 9,282 for himself, 4,000 each for his two roommates, and 1,000 for the other law student. Colt's friend also purchased 4000 shares at Colt's direction.
39. Colt also telephoned Joanne Colt and told her about ARTE, and Joanne Colt immediately called her friend. Joanne Colt purchased 17,500 shares and her friend purchased 11,730 shares, increasing the total number of shares purchased by the group to 51,512. All entered sell limit orders before the recommendation went out to subscribers.
40. These purchases of ARTE spurred an increase in the price and volume of ARTE stock. The purchases of 51,512 shares by Fast-Trades participants and their friends represented over 150% of the 33,000 share total average daily volume of ARTE. On March 10, before Colt began buying ARTE, only 800 shares changed hands and the price remained steady at $1.125 per share. From 10:11 a.m., when Colt's first trade was reported, until 11:30 when the recommendation went out, total trading volume of ARTE increased to 164,500 shares and the price rose to $1.375, a 22% increase in two hours.
41. As with his AEDU trading, Colt could see the effect of his purchases on the market because over the course of his purchases he paid progressively more for ARTE shares. Colt's firstpurchase of ARTE was at $1.125, but over the next eighty minutes Colt made ARTE purchases at $1.1875 and then $1.25 a share, and by the time of his last purchase before the selection was announced he paid $1.375 per share.
42. After the Fast-Trades recommendation went out to subscribers, the price and volume of ARTE went higher still. On March 10, ARTE had a reported one day trading volume of 4,581,000 shares and reached an intraday high of $6.00 -- a price movement of $4.875, more than 400% higher than the price of Colt's first purchase. The orders by Fast-Trades participants and their two friends were filled shortly after the recommendation went out. Douglas Colt's account reaped a profit of $66,516.36, Colt's friend made $15,474.37, Joanne Colt made $47,081.25, and her friend made $34,937. Within just a few hours after the recommendation, the price of ARTE collapsed, plummeting several dollars. Within a few days, ARTE was back to trading within pennies of its price at the time the recommendation was disseminated.
COLT AND OTHER PARTICIPANTS
43. As part of the Fast-Trades scheme, Colt, Terrell, Wyckoff and Altman posted hundreds of false or misleading messages on internet message boards. The vast majority of these messages were advertisements used to promote the Fast-Trades website to attract new subscribers. The purpose of these messages was to build the subscriber base by inducing readers of the message boards to visit the website, to review its recommendations and to become subscribers, so that they would in turn purchase Fast-Trades selected stocks and help drive up the price of the selection. Colt, Terrell, Wyckoff and later, Altman, all made such postings. Colt taught each of them how to create on-line "identities," and how to post messages to internet message boards at financial websites such as Yahoo.com and RagingBull.com.
44. Colt instructed them not to disclose their affiliation with Fast-Trades and to use multiple identities in order to enhance the credibility of their messages. Colt also instructed them to misrepresent substantive information, such as their investment successes from following Fast-Trades recommendations, to draw readers of the message boards to the Fast-Trades site.
45. For example, a February 9, 1999, posting by Colt to the Electrosource message bulletin board contains false information regarding his age and geographic location, conveys that he was not a participant in Fast-Trades when in fact he was, and misrepresents that Colt had made profits from Fast-Trades' recommendation of Electrosource, when in fact he had not traded in the stock.
46. Through these and hundreds of other postings containing false or misleading information, Colt expected to induce individuals to visit the Fast-Trades website and become subscribers so that they would then purchase Fast-Trades selections and drive up the price of the selected stocks. At Colt's direction, Wyckoff, Terrell and Altman all made numerous false or misleading postings similar to Colt's that failed to disclose their identities or their ties to Fast-Trades, and misrepresented their trading activity or success in trading Fast-Trades selections.
47. In addition to these "advertising" postings, Colt also posted messages on the internet defending Fast-Trades against investors who accused the site of price manipulation. In those messages, Colt misrepresented his identity and geographic location, and argued that Fast-Trades' activities were lawful. Indeed, Colt tried to discourage individuals from informing the SEC about the Fast-Trades scheme, at times taunting those who posted internet messages stating that they were going to contact the SEC about the website.
THE DISCLAIMER ON THE FAST-TRADES.COM WEBSITE
48. From the first time Fast-Trades published a recommendation, it included a disclaimer on the webpage that purported to describe the trading intentions of Fast-Trades representatives. This disclaimer was revised after the AMSI selection. With the first selection the participants traded in, Apache Medical Systems on February 16, the disclaimer stated: "We may buy or sell our picks at any time." After that selection, Colt, Terrell, and Wyckoff, along with the new participant Altman, revised various aspects of the disclaimer, including the portion addressing their trading in Fast-Trades selections. From that point on, through the remaining three selections they traded in, the disclaimer read, in relevant part: "FastTrades representatives may, and in many cases do, invest or hold positions in the companies that FastTrades recommends; FastTrades representatives reserve the right to buy or sell securities recommended by FastTrades at any time."
49. Both versions were materially misleading as to the real trading intent or trading activities of the participants. By the time the subscribers received the Fast-Trades recommendation, the Fast-Trades participants already had purchased shares in the recommended stock, and already had placed orders to sell the stock, which they expected to be filled by the increase in price and volume caused by the purchases of their own subscribers. If Fast-Trades had accurately disclosed their trading intentions, subscribers would have been able to deduce that the only reason Colt offered his "free" service was so he could further influence the market price movement initiated by his purchase of the recommended stock just before the announcement. In this way, Colt could condition the market and then profit at the expense of his subscribers by executing pre-set sales of the recommended stock at inflated prices to a market which was likely to include subscribers.
50. By reason of the foregoing, Douglas Colt violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
Issue a Final Judgment of Permanent Injunction permanently restraining and enjoining Douglas Colt from violating Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5].
Issue a Final Judgment requiring Colt to disgorge all illicit profits from the manipulative scheme alleged herein, with prejudgment interest.
Issue a Final Judgment requiring Colt to pay appropriate civil penalties pursuant to Section 21(d)(3)(A) of the Exchange Act [15 U.S.C. §78u(d)(3)(A)].
Grant such other relief as this Court may deem just and appropriate.
Dated: March 2, 2000
Paul V. Gerlach
Paul R. Berger (D.C. Bar # 375526)
Yolanda L. Ross
C. Hunter Wiggins
Attorneys for Plaintiff