UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission (the "Commission") alleges:
NATURE OF THE ACTION
1. G. Christopher Scoggin ("Scoggin"), a former licensed stockbroker, violated the antifraud and anti-touting provisions of the Securities Exchange Act of 1934 ("Exchange Act") and the Securities Act of 1933 (the "Securities Act") by making repeated false representations that his stock picks appearing in his newsletter, "Stock Talk," and on his website, "Stocktalknews.com," were the result of "independent and diligent analysis." In fact, Scoggin's stock picks were derived solely from his undisclosed financial and other employment-related obligations to the issuers he touted, rather than from any independent analysis. In addition, Scoggin failed to disclose the source of his compensation that, in fact, derived from the very issuers he touted. As a result, Scoggin purposefully misled investors. Moreover, on two occasions, Scoggin advised his readers to buy two different stocks he was "independently" analyzing, only to begin selling his own positions in those stocks days later.
2. By knowingly or recklessly engaging in fraudulent conduct, defendant directly or indirectly violated the antifraud provisions of the federal securities laws, specifically, 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].
3. Defendant also violated Section 17(b) of the Securities Act [15 U.S.C. § 77q(b)] when he touted stocks on his websites without fully disclosing he had received or expected to receive compensation for doing so, and the amount thereof.
4. The SEC brings this action for an order permanently enjoining the defendant from future violations pursuant to Section 20(b) of the Securities Act [15 U.S.C. §§77t(b)] and Section 21(d)(1) of the Exchange Act [15 U.S.C. §§78u(d)(1)], permanently barring the defendant from participating in the offering of any penny stock pursuant to Section 21(d)(6) of the Exchange Act [15 U.S.C. 78u(d)(6)] and Section 20(g) of the Securities Act [15 U.S.C. §§77t(g)] and ordering disgorgement of his illegal profits, plus prejudgment interest, and other relief. Unless enjoined, the defendant will continue to engage in transactions, acts, practices and courses of business similar to those described herein. The SEC also brings this action for an award of civil penalties, pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)].
5. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §§ 77v(a)], and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. Certain of the transactions, acts, practices, and courses of business alleged herein occurred within this District, and venue is proper pursuant to Section 22(a) of the Securities Act [15 U.S.C. §§ 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
6. Defendant, directly or indirectly, has made use of the means and instrumentalities of interstate commerce, or of the mails in connection with the acts, practices, and courses of business alleged herein.
7. Defendant, G. Christopher Scoggin ("Scoggin"), at all relevant times was a resident of Katy, Texas and is now believed to reside in San Antonio, Texas. Scoggin is a former stockbroker, having taken and passed his NASD Series 7 examination and his Series 64 Texas state test for licensing of registered representatives in 1997. Scoggin worked as a stockbroker for a firm in Houston, Texas until late 1997. Thereafter, Scoggin held senior shareholder relations positions at two NASDAQ-listed public companies until leaving to start his own investor relations consulting business.
8. In conjunction with his consulting firm, Scoggin started an investment newsletter called "Stock Talk" in September 1998. Scoggin published the newsletter on approximately a weekly basis, and distributed it via fax and posted it to Scoggin's company website: Stocktalknews.com. There was no subscription charged for Stock Talk. Stock Talk was also distributed indiscriminately to potential investors based upon facsimile machine "mailing lists" Scoggin purchased from third party vendors. Likewise, Stocktalk.com was accessible via the internet, without the need for a password or membership.
THE FRAUDULENT SCHEME
9. Scoggin was the sole author and editor of all the content in all editions of the newsletter. The newsletters in question all followed the same general format: the newsletter contained several stock recommendations followed by a disclaimer stating Scoggin's research and analysis was independent. While Scoggin did in some cases disclose his ownership interest in, or relationship with, the companies featured in his newsletters, Scoggin failed to disclose his relationship with and/or compensation from four of the companies featured in a number of his newsletters.
Aqua Vie Beverage
10. Scoggin sent out his first newsletter on September 28, 1998. In that newsletter, Scoggin recommended three stocks. Two of the companies were large, established technology companies: Gateway and Infoseek. The third was Aqua Vie Beverage, a small Canadian water beverage company. One critical fact was omitted from the newsletter: Aqua Vie Beverage paid Scoggin $20,000 to write and distribute the newsletter. While the newsletter did say that Scoggin's firm received a fee to "reprint and distribute this newsletter," Scoggin failed to disclose that Aqua Vie was the source of the payment and that the payment was in exchange for including Aqua Vie in the newsletter in the first place. Further, despite the fact that Aqua Vie paid the entire cost of producing the newsletter and received a glowing recommendation from Scoggin, the newsletter's disclaimer represented that the report was based on Scoggin's "independent and diligent analysis."
Alliance Consumer International
11. In the October 26, 1998 edition of the newsletter, Scoggin again profiled three companies, and he again chose two large, well-known companies (Wal-Mart and K-Mart) and one small obscure company -- Alliance Consumer International ("Alliance"). In his write-up, Scoggin provided a three-month target price for Alliance of $7.50 to $10.00, and asserted that the $7.50 target price seemed "a safe bet." Scoggin also told his readers that a few months earlier he "flew out to L.A. and toured the factory" and was so impressed that he invested in Alliance's private placement "on the spot."
12. Scoggin failed to disclose, however, one critical point: Alliance hired Scoggin to handle its investor relations, promote the company and eventually set up an in-house investor relations program. In exchange for his services, Alliance gave Scoggin the opportunity to purchase 100,000 shares of Alliance stock at a "special price" of $0.03 per share in a private placement before the company went public.
13. Further compounding the disclosure problems with the October 28th newsletter, Scoggin affirmatively and falsely wrote in the disclaimer he attached to the newsletter that his company had "not received a fee to reprint and distribute this newsletter." Scoggin further falsely represented that the report was based on his independent and diligent analysis.
14. Contrary to the suggestion in the newsletter, Scoggin's investment in Alliance was not a disinterested, objective investment decision based on the merits of the company. Rather, Scoggin received a sweet deal in lieu of cash compensation. While Scoggin did not sell his Alliance position at the time he featured Alliance in Stock Talk, Scoggin's position in Alliance was worth over $90,000 while he was promoting the company in Stock Talk (compared to the $3,000 he paid for the stock). Scoggin ultimately sold his position in Alliance in May and June of 1999, netting a profit of $45,112.
15. Scoggin engaged in a similar deception regarding his promotion of Carnegie International. Scoggin first recommended Carnegie to his readers in the October 6, 1998 newsletter. In that newsletter, Scoggin began with recommendations of two well-established telecommunications companies, AT&T and Lucent, and concluded with a glowing recommendation of Carnegie. Therein, Scoggin set a 6-9 month target price of $8 per share, despite the fact the stock had recently traded around $0.50 per share. Scoggin also assured his audience that his report was based on his "independent and diligent analysis" and represented that his firm did "not receive a fee to reprint or distribute this newsletter."
16. Absent from the newsletter was any mention that Scoggin's firm had entered into a shareholder relations consulting contract with Carnegie. In exchange for his services, Scoggin was to receive 2,000,000 shares of restricted Carnegie Stock, approximately 4.99% of the company's outstanding shares. While Scoggin did state his firm held 2,000,000 shares of restricted Carnegie stock and that Scoggin had personally purchased 10,000 shares of Carnegie stock, nowhere did he tell his readers that Scoggin's firm received the overwhelming majority of its position in return for Scoggin's promotional efforts.
17. Throughout the rest of 1998 and into 1999, Scoggin repeatedly promoted Carnegie in his newsletters without disclosing that he was Carnegie's paid promoter. Scoggin featured Carnegie in his two November 1998 newsletters. Neither of his November 1998 newsletters disclosed Scoggin's contractual relationship with Carnegie or the compensation he was to receive. In fact, in the November 10, 1998 newsletter, Scoggin stated that he had added 5,000 shares to his position, but failed to disclose that his position included nearly 5% of the company's outstanding shares. Both of the November 1998 newsletters continued to represent falsely, however, that they were the product of "independent and diligent analysis."
18. Scoggin's December 11, 1998 newsletter further misled his audience. In that newsletter, Scoggin again promoted Carnegie, saying that "[o]ur number one pick for 1998, is also number one for 1999, CAGI [Carnegie]." Scoggin again failed to identify that he held over 2,000,000 restricted shares of Carnegie or that Carnegie was the source for those shares. Rather, Scoggin disclosed only that he personally had purchased 111,000 shares and his partner had purchased 23,000 shares of Carnegie stock on the open market. With each disclosed transaction, Scoggin emphasized that the purchases were made with personal funds.
19. In the January 12, 1999 and January 27, 1999 editions of the Stock Talk newsletter, Scoggin continued to recommend Carnegie, along with the stocks of larger, more established companies such as Amazon, America Online, and Infoseek. Scoggin disclosed that he had purchased 133,000 shares of Carnegie on the open market with his own funds, and this time stated that his firm held two million shares of restricted stock. He failed again, however, to disclose that the two million shares were compensation from Carnegie for his promotional efforts. Coupled with his failure to disclose the source of the firm's two million share block of Carnegie stock, Scoggin falsely represented that the newsletters were based upon his "independent and diligent analysis" and his firm did not receive "a fee to reprint or distribute" the newsletters.
20. Finally, in his February 25, 1999 newsletter -- more than four months after his first newsletter promoting Carnegie shares -- Scoggin in his disclaimer admitted that he was a promoter and consultant for Carnegie and that he had received two million shares in payment for his services, stating: "Scoggin, Alexander & Associates was paid a consulting fee by [Carnegie] of $900,000 in restricted stock in July of 1998."
Entertainment Internet, Inc.
21. Scoggin also misled the readers of his newsletter with respect to his objectivity concerning Stock Talk's coverage of Entertainment Internet, Inc. ("EINI"). EINI was a Los Angeles-based company that purportedly used the internet to match actors with producers searching to cast their productions. Scoggin first featured EINI in the February 16, 1999 edition of the Stock Talk. Prior to February 1999, stock of EINI traded at approximately $0.90 per share.
22. In the February 16th edition of Stock Talk, Scoggin wrote that he was "BULLISH" on this stock. Scoggin noted that the stock had a "tiny" float of 3 million shares and that in the prior weeks he had bought 3% of the float on the market and the price "more than doubled." Scoggin then targeted the stock to reach $26 per share in one year.
23. Scoggin disclosed that he, his business partner and his employees held 103,300 shares of EINI. Scoggin falsely stated, however, that he did "not have any relation with the company."
24. On February 25, 1999, Scoggin again featured EINI in his newsletter. Scoggin stated that his company was beginning a series of acquisitions of EINI stock and disclosed his purchases from the last newsletter. Scoggin then projected that the stock price would reach $10 per share in the next three months with a price range in the "mid-20's" within the year. Shortly after the February 25th newsletter, EINI stock reached over $4.90 per share. Scoggin also featured EINI in the April 28, 1999 edition of his newsletter. In both the February 25th and April editions of his newsletter, Scoggin stated only that "he currently holds a large position in EINI purchased on the open market."
25. The assertions concerning EINI in the February and April editions of Stock Talk that Scoggin's analysis was independent and he had no relationship with EINI were materially false and misleading. First, Scoggin's assertion that there was no relationship between him and EINI was patently false. In January 1999, Scoggin and EINI entered into an oral agreement whereby EINI would compensate Scoggin for his promotional services and reimburse Scoggin's expenses. Second, Scoggin's assertion that he received no compensation from EINI to publish and distribute the Stock Talk newsletters was also false and misleading. In producing the February and April 1999 newsletters, EINI incurred significant debt to Scoggin, for which Scoggin expected payment under his oral agreement with EINI. For example, between January and June 1999, EINI had incurred a debt to Scoggin of $286,000 for Scoggin's promotional services.
26. Scoggin and EINI memorialized, in writing, their oral agreement on April 26, 1999. In that written agreement, the parties expressly acknowledged Scoggin began working for EINI on February 5, 1999 and that the agreement was effective as of that date. The agreement further obligated EINI to pay Scoggin one million EINI shares for his promotion of the company since that time in lieu of cash.
27. In the May 13, 1999 edition of Stock Talk, Scoggin finally disclosed the compensation from EINI, admitting his company was "paid a consulting fee by EINI of $750,000 in restricted stock."
Scoggin Scalped the Stock of His Clients
28. Scoggin also engaged in a fraudulent scheme to turn a quick profit on the sale of the stock of some of his clients. Specifically, Scoggin engaged in a practice known as scalping, i.e., recommending the purchase of a stock without disclosing the intent to sell the same stock that is currently being promoted.
29. Scoggin engaged in scalping with respect to the stock of two of his customers: Carnegie and EINI. Scoggin's fraudulent scheme had two effects. First, it provided Scoggin with an opportunity to profit at the expense of his readers. Second, it deceived the readers of Stock Talk as to the asserted independence of Scoggin's newsletters. Had Scoggin disclosed his intention to sell the stock of EINI and Carnegie contrary to his own advice, it would have undercut his claims of independence and objectivity.
30. With respect to Carnegie, Scoggin purchased 100,000 shares of Carnegie at prices between $0.81 and $2.22 per share. On January 12, 1999, Scoggin published another edition of Stock Talk telling his readers that he was giving Carnegie a recommendation of "STRONG BUY."
31. Scoggin, however, did not follow his own advice. Shortly after issuing the January 12th edition of his newsletter, Scoggin sold all of the stock he purchased on the market at between $5.25 and $5.68 per share, netting a profit of $381,708.59. Scoggin disclosed neither his intention to sell his Carnegie stock before the trades nor that he sold all of the Carnegie stock he had purchased on the open market. Thus, while Scoggin trumpeted his purchases of Carnegie stock as proof of its potential, he purposefully remained silent about his sales of those very same shares.
32. Scoggin engaged in similar conduct with the sales of his holdings of EINI stock. Despite expounding the virtues of EINI stock in his February 25, 1999 newsletter and predicting that the stock price would reach $10 per share in the next three months with a price range in the "mid-20's" within the year, Scoggin began selling his EINI stock within days of distributing that newsletter. Scoggin sold 57,300 shares of EINI between $4.083 and $4.906 per share.
33. In the May 1999 edition of Stock Talk, Scoggin encouraged his investors to invest in EINI and declared that he and his company owned over 1,000,000 shares of EINI. What Scoggin failed to disclose was his intention to continue selling EINI stock. Scoggin proceeded to sell nearly 30,000 shares of EINI common stock.
34. Scoggin's scalping of EINI stock in both February and May 1999 generated approximately $100,000.00 for Scoggin. During his selling, Scoggin continued to promote EINI stock and failed to disclose his sales to his readers.
Scoggin Acted With Scienter
35. Scoggin's failure to disclose facts that would reveal his self-interest and bias was not the product of innocent mistake or inadvertence. Rather, Scoggin intentionally or recklessly failed to disclose his compensation and misrepresented the nature and source of his holdings in the companies that he touted. Indeed, as a licensed securities industry specialist, Scoggin was fully aware of the disclosure requirements imposed by Section 17(b) of the Securities Act.
36. Despite these facts, none of the disclaimers in Scoggin's newsletters disclosed that: (i) Scoggin received or expected to receive more than two million shares of Carnegie for touting the stock; (ii) Scoggin's ability to invest in an Alliance private placement was given to him as compensation for his promotional efforts; (iii) Aqua Vie paid for the creation and distribution of the first edition of Stock Talk; or (iv) Scoggin was working as a promoter of EINI with the expectation of either receiving cash or stock in exchange for his services. Scoggin therefore willfully withheld valuable information -- the fact that Scoggin received or expected to receive compensation from the featured companies -- from investors. That information is material because it would have alerted a reasonable investor to Scoggin's possible bias, and would have signaled to an investor that she should discount Scoggin's rosy predictions about the future of these companies.
37. Likewise, the fact that Scoggin decided to sell his holdings in Carnegie and EINI in direct contradiction to his purportedly "independent" buy recommendations further underscores that Scoggin's failure to disclose the nature and source of his compensation was done with scienter. Scoggin knew that if he disclosed his true intent to sell his own holdings of Carnegie and EINI, his readers would have disregarded his self-proclaimed "independent" analysis.
FIRST CLAIM FOR RELIEF
(UNDISCLOSED COMPENSATION FOR
Violations of Section 17(b) of
38. Paragraphs 1 through 37 are hereby realleged and incorporated by reference.
39. Scoggin violated Section 17(b) of the Securities Act [15 U.S.C. § 77q(b)] when he recommended the purchase of securities described in Paragraphs 1 through 37 above, without fully disclosing his receipt of compensation or expected compensation from the companies whose stock he recommended.
40. By reason of the foregoing, defendant Scoggin directly or indirectly violated Section 17(b) of the Securities Act [15 U.S.C. § 77q(b)].
SECOND CLAIM FOR RELIEF
(FRAUDULENT SCHEME IN CONNECTION WITH
41. Paragraphs 1 through 37 are hereby realleged and incorporated by reference.
42. Scoggin made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaged in acts, practices and courses of business which operated as a fraud and deceit upon purchasers and sellers of such securities.
43. Scoggin's fraudulent scheme included the following: