IN THE UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
WILMER REID FUNDERBURK,
Civil Action No.:
The United States Securities and Exchange Commission ("Commission") files this Complaint against Defendants Wilmer Reid Funderburk ("Funderburk"), Edward W. Reckdenwald ("Reckdenwald"), and Todd Burk Priddy ("Priddy")(collectively "Defendants") and would respectfully show the Court as follows:
1. This matter involves a two-part scheme, carried out in the fall and winter of 2001 by insiders of BGI Inc. ("BGI"), an Austin-based reporting company whose stock trades on the OTC Bulletin Board. In the first part of the scheme, Funderburk, former BGI chairman and CEO, and Reckdenwald, former BGI president, artificially bolstered the price of BGI stock by omitting from BGI's upbeat press releases and an investor newsletter devastating information about the company. Funderburk further contributed to this phase of the scheme by omitting the adverse information from BGI's third quarter 2001 Form 10-QSB. In the second part of the scheme, Funderburk, Reckdenwald and Priddy, BGI's former and current operations manager, reaped illicit insider trading profits by selling their BGI stock at inflated prices just prior to release of the previously undisclosed negative information.
2. BGI leases "sweepstakes machines" throughout Texas; the machines offer customers the chance to win a cash prize after purchasing a pre-paid long distance telephone card or, more typically, making a donation to a charity. The sweepstakes machines are BGI's principal revenue-generating assets. The BGI press releases, investor newsletter and quarterly filing were materially misleading because, while trumpeting BGI's ongoing revenue growth and business expansion, they contained no reference to recent seizures by Texas authorities for BGI's possible violations of Texas gaming laws of a substantial number of BGI's sweepstakes machines and proceeds derived from the machines. The unqualified optimism projected by the releases and newsletter, unclouded by news of the contemporaneous seizures, boosted the price of BGI stock by over 500%. Just prior to publication of the suppressed information while the BGI stock price was still inflated Funderburk, Reckdenwald and Priddy sold their BGI stock, collectively avoiding market losses of approximately $562,000.
3. The Commission, in the interest of protecting the public from any further illegal activity, brings this action against Defendants seeking permanent injunctive relief, an officer and director bar against Funderburk and Reckdenwald, disgorgement of all illicit profits and benefits Defendants obtained, plus accrued prejudgment interest, and civil monetary penalties.
4. This Court has jurisdiction over this action pursuant § 22(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 77v(a)], § 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78(aa)] and Title 28 U.S.C. § 1331. Defendants, directly and indirectly, made use of the mails and of the means and instrumentalities of interstate commerce in connection with the acts, practices and courses of business described in this Complaint. Venue is proper because many of the transactions, acts, practices and courses of business described below occurred within the jurisdiction of the Western District of Texas.
5. Wilmer Reid Funderburk, age 49, a resident of Austin, Texas, was the CEO and chairman of BGI during the relevant period. Funderburk was involved in drafting and issuing the misleading press releases and newsletter. He was also responsible for reviewing and signing Commission filings on behalf of BGI. Funderburk sold 100,000 shares of his personally held BGI stock before BGI publicly disclosed the seizures of its machines and machine proceeds. He resigned as CEO after BGI's announcement of the seizures, and BGI's board of directors subsequently removed him as chairman.
6. Edward W. Reckdenwald, age 37, a past resident of Austin, Texas, was BGI's president during the relevant period. Reckdenwald was involved in drafting and issuing the misleading press releases and newsletter. He sold 20,000 of his personally held shares of BGI stock before BGI publicly disclosed the seizures of its machines and machine proceeds.
7. Todd Burk Priddy, age 37, a resident of Austin, Texas, is BGI's past and current operations manager. Priddy did not participate in drafting or issuing the misleading press releases or newsletter. However, Priddy was aware of the seizures of BGI's machines and proceeds, and was aware of BGI's failure to disclose these facts, when he sold 29,000 shares of his BGI stock at an artificially inflated price.
8. BGI, formed in 1981 under the name Bingo & Gaming International, Inc. ("B&G"), managed several charity bingo locations. The company entered into a reverse merger with a public shell corporation in 1994 and its stock became listed on the OTC-BB in 1995. In 1996, B&G began leasing and operating "Lucky Strike" pre-paid long distance telephone card machines. Upon purchasing a long distance telephone card from a Lucky Strike machine, customers were automatically entered into a sweepstakes, earning the chance to win a cash prize. In May 1999, the company changed its name to BGI.
9. In late 2000, BGI experienced a significant decline in the revenue it derived from its Lucky Strike machines. Seeking other revenue sources, BGI collaborated with the supplier of the Lucky Strike machines in developing the "Charity Station" sweepstakes machine. By inserting money in a sweepstakes machine, the customer would supposedly make a donation of a portion of the money to a charity. In exchange for the donation, the player activates the machine in the hope of winning a payout by matching certain symbols in a manner similar to the operation of conventional gambling machines.
10. By May 2001, BGI began to lease sweepstakes machines to establishments such as VFW Halls or, more commonly, to "independent" operators who lease a location, typically in a small strip center or freestanding establishment. Approximately half of these operators were not independent; they were partnerships or limited liability companies controlled by Funderburk. BGI and the operator each received 45% of the net proceeds from the sweepstakes machines; the operator was supposed to arrange to donate the remaining 10% to a charity. BGI employees periodically audited the machines at each location to confirm BGI's share of the proceeds.
11. In the fall of 2001, Texas law enforcement agencies, on a county-by-county basis, began seizing BGI's sweepstakes machines and the proceeds from the operation of the machines, for apparent violations of Texas gaming laws. On October 2, 2001, the District Attorney's Office of Hidalgo County, Texas, seized 25 sweepstakes machines and proceeds from a Hidalgo venue. On October 26, 2001, the District Attorney's Office of a second Texas county, Bexar County, seized eight sweepstakes machines and proceeds. On November 4, 2001, the Bexar County Sheriff's office served upon BGI a grand jury subpoena for documents relating to BGI's operations and bank accounts. On November 19, 2001, the District Attorney's office of a third Texas county, Tarrant County, seized 20 BGI sweepstake machines. At that point, 53 of BGI's approximately 398 machines in operation in Texas had been seized. On December 27, 2001, Bexar County notified BGI that it had seized over $325,000 in BGI's bank accounts. On December 28, 2001, the Texas Lottery Commission informed BGI that it was investigating the company's operations.
12. From late October 2001 through the end of December 2001, while Texas authorities were seizing BGI's sweepstakes machines and proceeds, BGI issued three press releases touting its growing revenues and expanding sweepstakes operations. Because the press releases contained no reference to the concurrent seizures of BGI's sweepstakes machines, they were materially misleading. In addition to disseminating the releases through Business Wire and other media outlets, BGI posted the press releases on its own Internet website. Funderburk and Reckdenwald furnished the content of the releases, reviewed them and approved their public dissemination.
13. The press releases issued during this period represented that the company's revenues were increasing substantially from prior periods (more than 100% in some instances), that BGI had experienced two "remarkable" quarters of revenue and earnings growth, and that the company would continue to expand aggressively its operations. In BGI's November 8, 2001, press release, Reckdenwald stated, "We have every reason to be bullish on the outlook of our business ... and we have proven our ability to execute and deliver consistent results." He added that "our operations continue to thrive." In BGI's November 15, 2001, release reporting its third quarter 2001 results, Funderburk commented, "BGI's profitability has been firmly restored ...[and] the Company is now better positioned to execute its strategies to enhance shareholder value." Finally, on December 21, 2001, with 54 three of its machines seized, BGI issued a release revising upward its projected fourth quarter 2001 revenues. In that release, Reckdenwald stated, "our operations continue to produce strong revenue growth and profitability." During this period, BGI's stock price increased from $0.89 per share to over $5 per share.
14. BGI misled the investing public by touting its growing revenues and operations, while making no mention of the seizures, not only in press releases, but also in an Internet-posted newsletter scripted and paid for by BGI. The newsletter, published by the E-Street Journal ("E-Street") and freely available to anyone perusing E-Street's Internet website, presented the materially misleading statements throughout the period of the seizures. Among the representations made in the newsletter was BGI's "estimate" that the Texas market could support 25,000 sweepstakes machines. The newsletter also touted the company's growth potential, specifically representing that BGI would have 2,500 operating machines within 36 months. Funderburk and Reckdenwald jointly decided to engage E-Street, supplied information to E-Street for the newsletter, reviewed the newsletter, and authorized its dissemination to the public on E-Street's Internet website.
15. The press releases and newsletter were materially misleading, because while vaunting BGI's business "success" in 2001, they contained no counterbalancing reference to the ongoing seizures of BGI's sweepstakes machines and proceeds throughout Texas.
16. On November 15, 2001, BGI filed with the Commission its Form 10-QSB for the third quarter ending September 30, 2001. The filing, like the press releases and newsletter, projected unqualified optimism about BGI's financial outlook, yet omitted any reference to the seizure, by that time, of 33 sweepstakes machines. Specifically, BGI trumpeted in the filing the following: a purported 75% increase in the number of sweepstakes machines placed in Texas in the third quarter; BGI's "success" in "diversifying its revenue flows by supplying machines to 15 new locations;" BGI's "positive results [in] the third quarter," attributed to "the continued deployment of the Charity station [sweepstakes machines];" and an increase in total revenue of 10.2%, attributed to "the increased revenue from the [sweepstakes] machines." Funderburk, while aware of the seizure of the 33 machines, reviewed and signed the materially misleading Form 10-QSB.
17. Funderburk, Reckdenwald, and Priddy were each aware of the seizures at the time the machines were seized or shortly thereafter. The Defendants learned of the seizures from both the relevant county, and from the sweepstakes machine operators. In addition, since BGI performed weekly audits of the machines, they learned of the seizures from the individuals conducting the audits. The Defendants also knew law enforcement authorities seized bank accounts containing funds derived from the operation of the sweepstakes machines. Nevertheless, Funderburk and Reckdenwald continued to draft and issue optimistic BGI press releases without disclosing the seizures. Moreover, Funderburk reviewed and signed BGI's third quarter 2001 Form 10-QSB, which was materially misleading for failure to reference the seizure, by the time of its filing, of 33 BGI sweepstakes machines. Each of the Defendants also knew that almost all of BGI's revenue derived from the leasing of sweepstakes machines in Texas. Finally, they knew of the investigation by the Texas Lottery Commission.
18. All three Defendants, acting on the basis of the material, non-public information in their possession, sold their BGI stock at or near its peak price. Funderburk sold a total of 100,000 shares between January 3, 2002, and January 7, 2002, generating over $436,000 in proceeds. Between December 6, 2001, and January 4, 2002, Reckdenwald sold 20,000 shares, generating over $56,000. Priddy sold 29,000 shares from late October 2001 to January 9, 2002, for a total of $90,585. The insiders' total proceeds were $582,585. Funderburk, Reckdenwald, and Priddy avoided losses of $422,305, $53,500, and $86,250, respectively.
19. On January 11, 2002, BGI announced for the first time the seizures of its sweepstakes machines and funds (by Bexar County). By January 12, the price of BGI's stock had plummeted by 56%, from $3.50 per share to $1.54 per share. On January 31 and February 1, 2002, BGI disclosed the other seizures in press releases, including the seizure, in late January 2002, of an additional 72 machines from two locations in Laredo, Texas. Following these announcements, the price of BGI stock dropped from $1.69 per share to $0.14 per share.
20. Plaintiff Commission repeats and incorporates paragraphs 1 through 19 of this Complaint by reference as if set forth verbatim.
21. Funderburk, Reckdenwald, and Priddy, directly or indirectly, singly or in concert with others, in the offer and sale of securities, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, has: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions 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 (c) engaged in transactions, practices or courses of business which operate or would operate as a fraud or deceit.
22. As part of and in furtherance of this scheme, Funderburk, Reckdenwald, and Priddy directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material fact and which 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, including, but not limited to, those statements and omissions set forth in paragraph 1 through 19 above.
23. Funderburk, Reckdenwald, and Priddy made the above-referenced misrepresentations and omissions knowingly or with recklessness regarding the truth. Defendants were also negligent in their actions regarding the representations and omissions alleged herein.
24. By reason of the foregoing, Funderburk, Reckdenwald, and Priddy have violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
25. Plaintiff Commission repeats and incorporates paragraphs 1 through 19 of this Complaint by reference as if set forth verbatim.
26. Funderburk, Reckdenwald, and Priddy, directly or indirectly, singly or in concert with others, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails has: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts 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 (c) engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
27. As a part of and in furtherance of this scheme, Funderburk, Reckdenwald, and Priddy, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material facts and misrepresentations of material facts, and which 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, including, but not limited to, those set forth in paragraphs 1 through 19 above.
28. Funderburk, Reckdenwald, and Priddy made the above-referenced misrepresentations and omissions knowingly or with recklessness regarding the truth.
29. By reason of the foregoing, Funderburk, Reckdenwald, and Priddy violated and, unless enjoined, will continue to violate the provisions of 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].
30. Plaintiff Commission repeats and incorporates paragraphs 1 through 19 of this Complaint by reference as if set forth verbatim.
31. BGI as a public company, whose common stock is registered with the Commission is required to file annual, quarterly and current reports in accordance with Section 13(a) of the Exchange Act and Rule 13a-13 thereunder. Exchange Act Rule 12b-20 requires that reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, misleading.
32. BGI fraudulently filed, and Funderburk aided and abetted BGI's false and misleading filing of, Form 10-QSB on November 15, 2001. Funderburk knew, or was reckless in not knowing, that this filing contained false and misleading statements yet caused the company to file the misleading report with the Commission and make it available to the investing public.
33. By reason of his acts and practices, Funderburk, with general awareness and through substantial assistance, aided and abetted BGI's violations of Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)], and Commission Rules 12b-20 and 13a-13 [17 C.F.R. §§ 240.12b-20 and 240.13a-13] thereunder.
The Commission seeks the following relief:
34. An order permanently enjoining and restraining Funderburk, Reckdenwald, and Priddy from further violations of the federal securities laws and specifically enjoining and restraining Funderburk, Reckdenwald, and Priddy from further violations of Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 thereunder of the Exchange Act, and an order permanently enjoin Funderburk from further aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder;
35. An order permanently enjoining and restraining Funderburk and Reckdenwald, from acting as a director or officer of any issuer having a class of securities registered with the Commission pursuant to Section 12 of the Exchange Act or required to file reports pursuant to Section 15(d) of the Exchange Act;
36. An order directing Funderburk, Reckdenwald, and Priddy to disgorge all illicit profits and benefits plus prejudgment interest realized by Funderburk, Reckdenwald, and Priddy as a result of or attributable to the scheme alleged herein;
37. An order directing Funderburk, Reckdenwald, and Priddy to pay civil penalties as appropriate under the federal securities laws.
38. Such other and further relief as the Commission may show itself entitled.
Dated this ______ day of March, 2003.
Harold R. Loftin, Jr.
Texas Bar No. 12487090
U.S. Securities and Exchange Commission
Burnett Plaza, Suite 1900
801 Cherry Street, Unit #18
Fort Worth, TX 76102-6882
(817) 978-4927 (fax)
Spencer C. Barasch
Jeffrey A. Cohen
Douglas A. Gordimer
John M. Oses
U.S. Securities and Exchange Commission
Burnett Plaza, Suite 1900
801 Cherry Street, Unit #18
Fort Worth, TX 76102-6882
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