UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION,
KENNETH P. D’ANGELO and RBF INTERNATIONAL, INC.,
Civil Action No.
Plaintiff Securities and Exchange Commission (the "Commission") alleges:
1. This case involves an unlawful scheme to manipulate the stock price of GenesisIntermedia, Inc. ("GENI"), a now defunct public company that was based in Van Nuys, California, between September 1999 and September 2001, which resulted in the misappropriation of more than $130 million, the collapse of three broker-dealers, and the largest Securities Investor Protection Corporation ("SIPC") bailout in history.
2. With the knowing and intentional assistance of defendant Kenneth P. D’Angelo, GENI’s former principal and an accomplice loaned approximately 15 million shares of GENI stock to Native Nations Securities, Inc., a New Jersey broker-dealer ("Native Nations"), and more than a dozen other broker-dealers in exchange for approximately $130 million. To facilitate these stock loan transactions, defendant D’Angelo defrauded those broker-dealers by leading them to believe that the GENI shares were being lent to them by reputable brokerage firms. In fact, the GENI shares were being loaned by Ultimate Holdings, Ltd. ("Ultimate Holdings"), which was an offshore entity controlled by GENI’s principal and his accomplice.
3. The GENI principal who orchestrated the stock loan scheme was the company’s Chief Executive Officer, President, the Chairman of the Board of Directors, and majority shareholder (hereinafter "GENI’s CEO"). His accomplice is a Saudi Arabian national, who was President, Director and beneficial owner of Ultimate Holdings (hereinafter the "accomplice"). The accomplice is reported to be an international arms dealer and financier, who is currently wanted by police in Thailand on suspicion of loan fraud in connection with the collapse of the Bangkok Bank of Commerce in 1996.
4. To inflate GENI’s stock price, GENI’s CEO, his accomplice and defendant D’Angelo systematically engaged in fraudulent and deceptive practices that had the intended effect of generating additional cash proceeds from the broker-dealers participating in the stock loan transactions. Their illegal manipulative activities included (i) reducing the supply of GENI stock to control the public float; (ii) promoting a short squeeze; (iii) secretly compensating a well-known financial commentator to tout GENI on CNBC, Bloomberg TV, CNN and CNNfn thereby creating demand for the stock; (iv) making false and misleading statements in periodic reports filed with the Commission and in press releases issued by the company (with assistance from GENI’s former Chief Financial Officer); (v) making trades through nominee accounts; and (vi) engaging in a free-riding scheme.
5. The manipulation caused GENI’s stock price to increase approximately 1,400%, from a low of $1.67 per share (split adjusted) on September 1, 1999 to a high of $25 per share on June 29, 2001. After the scheme collapsed in September 2001, GENI’s stock price plunged to pennies per share. GENI’s CEO and his accomplice then defaulted on the obligations of Ultimate Holdings to repay approximately $130 million they had obtained from loaning GENI shares to broker-dealers, causing (among other things) the insolvency of at least three broker-dealers.
6. By engaging in the conduct described above, (i) defendant D’Angelo and his company, defendant RBF International, Inc., directly or indirectly violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder
7. The Commission seeks a judgment from the Court: (i) enjoining defendants from engaging in future violations of the above provisions of the federal securities laws; (ii) requiring defendants to account for and disgorge, with prejudgment interest, the illegal profits and proceeds he obtained as a result of his actions alleged herein; and (iii) requiring defendants to pay a civil money penalty.
8. This Court has jurisdiction of this action pursuant to Section 22 of the Securities Act [15 U.S.C. § 77v] and Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa].
9. Defendants, directly or indirectly, have made use of the means or instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged herein.
10. Defendants may, unless restrained and enjoined, continue to engage in the acts, practices, and courses of business alleged herein, or in transactions, acts, practices, and courses of business of similar purport and object.
11. Assignment to the Western Division is appropriate because the majority of claims and certain of the transactions, acts, practices and courses of business alleged below occurred within the Central District of California, including Los Angeles, California.
12. Kenneth Peter D’Angelo, age 60, resides in Edison, New Jersey. During the relevant time, he was President and Secretary of RBF International. In 1983, D’Angelo consented to a permanent injunction prohibiting future violations of the antifraud provisions of the federal securities laws. In 1984, D’Angelo pled guilty in federal court in Manhattan to charges of conspiracy and wire fraud involving a scheme to misappropriate funds from various broker-dealers. In a 1994 administrative proceeding, the Commission ordered D’Angelo and RBF International to cease and desist from causing violations of the Commission’s short tender rule.
13. RBF International, Inc. is located in Edison, New Jersey. RBF International is in the business of locating stock and acting as an intermediary between brokerage firms in securities lending transactions.
14. GenesisIntermedia, Inc., ticker symbol GENI, is a Delaware corporation with its principal office in Van Nuys, California. During the relevant time, its main businesses were operating a consumer telemarketing company, shopping mall kiosks and a car rental company. The company’s common stock was registered pursuant to Section 12(g) of the Exchange Act. GENI’s stock traded on the Nasdaq National Market System until September 25, 2001, when Nasdaq halted trading to obtain additional information from the company. Instead of responding to the inquiry, the company voluntarily delisted its stock on January 29, 2002. Currently, GENI’s stock is quoted in the pink sheets for pennies per share.
15. From its inception until June 1999, GENI was a privately held telemarketing company. On June 14, 1999, GENI went public by offering 2 million shares at $2.83 per share (split adjusted). After GENI’s IPO, its CEO owned approximately 2.9 million restricted shares of GENI or 55% of the total outstanding common stock.
16. GENI lost substantial amounts of money in every financial quarter after its IPO for which it filed reports with the Commission. Its Forms 10-K for the fiscal years ended December 31, 1999 and 2000 reported net losses of $8,296,550 and $33,530,627 respectively. These losses continued into 2001, with GENI’s Form 10-Q for the quarter ended September 30 reporting a nine-month loss of approximately $119 million. Before the collapse of the GENI stock scheme in September 2001, the CEO and his accomplice (through Ultimate Holdings) kept GENI afloat by lending the company approximately $49 million.
17. In September 1997, GENI’s CEO incorporated Ultimate Holdings, representing in incorporation documents that it would be his own “personal investment/holding company.” GENI’s CEO was the President, a director and sole beneficial owner of Ultimate Holdings from its incorporation until November 2000.
18. On November 3, 2000, Ultimate Holdings petitioned, and received approval from, Bermuda to allow GENI’s CEO to transfer his interest to his accomplice. Thereafter, the accomplice was the President and Director of record for Ultimate Holdings.
19. Despite the record change in ownership, GENI’s CEO continued to exercise control over Ultimate Holdings, evidenced by (i) opening bank and brokerage accounts on its behalf and authorizing transactions in its accounts, (ii) negotiating and facilitating sales of GENI stock by Ultimate Holdings, (iii) arranging for Ultimate Holdings to obtain cash using its GENI stock as collateral, and (iv) acting as an agent for Ultimate Holdings.
20. In their filings with the Commission, GENI and Ultimate Holdings failed to disclose the relationship of GENI’s CEO with Ultimate Holdings and the accomplice.
A. Overview of the Stock Lending Scheme
21. The manipulation of GENI’s stock price began shortly after the company’s June 1999 public offering. To benefit from the manipulation, GENI’s CEO developed a stock lending scheme. Instead of selling GENI shares in the open market, which would have depressed the stock’s price and reduced his profits, he and Ultimate Holdings loaned millions of GENI shares to unsuspecting broker-dealers. The loans generated cash proceeds for the full market value of the GENI shares and assured that the CEO would benefit from future price increases.
22. In the typical stock loan transaction, Ultimate Holdings loaned stock to a broker-dealer and received the current market value of the stock in cash. As GENI’s stock price fluctuated, the loaned stock was marked-to-market by the broker-dealer. In a hypothetical example, if Ultimate Holdings loaned a broker-dealer 1,000 shares of stock valued at $5.00 per share, Ultimate Holdings would get $5,000 from the broker-dealer and the broker-dealer would take possession of the stock. If the price of the stock subsequently rose to $6.00 per share, Ultimate Holdings would get another $1,000 from the broker-dealer. If the stock then dropped to $4.00 per share, Ultimate Holdings would be obligated to return $2,000 to the broker-dealer. Ultimate Holdings received additional cash when GENI’s price increased, and was obligated to return cash when the stock price dropped.
23. By lending the shares in this manner, rather than selling them, GENI’s CEO: (i) raised substantial sums of money without giving up control of his stock or depressing the market; (ii) generated funds used in part to buy more GENI shares and drive up the market price; and (iii) prevented the shares from being used for short sales.
24. As alleged below, between September 1999 and September 2001, GENI’s CEO and his accomplice (through Ultimate Holdings) obtained more than $130 million in cash by loaning approximately 15 million shares of GENI stock (about 65% of the float) to various broker-dealers.
B. GENI’s CEO Hires D’Angelo to Arrange the Stock Loan Transactions
25. In the summer of 1999, GENI’s CEO retained defendant D’Angelo (acting through his company, defendant RBF International) to facilitate loans of GENI stock to broker-dealers.
26. Shortly thereafter, D’Angelo approached a former RBF employee to broker GENI stock loans with the former employee’s current firm, Deutsche Bank Securities Limited (“Deutsche Bank Canada”), which is based in Toronto. At the time, the former RBF employee was the head of Deutsche Bank Canada’s securities lending department.
27. The former RBF employee agreed to borrow GENI stock on behalf of Deutsche Bank Canada from GENI’s CEO and Ultimate Holdings. However, he would not accept their GENI stock directly because they were not broker-dealers. The former employee would only borrow stock from a creditworthy broker-dealer. To fulfill these conditions, D’Angelo interposed other broker-dealers between Deutsche Bank Canada and GENI’s CEO.
28. D’Angelo first contacted the head of securities lending at Native Nations, who agreed, in October 1999, to accept delivery of the GENI shares owned by GENI’s CEO and Ultimate Holdings and then re-loan them to Deutsche Bank Canada. D’Angelo delivered the GENI shares to Native Nations for Ultimate Holdings. The head of securities lending at Native Nations then transferred the GENI shares to Deutsche Bank Canada in a second, but virtually simultaneous, stock loan transaction. In return, the current market value of the shares was paid in cash from Deutsche Bank Canada, through Native Nations, to GENI’s CEO and Ultimate Holdings.
29. Between October 1999 and September 2001, Native Nations continued to obtain GENI shares in this manner. The amount of the loans grew (due to the fact that more shares were being loaned and the fact that GENI’s stock price was increasing dramatically) until Native Nations reached its credit limit with Deutsche Bank Canada. As a result, Deutsche Bank Canada would not continue to use Native Nations as its exclusive, direct counter-party for the GENI stock loans.
30. To solve this problem, D’Angelo interposed a chain of stock lenders between GENI’s CEO and Deutsche Bank Canada, arranging for Ultimate Holdings to provide GENI stock to Native Nations, which then loaned the stock to other broker-dealers that continued re-loaning the stock until it ended up at Deutsche Bank Canada. The loan proceeds traveled in the opposite direction: from Deutsche Bank Canada through the various broker-dealers to Native Nations and ultimately to GENI’s CEO and Ultimate Holdings. At the height of the scheme, D’Angelo interposed more than a dozen broker-dealers between Deutsche Bank Canada and Native Nations.
31. For assisting in this scheme, D’Angelo secretly compensated the head of securities lending at Native Nations and the head of Deutsche Bank Canada’s securities lending department.
32. After the stock loan scheme was in place, GENI’s CEO, his accomplice and D’Angelo engaged in a variety of actions designed and intended to manipulate GENI’s stock price.
A. GENI’s CEO Hires A Financial Commentator to Tout GENI on Television
33. On or about December 15, 1999, GENI’s CEO was introduced to a well-known financial commentator by a mutual friend.
34. On or about December 20, 1999, the financial commentator agreed to tout GENI on television in exchange for substantial payments from GENI’s CEO that would not be disclosed to the investing public.
35. The financial commentator began touting GENI on December 21, 1999, calling the company “a very hot, speculative pick” and describing its core business as “extremely profitable” on Bloomberg TV. In the days after this recommendation, GENI’s stock price rose 50% from $1.50 to $2.25, trading at 29 times its average volume over the prior three months.
36. The financial commentator continued to tout GENI on television through February 2000. For instance, during a February 8 appearance on Bloomberg TV, he described GENI as “exploding in revenues” and predicted that its share price would rise 300-500%. The next day, the stock rose 77%, from $2.21 to $3.92, on 24 times its average volume. On February 25, the financial commentator recommended GENI on CNBC, making the company his “Double Your Money Pick.”
37. GENI made two secret payments to the financial commentator shortly after his February 25, 2000 appearance on CNBC. To disguise the payments, GENI used the financial commentator’s then girlfriend as an intermediary.
38. The first payment was made on February 28, when one of GENI’s subsidiaries wired $100,000 to the girlfriend’s personal bank account. The next day, the girlfriend transferred $95,000 to a company wholly owned by the financial commentator.
39. To document the $100,000 payment to the financial commentator’s girlfriend, GENI, at the direction of its CEO, entered into a written agreement, dated March 1, 2000, with a small vitamin exporting company owned by the girlfriend, to purchase the vitamin company’s customer list. In fact, the list belonged to the financial commentator and consisted of the names of some 30,000 people interested in commodities trading.
40. Other than the sale to GENI, the financial commentator never sold that customer list for more than $6,700. GENI never obtained an appraisal or independent valuation to justify the $100,000 price paid to the financial commentator’s girlfriend for the customer list and GENI never sold any products or generated any revenue from it.
41. GENI made a second payment to the financial commentator on March 29, 2000, structured as follows: a company wholly owned by the financial commentator entered into a contract to sell a certain Internet website to his girlfriend’s vitamin company for 69,000 shares of GENI stock. GENI then simultaneously entered into a contract with the vitamin company to purchase the website for 72,000 GENI shares. At the time, 69,000 shares of GENI were worth approximately $1 million and the 72,000 shares of GENI were worth approximately $1.2 million.
42. GENI never obtained an appraisal or independent valuation to justify the purchase price of the financial commentator’s website and, at the time, the website had no revenue, no working model, no product, no customers and no employees.
43. GENI issued 72,000 shares to the vitamin company on May 24, 2000 pursuant to the terms of the March 29 contract. Three months later, the shares were reissued, and 69,000 shares were issued directly to the financial commentator’s company and 3,000 shares were issued to his girlfriend’s vitamin company.
44. In August and September 2001, shortly before GENI’s stock price collapsed, the financial commentator sold 50,000 GENI shares (split adjusted) for proceeds of $826,817.
B. The Financial Commentator Continues to Makes False and Misleading Statements About GENI on Television and Fails to Disclose Conflicts of Interest to His Clients
45. Between March 2000 and April 2001, after receiving more than $1.1 million from GENI, the financial commentator continued to tout GENI’s stock on television without disclosing the payments from GENI or his relationship with the company and its CEO. In certain of these appearances, the financial commentator made representations regarding GENI that he knew or was reckless in not knowing were false, misleading and/or lacked a reasonable basis. For example, he said that GENI is “exploding in revenues,” “its core business is extremely profitable” with a “PE ratio of somewhere between 5 and 10 to 1,” and that stock was “very cheap” in light of those considerations.
46. The financial commentator also worked as an investor adviser. After receiving undisclosed compensation from GENI, he recommended GENI stock to certain of his clients and he also purchased GENI shares in some accounts under his management.
C. D’Angelo Engaged in Manipulative Trading
47. During the course of the scheme, GENI’s CEO, his accomplice and D’Angelo extensively engaged in manipulative trading practices. GENI’s CEO (trading in his personal account and the accounts of a certain nominee and Ultimate Holdings), his accomplice (trading in the account of Ultimate Holdings), and D’Angelo dominated the monthly trading volume of GENI stock. The chart below illustrates their trading activity as a percent of the monthly trading volume, as publicly reported by Dow Jones, for the period January 2000 to September 2001.
Percent of Monthly Trading Volume
48. Among other things, their combined position enabled them to limit the supply of GENI stock and to control the float of GENI stock.
49. In April 2001, D'Angelo began trading GENI stock in accounts that he controlled at Liberty Discount Brokers, Inc., which was owned and operated by his son-in-law. D'Angelo received the stock from GENI's CEO, and placed trades on his behalf to evade the SEC's disclosure requirements for trading by corporate insiders. Between April and September 2001, D'Angelo executed approximately 18,000 trades of GENI stock, representing a total value of more than $87 million. D'Angelo intentionally and knowingly effected those trades to create trading volume and inflate GENI's stock price.
D. Native Nations Discovers the Fraudulent Stock Loan Transactions
50. To cover up the stock loan transactions with Ultimate Holdings, D'Angelo and his contact at Native Nations sent falsified audit confirmations to Native Nations' auditors. In connection with the 1999 and 2000 audits of Native Nations' financial statements, the auditors requested confirmation of certain loans involving GENI stock from a large securities clearinghouse. D'Angelo and his contact at Native Nations arranged for phony confirmations to be signed by individuals who were not associated with the clearinghouse and then returned to the auditors. In another instance, D'Angelo and GENI's CEO tried, unsuccessfully, to convince one of the CEO's brokers to sign a confirmation letter falsely stating that his firm had loaned GENI shares to Native Nations.
51. During the fiscal 2000 audit, the auditors asked a certain broker-dealer to confirm loans of GENI stock to Native Nations. Because that broker-dealer's records did not reflect such stock loans, its compliance officer informed the head of Native Nations of this discrepancy on February 13, 2001.
52. Shortly thereafter, D'Angelo informed the head of Native Nations that he had arranged the GENI stock loans and that Native Nations had actually borrowed the stock from GENI's CEO, his accomplice and Ultimate Holdings. During his conversation with D'Angelo, the head of Native Nations demanded that D'Angelo unwind the loans, but D'Angelo informed him that GENI's CEO, his accomplice and Ultimate Holdings did not have the money to repay the loans and that the transactions could not be unwound before March 2001. To provide some protection to Native Nations, its head then demanded that Ultimate Holdings execute a master stock loan agreement with the firm, and he decided not to remit future cash payments to GENI's CEO, his accomplice and Ultimate Holdings if GENI's stock price continued to rise.
53. In March 2001, after GENI's stock price had risen and Native Nations had not forwarded marks to GENI's CEO, his accomplice and Ultimate Holdings, they began pressuring the head of Native Nations to forward the cash. GENI's CEO told the head of Native Nations that he needed the money to cover purchases of GENI stock that he had made on margin and further that if he did not get the cash, the shares would be sold, causing the stock price to drop.
54. On April 4 and 6, 2001, Native Nations transferred $8.1 million and $7 million, respectively. The $15.1 million was used to pay off margin balances in accounts owned by Ultimate Holdings, GENI's CEO and two of his nominees.
55. Between April and July 2001, GENI's stock price continued to rise. GENI's CEO, his accomplice and D'Angelo continued to pressure the head of Native Nations to release the additional cash that it had collected from its counterparties. Native Nations released an additional $11 million to Ultimate Holdings, which was used to inflate GENI's stock price.
56. In late August 2001, GENI's CEO told the head of Native Nations that he needed $17 million to meet margin calls. On August 22, Native Nations transferred $17 million to GENI's CEO on the express condition that $15 million would be repaid to the firm in a few days. These funds were not repaid.
57. In September 2001, GENI's CEO and D'Angelo asked the head of Native Nations for more money or for shares of GENI stock which Native Nations had previously collected. When these requests were refused, D'Angelo asked the head of Native Nations: "do you want to go out of business?"
E. GENI's Stock Price Collapses and the Stock Loans Are Not Repaid
58. On September 10, 2001, GENI's stock price closed at $17.03 per share. After the terrorist attacks of September 11th, GENI's CEO and his accomplice stopped supporting GENI's stock price. As a result, on September 17, 2001, the first trading day after the terrorist attacks, GENI's stock price began falling precipitously. On September 25, 2001, GENI closed at $5.90 and Nasdaq halted trading to obtain additional information from the company. GENI did not respond to the inquiry and voluntarily delisted its stock.
59. When GENI's stock price dropped in September, GENI's CEO and Ultimate Holdings were obligated under the stock loan transactions to return the cash that they had received from Native Nations, so that Native Nations could pay the money to the other broker-dealers that had borrowed GENI shares. GENI's CEO, his accomplice and Ultimate Holdings failed to repay any money. As a result of its obligations to its counterparties, Native Nations quickly exhausted its net capital and was forced out of business. One of its counterparties, MJK Clearing, Inc., a registered broker-dealer located in Minneapolis, Minnesota, was also forced out of business because it could not repay downstream broker-dealers to which it had loaned GENI shares. Numerous other broker-dealers suffered losses in the tens of million of dollars as a result of the stock loan scheme.
60. Although Deutsche Bank Canada was the ultimate lender to GENI's CEO and Ultimate Holdings, it was able to collect much of the cash that it had advanced to the broker-dealers that D'Angelo interposed between it and GENI's CEO and Ultimate Holdings, and it suffered only minimal losses.
61. The $130 million obtained by GENI's CEO, his accomplice and Ultimate Holdings was used to purchase GENI stock, finance GENI's operations and enrich GENI's CEO and his accomplice.
62. Paragraphs 1 through 61 above are realleged and incorporated herein by reference.
63. Defendants knowingly or recklessly engaged in a fraudulent scheme to manipulate the price of GENI stock.
64. By reason of the foregoing, defendants violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b?5] thereunder.
WHEREFORE, the Commission respectfully requests that this Court enter a final judgment:
1. against Kenneth Peter D'Angelo:
enjoining him from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
ordering him to produce to the Commission a written, specific, sworn accounting of the disposition and present location of all the money he obtained from the conduct alleged herein;
ordering him to disgorge the profits and proceeds he obtained as a result of his actions alleged herein and to pay prejudgment interest thereon; and
ordering him to pay 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)];
2. against RBF International, Inc.:
enjoining it from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder;
ordering it to produce to the Commission a written, specific, sworn accounting of the disposition and present location of all the money it obtained from the conduct alleged herein;
ordering it to disgorge the profits and proceeds it obtained as a result of its actions alleged herein and to pay prejudgment interest thereon; and
ordering it to pay 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)]; and
granting such other relief as this Court deems just and proper.
Dated: September 11, 2003
Debra M. Patalkis
Scott W. Friestad
Howard A. Scheck
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0911
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