UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission (the "SEC" or the "Commission") for its complaint against defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn (collectively, the "Defendants") alleges as follows:
NATURE OF THE ACTION
1. Defendants Desjardins, Zaba, Jiwan, Brouillette and Koehn engaged in a wide-ranging fraudulent scheme to sell the stock of Pay Pop, Inc. ("Pay Pop"), a now-defunct company, to investors in the United States and Canada. The fraudulent scheme involved, among other things: (i) bribing Jiwan, a senior manager of Pay Pop's transfer agent, CIBC Mellon Trust Company ("CIBC Mellon"), to issue Pay Pop stock without any payment to the company for such stock -- the "free" stock; (ii) the fraudulent issuance by Pay Pop's transfer agent of millions of shares of purportedly "free trading" Pay Pop stock -- the legend-free Pay Pop stock certificates that created the false impression that the stock complied with United States securities laws; (iii) the issuance of fabricated financial statements, and a series of materially false and misleading public statements, including press releases, that led to an artificial and inflated market for Pay Pop's stock; and (iv) the sale of Pay Pop stock to unsuspecting investors through the U.S. securities market.
2. By the end of the fraudulent scheme, approximately 98 million Pay Pop shares were illegally issued and distributed to the public. Pay Pop meanwhile, received none of the proceeds from the fraudulent stock sales and ultimately its stock became worthless. In fact, defendants Zaba and Desjardins received most of the proceeds, totaling millions of dollars, from these stock sales.
3. The fraudulent scheme was choreographed by Desjardins and Zaba. To secure the supply of "free," and purportedly "free trading," Pay Pop stock, Desjardins and Zaba turned to its transfer agent. In exchange for a series of bribes to one of its senior managers, Pay Pop's transfer agent issued Pay Pop stock free of restrictive legends, without requiring proof that the Pay Pop shares were subject to a registration statement filed with the Commission, or any exemption from registration, and converted the stock into street form (i.e., placing record ownership in the name of a brokerage firm or clearing agency, such as the Depository Trust Company, so that beneficial ownership of the shares could be readily traded via electronic means in the public markets without need to reissue stock certificates).
4. To obtain a market maker for Pay Pop stock and secure a sales force for Pay Pop stock in the United States, Desjardins and Zaba commissioned Koehn, who was not an accountant, to fabricate a set of materially false and misleading "audited" financial statements. To make sure that the market was primed for the sales of Pay Pop stock, Desjardins and Zaba directed that Pay Pop issue at least eight press releases that falsely announced assets the company never owned, contracts that never existed, substantial third party equity investments that never occurred, and business prospects that had no basis in reality.
5. Zaba and Desjardins' sales of stock in the U.S. were assisted by Brouillette, a U.S. registered representative. Brouillette's activities included setting up and managing a set of nominee accounts for Desjardins and Zaba, introducing Desjardins and Zaba to other promoters, marketing Pay Pop stock to his customers through a series of materially false statements, engaging in rampant unauthorized trading in customer accounts to create and manipulate a market for Pay Pop stock, and arranging direct sales of legend-free Pay Pop stock certificates to his customers. Brouillette continued his sales efforts with respect to Pay Pop and other stocks even after being terminated from his position as a registered representative and was suspended from the securities industry by NASD in 2001.
6. The majority of the proceeds from the sales of Pay Pop stock were funneled back to Desjardins and Zaba, completely bypassing Pay Pop. Desjardins even boasted that Pay Pop was his own "printing press" for money, while at the same time bartering Pay Pop stock for several exotic cars and an ownership interest in a thoroughbred racehorse. In all, Desjardins and Zaba realized illegal profits of over $3 million (U.S.).
7. This Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. §§77t(b) and 77v(a)] and Sections 21A and 27 of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 78u-1, 78aa].
8. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce and/or of the mails in connection with the transactions described in this Complaint.
9. Defendant Alnoor Jiwan ("Jiwan") is a Canadian citizen, residing in British Columbia, Canada. During all relevant times, Jiwan was the Manager of the Pacific Region of Pay Pop's transfer agent, CIBC Mellon. Jiwan oversaw the transfer agent and registrar relationship between Pay Pop and his employer.
10. Defendant Daryl G. Desjardins ("Desjardins") is a Canadian citizen, residing in British Columbia, Canada. Desjardins was, at all relevant times, the president and a director of Pay Pop.
11. Defendant Robert S. Zaba ("Zaba") is a Canadian citizen, residing in British Columbia, Canada. Zaba, at all relevant times, controlled Pay Pop and served as Pay Pop's corporate secretary and acted as, and held himself out as, a director of Pay Pop. However, he was never formally appointed as a director.
12. Defendant Ronald D. Brouillette, Jr. ("Brouillette") is a U.S. citizen. Brouillette was formerly a registered representative, holding Series 3, 7, 11, 22, 62 and 63 licenses. Brouillette has not been associated with a registered brokerage firm since he was terminated from his former employer in August 1999. The NASD suspended Brouillette in October 2001 for engaging in "egregious unauthorized trading" and failing to cooperate with an inquiry conducted by the NASDR.
13. Brian A. Koehn ("Koehn") is a Canadian citizen, residing in British Columbia, Canada. Koehn created Pay Pop's "audited" financial statements. Koehn is neither a CPA nor a chartered accountant.
A. Pay Pop
14. In the spring of 1998, Zaba purchased Pay Pop, which was a Nevada shell corporation at the time. That is, while Pay Pop was a legal entity formed under the laws of Nevada, it had no assets or business activity. When Zaba acquired the Pay Pop shell, Pay Pop had a negative net worth.
15. After Zaba's purchase, Pay Pop's principal place of business was in British Columbia, Canada. During all relevant times, Pay Pop's stock was traded in the United States via the NASD's Over-the-Counter Bulletin Board. Prior to July 1998, Pay Pop had only 1 million shares of stock issued and outstanding. Between July 1998 and March 1999, Pay Pop issued over 55 million shares of stock. In March 1999, Pay Pop conducted a 40-1 reverse split of its existing shares of additional stock, bringing the number of shares issued and outstanding to 1.47 million shares. From March 1999 to August 1999, a period of only six months, the number of issued and outstanding Pay Pop shares grew to approximately 40 million. Almost all of this stock was distributed to the public in a series of sales and transfers. At no point in time were any of the transactions involving Pay Pop stock registered with the Commission as required by Section 5 of the Securities Act. [15 U.S.C. § 77e].
B. Delecom Communications
16. In the summer of 1998, Pay Pop claimed through a press release and on the company website to have acquired Delecom Communications, Inc. ("Delecom"), a British Columbia corporation, from Desjardins. In fact, the transaction never closed. Pay Pop falsely described Delecom as Pay Pop's principal operating subsidiary. Delecom was a small telecommunications company located in British Columbia, in business for less than two years. Delecom was a reseller of British Columbia Telephone ("BC Tel") long distance and local service, leasing telephone line capacity from BC Tel and reselling telephone service to its customers at a markup. Delecom had less than a dozen employees and, at its zenith, had 1,600 lines leased to only 300 customers in British Columbia. After the purported sale of Delecom to Pay Pop, Desjardins became the president and a director of Pay Pop.
A. Step One: Securing A Source of Pay Pop Stock
17. The initial part of executing the fraudulent scheme was the creation of a ready source of purportedly "free trading" Pay Pop stock to sell into the market. In mid-1998, Zaba was informed by Pay Pop's then-existing transfer agent that it would not issue any Pay Pop stock certificates without restrictive legends unless Pay Pop supplied it with either proof that the shares were subject to a registration statement filed with the Commission or an attorney opinion letter representing that the stock was exempt from registration.
18. A restrictive legend is a statement placed upon a stock certificate stating, among other things, that the stock is not registered with the Commission pursuant to Section 5 of the Securities Act and an ownership interest in the stock represented by that certificate cannot be sold or transferred absent registration or the existence of a valid exemption from registration. The presence of a restrictive legend forecloses future sale or distribution of such a stock certificate until such time as the issuer's transfer agent removes the legend via re-issuance of the certificate without the legend being present. The absence of the restrictive legend on the stock certificate creates the impression that the stock it represents is the subject of a registration statement with the Commission or exempt from such registration.
19. To bypass Pay Pop's existing transfer agent who had refused to participate in his scheme, Zaba approached Jiwan, the head of CIBC Mellon's Pacific Region. Zaba advised Jiwan of Pay Pop's prior transfer agent's unwillingness to issue legend-free stock without registering the stock with the Commission or providing a legal opinion letter that the transaction was exempt from registration.
20. Jiwan agreed that in return for a bribe in the form of Pay Pop stock, he would not require there to be a registration statement in effect for Pay Pop as required under United States securities law, or any proof of an exemption from such registration (such as an attorney opinion letter) for CIBC Mellon to issue legend-free Pay Pop stock.
21. Thereafter, between July 1998 and February 1999, Jiwan received 315,000 Pay Pop certificated shares from Desjardins and Zaba. By the spring of 1999, CIBC Mellon had issued legend-free Pay Pop certificates representing over 50 million shares of Pay Pop stock, and Pay Pop had just completed a 40-1 reverse stock split. To continue the scheme, Jiwan demanded from Desjardins and Zaba additional shares of Pay Pop to compensate him for the risk he was taking. They complied. By the end of the fraudulent scheme, Zaba and Desjardins had paid Jiwan up to 820,000 shares of Pay Pop stock in return for his assistance to their unlawful scheme.
22. Jiwan directed that the majority of the Pay Pop share certificates he received as bribes be placed in the name of the sister of one of the transfer agent's managers that reported to Jiwan. Jiwan deposited at least 421,000 shares of Pay Pop stock issued in his nominee's name into his Canadian brokerage accounts and ordered twelve sales of Pay Pop stock, totaling 166,000 shares, from December 1998 through December 1999.
23. Between July 1998 and August 1999, Zaba and Desjardins, individually or together, signed or directed others to sign at least fifty-six Pay Pop "treasury orders" authorizing CIBC Mellon to issue Pay Pop stock certificates representing approximately 98.6 million shares of Pay Pop, all but approximately 23.6 million of which were free of any restrictive legend. According to CIBC Mellon's policies and procedures, a "treasury order" was "[a]n official letter from a company authorizing the transfer agent and registrar to issue shares" of the company. CIBC Mellon issued all of the Pay Pop stock certificates pursuant to the Pay Pop treasury orders.
24. At least fifteen treasury orders bore the signature of Desjardins and the forged signature of a former Pay Pop officer and director. The fifteen forged treasury orders authorized the issuance of at least 24,740,000 shares of Pay Pop stock. Desjardins personally forged, or directed his secretary to forge, the signature of this former officer and director on the treasury orders.
25. Jiwan at all times knew, or was reckless in not knowing, that his conduct was illegal. For example, the vast majority of the stock he received as his bribe was in the name of a nominee to evade detection. In addition, Pay Pop's counsel, Warren Soloski, on two separate occasions, advised Jiwan that he was violating the U.S. securities laws and harming Pay Pop by issuing legend-free stock certificates. In late May of 1999, Soloski discovered that the transfer agent had issued approximately 4 million shares of Pay Pop stock in the form of legend-free Pay Pop stock certificates. As a result, Soloski wrote to CIBC Mellon, via Jiwan, a letter dated June 8, 1999, advising CIBC Mellon that it had issued stock certificates representing 4 million shares (to that point) of Pay Pop stock, without any restrictive legends, in violation of Section 5 of the Securities Act - - i.e., the transactions were neither registered with the Commission nor exempt from registration. The June 8 th letter further instructed Jiwan to " NEVER DO THIS AGAIN." (Emphasis in the original).
26. Several weeks later, Soloski learned that the transfer agent and Jiwan ignored his instructions and issued legend-free stock certificates representing another 11 million shares of Pay Pop stock. Soloski flew to Vancouver and met with Jiwan and another manager of CIBC Mellon in CIBC Mellon's Vancouver offices on July 19, 1999. Soloski demanded to see a shareholder list and learned that the amount of Pay Pop stock issued and outstanding had grown from 3.7 million to over 18 million shares in a six-week period. Soloski, in the other manager's presence, screamed at Jiwan and again advised him that these actions violated U.S. securities laws and was "beyond civil tort." Soloski also advised Jiwan that CIBC Mellon's actions would destroy Pay Pop.
27. Once again, CIBC Mellon and Jiwan ignored Soloski's admonitions. After Soloski's trip to Vancouver, CIBC Mellon issued legend-free Pay Pop certificates representing at least an additional 3 million shares of Pay Pop stock.
B. Step Two: Zaba and Desjardins Pump
Up The Market For Pay Pop Stock
28. With their supply of Pay Pop stock secured through the bribes to the transfer agent, Zaba and Desjardins set out to create demand for Pay Pop stock. Before July 1998, there was no active U.S. market maker for Pay Pop stock and little trading activity. Beginning in August 1998, Desjardins and Zaba made a series of material misrepresentations and omissions that portrayed Pay Pop as a successful telecommunications company on the verge of becoming a major player in the Canadian telecommunications market. These material misrepresentations included false sales presentations to U.S. brokers, the creation of fraudulent financial statements, and a series of false and misleading press releases.
1. Desjardins' and Zaba's sales presentations to U.S. brokers
29. A key component of Desjardins and Zaba's scheme was to secure an active U.S. market maker for its stock and a willing sales force to sell Pay Pop's stock to unsuspecting investors. In the fall of 1998, Desjardins and Zaba approached the brokerage firm of La Jolla Capital, located in California. Zaba and Desjardins conducted at least two presentations concerning Pay Pop with La Jolla Capital registered representatives, including Brouillette. At the presentations, they told the La Jolla Capital brokers that Pay Pop was experiencing explosive growth and had a stable asset base. For example, Desjardins and Zaba falsely represented that:
2. Creation of fraudulent "audited" financial statements
30. As a result of the presentations, La Jolla Capital brokers were eager to start selling Pay Pop stock. Before La Jolla Capital could make a market in Pay Pop, it required Pay Pop to provide it with audited financial statements. At the time of the presentations, Pay Pop only had audited financials covering the period ending April 30, 1998, and the sales brochure of the Surf Mar property. Pay Pop's existing audited financial statements also showed that Pay Pop had a negative net worth with no assets.
31. Immediately after the presentations to La Jolla Capital, Zaba and Desjardins approached Koehn, a stock promoter from British Columbia, to prepare the necessary "audited" financial statements for Pay Pop. Koehn was neither a CPA nor a chartered accountant. That fact did not dissuade Koehn, though. Without making any attempt to verify the financial information Zaba and Desjardins supplied him, Koehn combined the financial numbers of Pay Pop and Delecom with the appraised value of Surf Mar into a set of consolidated "audited" financial statements.
32. Koehn also drafted and signed an audit opinion letter to accompany the Pay Pop financial statements. The audit opinion letter falsely represented that chartered accountants audited Pay Pop's financial statements and that the financial statements were prepared in accordance with generally accepted auditing standards ("GAAS"). Koehn distributed the financial statements to at least one U.S. brokerage firm making a market in Pay Pop stock and one investor.
33. The financial data contained in the "audited" Pay Pop financial statements were materially false and misleading. According to the Pay Pop financials, Pay Pop had assets of $13.05 million (U.S.) and a net worth of $11.45 million (U.S.). Two assets on Pay Pop's balance sheet made up virtually its entire asset base: (i) the Surf Mar resort property, valued at $4.1 million; and (ii) 3,800 leased Centrex telephone lines that it valued at $2,100 (U.S.) per line, totaling $7.98 million. These figures were baseless. Pay Pop never owned the Surf Mar property and never had more than 1,600 Centrex lines leased to its customers. In fact, even assuming that Pay Pop's per line valuation was accurate, Pay Pop's real assets were worth only $3.36 million, not the $13 million reported in the financial statements.
34. Koehn knew he was neither a CPA nor a chartered accountant, yet he drafted and distributed financial statements under the cover of an audit opinion letter he signed. Rather than taking any steps to validate the financial data contained in the financial statements he prepared, Koehn blindly incorporated the financial data supplied by Desjardins and Zaba without ever verifying its accuracy. Koehn profited from his fraud, receiving at least $5,000 in cash and 300,000 shares in Pay Pop stock for his services. Koehn sold his Pay Pop stock and received $20,975 for the stock.
35. Based upon the October 15, 1998 "audited" financial statements, La Jolla Capital made a market in Pay Pop stock and allowed its representatives to begin selling Pay Pop stock to the firm's clients. The financial information contained in the fictitious financial statements was conveyed to the customers of La Jolla Capital.
3. Fraudulent Press Releases
36. Zaba and Desjardins directed that Pay Pop issue at least eight materially false and misleading press releases between August 1998 and June of 1999. The press releases falsely reported a variety of information designed to boost and maintain the demand for Pay Pop stock. For example, the press releases falsely reported multi-million dollar investment bank financings that did not exist, the purchase and sale of valuable Caribbean beach resort property that never occurred, the growth in client base and revenue in the face of a business decline, the signing of material contracts that never existed, and the successful expansion into new business territories that were either never pursued or recently abandoned. This false and misleading information was also disseminated via Delecom's web site. The false and materially misleading press releases were designed to maintain demand for Pay Pop stock in the face of an ever-increasing supply of legend-free Pay Pop stock certificates being issued out of the transfer agent's offices. The false press releases are summarized below.
a. The August 31, 1998 Press Release
37. Pay Pop issued its first press release on August 31, 1998. The press release, authored by Zaba, proclaimed that Pay Pop had acquired two companies, Delecom and Surf Mar Resorts. The press release claimed that the two acquisitions brought Pay Pop's "asset base to approximately U.S. $17.6 million. Projected revenues for 1999 year end are $20 million."
38. The press release was completely false. First, Pay Pop never purchased Surf Mar. Second, Pay Pop never closed on the transaction to acquire Delecom. While the topic of an acquisition and various deal structures were discussed, the deal never closed. Likewise, the representation that Pay Pop would have an asset base of U.S. $17.6 million was also patently false. As of April 30, 1998, the date of Pay Pop's latest audited financial statements, Pay Pop had no assets and a negative net worth.
b. The October 16, 1998 Press Release
39. Pay Pop issued another materially false and misleading press release on October 16, 1998. Therein, Pay Pop announced:
40. Each of the statements in the October 16, 1998 press release was materially false and misleading. As discussed above, the acquisition of Delecom never occurred. Second, the contract with the property management company never materialized. As a result, Delecom never installed anyswitching equipment under that contract. Similarly, there were no "advanced" merger negotiations with a Florida telecommunications firm.
41. In addition, the representation that Delecom had successfully tested its long distance connections between Vancouver and Toronto was also false. At the time of the press release, Delecom had only just begun to test its capabilities. The testing was far from successful. While Delecom was able to complete one call, the service was riddled with defects. Even assuming that Delecom had the financial resources available to complete the project, which it did not, the service was months away from being available to customers.
42. Last, but not least, the representation that Delecom had begun installing switching equipment in Calgary and New York was false. Delecom never had any definitive plans for U.S. expansion and Delecom had only begun considering Calgary as a potential market. No steps were taken to begin installing equipment in Calgary and New York.
c. The January 6, 1999 Press Release
43. On January 6, 1999, Pay Pop announced in a press release, among other things, that Pay Pop had added new management, including a new Corporate Secretary. The press release further detailed the new secretary's impressive resume as the Agent-General for the Government of Saskatchewan, where he acted as the principal trade negotiator with foreign investors for the province of Saskatchewan, as well as the new secretary's extensive management experience with international financial companies.
44. The January 6, 1999 release was false and misleading. In fact, the new Pay Pop Secretary had resigned as an officer and director of Pay Pop on November 10, 1998, after serving only three weeks in these positions.
d. The March 4, 1999 Press Release
45. On March 4, 1999, Pay Pop issued another materially false and misleading press release. In this release, Pay Pop announced that it was conducting a 40-1 reverse stock split. The press release contained the following material misstatements:
46. Each of these assertions was false. First and foremost, Pay Pop never completed the announced financing. Pay Pop had no plans or capital to expand into Alberta or Saskatchewan at the time of the press release. In fact, the only steps Pay Pop had taken to expand its operations outside of Ontario and British Columbia was one trip to Quebec by one of its employees. Moreover, the business operations in British Columbia and Ontario were anything but "successful." At the time of the press release, Pay Pop closed its Ontario office because of the absence of any business, and the office in British Columbia was experiencing a decline of its already small client base.
47. In addition, the representations that Delecom had the capacity to offer telephone and fax service over the internet was false. At the time of the press release, Delecom was unable to provide these services, as its internet service provider had already terminated Delecom's internet access for non-payment of its bills.
48. The press release also failed to disclose a significant fact - - the amount of Pay Pop stock issued and outstanding. Prior to the March 4, 1999 press release, the only figure publicly available for the amount of Pay Pop stock issued and outstanding was 20 million shares. The real reason Pay Pop needed to perform the 40-1 reverse split was that the amount of stock issued and outstanding had increased to 56 million shares.
e. March 23, 1999 Press Release
49. One week after Pay Pop completed its 40-1 reverse stock split, the company issued another press release, dated March 23, 1999. Therein, Pay Pop announced that it finalized the $6 million financing it previously disclosed on March 4, 1999. According to the press release, Desjardins stated "the agreement calls for funding $4 million on a `Firm Basis' and the balance on a `Best Efforts' basis." Pay Pop also announced that it had hired three new sales and marketing people, and projected that the new additions will enable Pay Pop to add "up to ten thousand (10,000) new lines per month in Canada alone."
50. Again, the press release was false. No financing was ever secured. Likewise, Pay Pop's growth projections also lacked any good faith basis. Delecom had been in business for several years and had only been able to secure 1,600 lines and 300 customers. The addition of three people to the sales and marketing force, approximately doubling the team, would not have permitted Pay Pop to increase its number of lines by 10,000 lines per month. In fact, at the time of the press release, Delecom was actually losing customers and could not add any new lines to its service due to its persistent non-payment of BC Tel bills, the company that leased Delecom its phone lines. Moreover, Pay Pop never owned Delecom.
f. May 18, 1999 Press Release
51. On May 18, 1999, Pay Pop issued a press release to follow up on its prior announcement of March 23, 1999 concerning the hiring of new sales and marketing personnel. Specifically, Pay Pop stated that as a result of these three new employees, company revenue and number of customer lines had already increased by 7%. Pay Pop also announced for the first time its plan to become a competitive local exchange carrier ("CLEC") by buying telephone switch equipment. (A CLEC is a telephone company that owns its own lines and switches). Pay Pop stated that the new switch would allow it to add "60,000 lines and increase revenue by an estimated $1.8 million per month while increasing its profit margins by about 50%."
52. Once again the press release was false. For example, the addition of the new members of the sales and marketing team did not result in a 7% increase in lines and revenue. In fact, Pay Pop was actually losing customers at the time of the press release and could not add new lines because of non-payment of its BC Tel bills. Similarly, the assertions that Pay Pop had decided to purchase a single telephone switch and become a CLEC, along with the profit and revenue projections, were materially false and misleading. In fact, the notion of buying a switch and begin acting as a CLEC was just an idea that was raised by a Delecom employee, only as a potential business idea, two or three days before the press release. Before making this announcement, Pay Pop had not even contacted the supplier of the switch. Nor had Delecom employees performed any analysis of what effect becoming a CLEC would have on its line capacity or revenue. Nor had Delecom taken any steps to inquire as to what regulatory requirements it would have to pass to become a CLEC. Had Desjardins or Zaba even inquired about the capacity and costs of the switch before making the public statement, they would have learned that the added capacity would have been only 10,000 lines, not 60,000 lines, and the profit margins would have been far less than claimed.
g. June 28, 1999 Press Release
53. Pay Pop issued another false press release on June 28, 1999. This press release announced that Pay Pop had secured $8.5 million in financing from "American Fronteer [sic] Capital Corp.", $6 million of which would be available immediately. The press release also asserted that Pay Pop would use the new funds to buy new switching equipment, which would allow Pay Pop to add up to "500,000 additional lines. (Each 5,000 new customer lines equals approximately $200,000 in new monthly revenue)."
54. Again the press release was false and misleading. Pay Pop had only received a draft term sheet for the financing and never came to terms on the financing. Moreover, the statements concerning Pay Pop's plans to buy a new telephone switch with the proceeds of the financing, and the resulting revenue projections, had no basis in fact. Even if Pay Pop had received the financing, Pay Pop had insufficient funds to buy the switch described in its press release, because the cost of the described switching equipment exceeded the amount of the financing Pay Pop claimed it was to receive, and was far less than the cost of installing the switch and bringing it on line. As with the May 1999 press release, Desjardins and Zaba greatly overstated the capacity of the switch identified in the release as well as the revenue projections.
h. June 29, 1999 Press Release
55. On June 29, 1999, Pay Pop announced that it had sold its property in the Dominican Republic for $4.4 million. This statement was also false. As indicated above, Pay Pop never owned the property in question.
D. Step Three: The Dumping of Tens of Millions of Pay Pop Shares
1. Brouillette's role in creating a market for Pay Pop stock
56. While Zaba and Desjardins pumped up or artificially maintained the price of Pay Pop stock through the false press releases, Brouillette was one of the principal architects of the "dumping" of Pay Pop stock for his own benefit and for the benefit of Desjardins and Zaba. Brouillette carried out his role in the dumping of Pay Pop stock in several ways. First, Brouillette brought Pay Pop as an "investment banking" client to Centex Securities after he was fired by La Jolla Capital. Based upon the fraudulent "audited" October 15, 1998 Pay Pop financials, Centex allowed Brouillette to make a market in Pay Pop stock at Centex and sell Pay Pop stock. Brouillette also served as a conduit of false information contained in the false financial statements and press releases from Pay Pop to Brouillette's clients and the customers of Centex.
57. Second, Brouillette helped Desjardins and Zaba in setting up Desjardins' account and the eight accounts in the names Desjardins' friends, family and employees for the sale of Pay Pop stock. Desjardins and Zaba set up the nominee accounts, which traded Pay Pop stock, to create the appearance of genuine demand for, and trading activity involving, Pay Pop stock. Brouillette submitted false customer account applications to Centex for the nominee accounts, which grossly overstated the income and net worth of the account holders. Brouillette also provided false customer addresses for the nominee accounts so as not to alert the nominees of the activity in their accounts.
58. Third, Brouillette received dozens of share certificates in the names of Desjardins and Desjardins' nominees (each one for hundreds of thousands of shares) and deposited them in the Centex accounts. After receiving the Pay Pop stock, Desjardins, not the nominees, authorized Brouillette's trades in the Pay Pop stock in the nominee accounts, but gave the false impression that the nominees authorized the trades. To carry this scheme out, Brouillette drafted the trade or transfer authorizations required by his firm's clearing broker. Brouillette would call Desjardins and ask that he secure the required nominee signatures, knowing full well that these would be forged by, or at the direction of, Desjardins. At times when Brouillette could not contact Desjardins, Brouillette directed Desjardins' secretary to forge the names of the nominees on the documents he prepared.
59. Fourth, Brouillette was active in assuring that there were buyers for Pay Pop stock through false representations to his customers or by omitting material information. Brouillette made numerous baseless assurances of quick gains to his customers to encourage their purchase of Pay Pop stock. For example, Brouillette told his customers, without any basis, that:
Brouillette knew, or was reckless in not knowing, that each of these statements was materially false and misleading.
60. Brouillette also failed to disclose to his customers that he was simultaneously selling millions of Pay Pop shares for Desjardins into the market or that he received compensation, or expected to receive compensation, from Pay Pop for his selling efforts. For his efforts, Brouillette received at least 200,000 shares of Pay Pop stock in his name as well as 1.5 million shares of Pay Pop stock in the name of his then-wife. Brouillette made at least $63,786 from the Pay Pop stock he sold through accounts he controlled.
61. Fifth, Brouillette also engaged in systematic unauthorized trading in his customers' accounts. Brouillette purchased Pay Pop stock in approximately 20 customer accounts without authorization. In one customer account, he took advantage of the customer's illness to buy approximately $750,000 of Pay Pop stock without authorization. Brouillette also traded stock between related customer accounts to create the impression of trading volume in Pay Pop stock.
62. Brouillette's conduct was accompanied by deception, misrepresentation and/or non-disclosure. For example, Brouillette:
63. Sixth, Brouillette directly participated in the distribution of the legend-free Pay Pop certificates that the transfer agent sent, at Desjardins' and Zaba's request, to Brouillette. In several instances, Brouillette arranged for his customers to buy Pay Pop stock certificates at a discounted price directly from Desjardins.
64. In each case, Brouillette, for the promise of compensation from Desjardins and Zaba, completely abrogated his duties to his customers and acted solely to advance his own personal interests.
2. The fraudulent scheme is a success
65. The combination of Zaba's and Desjardins' dissemination of materially false and misleading information to the public and the fraudulent activities of Brouillette in making and manipulating a market for Pay Pop stock was wildly successful. Desjardins received, directly and indirectly through the nominee accounts, 32,475,000 of the 98 million certificated shares of Pay Pop stock issued. Of this amount, Desjardins sold at least 10.7 million shares to the public, making illegal profits of at least $2,056,011.26. With the assistance of Brouillette, Desjardins also sold millions of Pay Pop shares, represented by legend-free stock certificates, directly to Brouillette's customers and friends, netting Desjardins illegal profits in excess of $300,000.
66. Zaba received 14,039,000 shares of Pay Pop stock in certificated form. Of this amount, Zaba sold 12,788,000 shares to the public, netting illegal profits of at least $1,006,331.23. Zaba also had Pay Pop issue approximately 14 million shares of stock, which were to be sold to pay off approximately $800,000 of his personal debt. Of the stock Zaba received in his own name, 10.3 million shares bore restrictive legends. This fact did not deter Zaba, however. Zaba arranged to have the legends removed by providing a U.S. brokerage firm with a legal opinion letter that falsely represented that he had no connection with Pay Pop.
67. While Pay Pop, through the control of Desjardins and Zaba, told the market that Pay Pop had approximately 20 million shares issued and outstanding, Pay Pop never disclosed the fact that substantially more stock had been issued and illegally distributed to the public. Nor did Desjardins and Zaba ever publicly disclose the totality of their sales of Pay Pop stock. Zaba never disclosed any of his sales, while Desjardins disclosed only a small percentage of his sales in his own name via Forms 144 filed with the Commission. However, of those sales, Desjardins did not disclose any of the sales through his nominees and lied as to the source of those Pay Pop shares he did sell.
68. Of the money raised by Desjardins and Zaba through the market sales of Pay Pop stock, Pay Pop did not receive a single dollar of the proceeds. The proceeds of all the sales from Desjardins and Zaba went into their personal bank accounts and not to Pay Pop. As a consequence, Zaba and Desjardins defrauded both the members of the public that invested in Pay Pop and the company itself.
E. Brouillette Acts As An Unregistered Broker
69. In September 1999, Centex terminated Brouillette for reimbursing the losses of his clients and guaranteeing client trades. Despite not being associated with a broker-dealer, Brouillette continued to "promote" Pay Pop stock and other companies after being terminated from Centex. In one case, Brouillette brokered a deal between a former customer and Desjardins whereby the former customer would receive 4 million shares of legend-free, "free trading" Pay Pop stock for a $30,000 payment to Desjardins. Despite Brouillette's assurances, the customer never received the promised "free trading" stock. Instead the customer received stock certificates in Desjardins' name bearing a restrictive legend.
70. In October 2001, the NASD barred Brouillette from associating with any member firm for his "egregious unauthorized trading" of Pay Pop and other stocks in seven of his customers' accounts. The NASD's bar did not stop Brouillette from acting as an unregistered securities broker. Brouillette continued in the industry as a "promoter." As late as December of 2002, Brouillette continued to contact his former Centex customers and brokered deals between them and the issuers of several penny stocks. Brouillette offered his former customers, via handwritten faxes and telephone calls, to arrange purchases of "free trading" certificated stock at "discount" prices. Often, the customers would pay the money and Brouillette failed to deliver the stock or delivered shares with restrictive legends.
71. Brouillette often received compensation for his broker activities in the form of stock from the issuers, including Pay Pop, whose stock he was selling or offering for sale to members of the public.
F. Defendants Trade On Material Nonpublic Information
1. Desjardins and Zaba
72. Zaba and Desjardins, as officers and/or directors of Pay Pop, owed Pay Pop and its shareholders duties of trust and confidence. Zaba and Desjardins breached these duties when they sold tens of millions of Pay Pop shares while in possession of material nonpublic information. They sold Pay Pop stock with the knowledge, or were reckless in not knowing, that: (i) the publicly-available information concerning Pay Pop was false; and/or (ii) they had illegally flooded the market with unregistered Pay Pop common stock issued in violation of Section 5 of the Securities Act. Moreover, Zaba continued selling Pay Pop stock with knowledge that Pay Pop's financial statements were false and that Pay Pop was on the verge of halting operations due to the mass resignation of Pay Pop's employees. As a result of their sales, Desjardins and Zaba breached their duties to Pay Pop and its shareholders and were unjustly enriched.
73. Koehn served as a paid consultant of Pay Pop during the fall of 1998 and the spring of 1999. Due to his paid consultant status, Koehn was a temporary insider of Pay Pop and owed Pay Pop and its shareholders duties of trust and confidence.
74. During this time, Koehn prepared Pay Pop's "audited" financial statements. In breach of his duties to Pay Pop and its shareholders, Koehn sold 55,000 shares of Pay Pop, netting profits of U.S. $20,975. Koehn sold these shares while in possession of, and used, the following material nonpublic information:
75. Koehn knew, or was reckless in not knowing, that Pay Pop's audited financial statements were false and misleading.
76. In May of 1999, Zaba and Desjardins again retained Koehn as a consultant to assist a U.S. auditing firm that Pay Pop had retained to prepare audited financial statements for Pay Pop. The audit was required as part of the financing Pay Pop was seeking from American Fronteer [sic].
77. Prior to the audit commencing, and after being retained as a consultant, Koehn purchased 57,500 shares of Pay Pop stock between May 13, 1999 and June 17, 1999, totaling $18,043.75. Koehn purchased these shares based upon the material nonpublic information that Pay Pop was negotiating to receive an $8 million financing deal with a New York investment-banking firm. This potential investment was material due to its size relative to Pay Pop's asset base at the time.
78. During the course of the attempted audit, Koehn learned the following material nonpublic information:
79. After being unable to gather from Desjardins the information the auditors required to complete the Pay Pop audit, Koehn also knew that the auditors would resign.
80. Based upon the material nonpublic information he received, Koehn began selling the 57,500 shares he had purchased. Koehn sold 27,000 shares of Pay Pop on June 21, 1999 and 13,000 shares on June 24, 1999. By the time of the sales, the price of Pay Pop stock had lost nearly half its value, and Koehn received U.S. $9,740, avoiding losses of U.S. $8,303.75.
81. As a result of his trading, Koehn was unjustly enriched and received illegal benefits totaling at least U.S. $29,278.75.
82. Jiwan also traded on material nonpublic information when he sold into the market the stock he obtained as a bribe. Specifically, Jiwan sold his Pay Pop stock based upon his knowledge that Pay Pop was illegally distributing tens of millions of shares of Pay Pop into the market without disclosing the true number of shares issued and outstanding. The transfer agent's policies and procedures required its employees, including Jiwan, to maintain the confidentiality of the information obtained about its clients, such as Pay Pop. Jiwan misappropriated confidential information entrusted to his employer when he sold Pay Pop stock while in possession of material nonpublic information. As a result, Jiwan was unjustly enriched and netted at least $20,000 (Canadian).
FIRST CLAIM FOR RELIEF
Violation of Section 10(b) of the Securities Exchange of 1934 [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5]
83. Paragraphs 1 through 82 are hereby realleged and incorporated by reference.
84. Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit: (a) employing devices, schemes, and artifices to defraud; (b) making untrue statements of material fact or omitting to state material facts necessary to make the statements not misleading; and/or (c) engaging in acts, practices, and a course of business which operates or would operate as a fraud and deceit upon any person in connection with the purchase or sale of any security.
85. Throughout the relevant events, each of the defendants, through commission or omission: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact or omitting to state material facts necessary to make the statements not misleading; and/or (c) engaged in acts, practices, and a course of business which operated, or was intended to operate, as a fraud and deceit upon the purchasers or sellers of Pay Pop stock.
86. Each of the defendants used the means or instrumentalities of interstate commerce, the mails or the facilities of a national securities exchange in undertaking the conduct described above.
87. Each or the defendants' acts or omissions occurred in connection with the purchase or sale of the stock of Pay Pop.
88. Each defendant's acts or omissions were made with scienter.
89. By reason of the foregoing allegations, defendants Desjardins, Zaba, Jiwan, Brouillette and Koehn each violated 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.
SECOND CLAIM FOR RELIEF
Violation of Section 17(a) of the Securities Act of 1933 [15 U.S.C. § 77q(a)]
90. Paragraphs 1 through 89 are hereby realleged and incorporated by reference.
91. Section 17(a) of the Securities Act prohibits any person, in the offer or sale of securities, from: (a) employing devices, schemes, and artifices to defraud; (b) obtaining money or property by means of any untrue statement of a material fact or any omission to state a material; or (c) engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser.
92. In the offer or sale of Pay Pop stock, defendants Desjardins, Zaba, Jiwan, Brouillette and Koehn each: (a) employed devices, schemes, and artifices to defraud; (b) obtained money or property by means of any untrue statement of a material fact or any omission to state a material; or (c) engaged in transactions practices or a course of business which operated, or would have operated, as a fraud or deceit upon the purchaser.
93. Each of the defendants used the means or instrumentalities of interstate commerce, the mails or the facilities of a national securities exchange in undertaking the conduct described above.
94. By reason of the foregoing allegations, defendants Desjardins, Zaba, Jiwan, Brouillette and Koehn each violated Section 17(a) of the Securities Act [15 U.S.C. §77q(a)].
THIRD CLAIM FOR RELIEF
Violations of Section 20(e) of the Securities Exchange Act of 1934 [15 U.S.C. § 78t(e)]
95. Paragraphs 1 through 94 are hereby realleged and incorporated by reference.
96. As alleged above, the defendants engaged in a fraudulent scheme to sell Pay Pop stock into a market created and maintained by a series of false and misleading public statements and material omissions in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
97. Defendant Jiwan knew, or was reckless in not knowing, that he was providing substantial assistance to the defendants' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
98. By reason of the foregoing, defendant Jiwan is liable for aiding and abetting defendants' fraudulent scheme under Section 20(e) of the Exchange Act. [15 U.S.C. §78t(e)].
FOURTH CLAIM FOR RELIEF
Violations of Section 17(a) of the Securities Act of 1933 [15 U.S.C. § 77q(a)],
Section 10(b) of the Securities Exchange of 1934 [15 U.S.C. §78(b)]
and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5]
99. Paragraphs 1 through 98 are hereby realleged and incorporated by reference.
100. Defendants Desjardins, Zaba and Koehn, due to their positions within the company or service as paid consultants to the company, were insiders or temporary insiders of Pay Pop. As such, each owed a duty of trust and confidence to Pay Pop and its shareholders.
101. Defendants Desjardins, Zaba, Brouillette and Jiwan knew, or were reckless in not knowing, that the information that they possessed concerning Pay Pop was material and nonpublic.
102. Defendants Jiwan and Brouillette each breached a duty of trust or confidence to their respective employers and clients of their employers to maintain client confidences.
103. Defendants Desjardins, Zaba and Koehn breached their duties of trust and confidence when they purchased or sold Pay Pop stock while using material nonpublic information concerning Pay Pop for their own personal benefit. Likewise, Brouillette and Jiwan misappropriated material nonpublic information when they purchased or sold Pay Pop stock while using this information for their personal use and benefit.
FIFTH CLAIM FOR RELIEF
Violations of Section 5(a)(1) of the Securities Act of 1933 [15 U.S.C. §77e(a)(1)]
104. Paragraphs 1 through 103 are hereby realleged and incorporated by reference.
105. The shares of Pay Pop stock were securities within the meaning of Section 2(1) of the Securities Act [15 U.S.C. §77b(1)].
106. Section 5 of the Securities Act prohibits the sale of, and the offer to sell, any security unless a registration statement is on file at the Commission and in effect with regard to that security, absent an applicable exemption from that requirement. [15 U.S.C. §77e(a)(1)].
107. No registration statement had been filed with the Commission or was in effect with regard to any public sale of the Pay Pop securities at issue.
108. As described above, defendants Desjardins, Zaba, Jiwan, Brouillette and Koehn directly or indirectly: (a) without a registration statement in effect as to the securities, (i) made use of the means or instruments of transportation or communication or the mails to sell such securities through the use or medium of a prospectus or otherwise, or (ii) carried or caused to be carried through the mails, or in interstate commerce, by any means or instruments of transportation, such securities for the purpose of sale or for delivery after sale, and (b) made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to sell through the use or medium of a prospectus or otherwise securities for which a registration statement had not been filed as to such securities, in violation of Section 5 of the Securities Act [15 U.S.C. §77e] and regulations thereunder.
SIXTH CLAIM FOR RELIEF
Violations of Section 5(c) of the Securities Act of 1933 [15 U.S.C. §77e(c)]
109. Paragraphs 1 through 108 are hereby realleged and incorporated by reference.
110. Section 5(c) of the Securities Act prohibits, among other things, any person, directly or indirectly, via the instrumentalities of interstate commerce or the mails, to offer to sell a security unless a registration statement has been filed as to such security.
111. The shares of Pay Pop stock were securities within the meaning of Section 2(1) of the Securities Act [15 U.S.C. §77b(1)].
112. Despite the prohibition contained in Section 5(c) of the Securities Act, defendants Desjardins, Zaba and Brouillette offered to sell Pay Pop to various individuals in person, via telephone, via facsimile and by use of the NASD Over-The-Counter Bulletin Board.
113. In doing so, defendants Desjardins, Zaba and Brouillette used the instrumentalities of interstate commerce and/or the mails.
114. No registration statement had been filed with the Commission or was in effect with regard to any public sale of the Pay Pop securities at issue.
115. As a result, defendants Desjardins, Zaba and Brouillette violated Section 5(c) of the Securities Act.
SEVENTH CLAIM FOR RELIEF
116. Paragraphs 1 through 115 are hereby realleged and incorporated by reference.
117. Section 15(a)(1) of the Exchange Act prohibits any person from acting as a broker or dealer by making use of the mails or an instrumentality of interstate commerce to solicit the purchase or sale of a security unless such person is registered in accordance with the statute. From approximately October 1999 through Winter 2002, defendant Brouillette, who was not registered as a broker at the time or associated with a broker, solicited investors for the purchase of various stocks on behalf of third parties, negotiated with investors for such sales and was paid commissions in the form of stock.
118. By reason of the foregoing, defendant Brouillette violated Section 15(a)(1) of the Exchange Act by effecting the purchase or sale of securities without satisfying the broker-dealer registration requirements of the Exchange Act.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court enter a final judgment:
Permanently enjoining defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn from violating, directly or indirectly, 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];
Permanently enjoining defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn from violating, directly or indirectly, Section 17(a) of the Securities Act [15 U.S.C. §77q(a)];
Permanently enjoining defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn from violating, directly or indirectly, Section 5 of the Securities Act [15 U.S.C. §77e];
Permanently enjoining defendant Alnoor Jiwan from aiding and abetting future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder as defined by Section 20(e) of the Exchange Act [15 U.S.C. §78t(e)];
Permanently enjoining defendant Ronald D. Brouillette, Jr. from violating Section 15(a)(1) of the Exchange Act [15 U.S.C. §78o(a)(1)];
Ordering defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn to provide an accounting of any and all benefits obtained as a result of their respective violations of the federal securities laws identified above;
Ordering defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn to disgorge any and all ill-gotten gains, including, but not limited, to all fees, revenues, proceeds from sales of Pay Pop stock and commissions that they received as a result of their wrongful conduct, to pay prejudgment interest thereon, and to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)] and Sections 21(d) and 21A of the Exchange Act;
Barring defendants Daryl G. Desjardins, Robert S. Zaba, Alnoor Jiwan, Ronald D. Brouillette, Jr. and Brian A. Koehn from any future participation in the offering of any penny stock as defined by Section 3 (a)(51)(A), [15 U.S.C. §78c(a)(51)(A)] and Section 20(g) of the Securities Act [15 U.S.C. §77t(g)];
Barring Desjardins and Zaba from acting as officers or directors of any public company pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act;
Entering and establishing a Fair Fund for the benefit of innocent investors in Pay Pop pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002;
Granting such other relief as this Court may deem just and proper; and
Retaining jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.