 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
GLENN A. HARRIS, D.C. Bar No. 428328 (Lead Counsel)
THOMAS A. ZACCARO, Cal. Bar No. 183241 (Local Counsel)
UNITED STATES DISTRICT COURT
Plaintiff, United States Securities and Exchange Commission ("Commission"), alleges as follows: INTRODUCTION 1. Red Hot Stocks ("Red Hot") is an Internet website that was a fraudulent device used by the defendants to perpetrate a fraudulent securities scheme that generated over $4 million of profits at the expense of unwitting investors. During 1997, 1998 and, upon information and belief, times thereafter, defendant James Franklin and certain other defendants touted and hyped the stocks of companies profiled in Red Hot website reports. Statements the defendants made in the profiles were materially false or misleading because, among other things, (a) they contained unreasonable price predictions, (b) they failed adequately to disclose that defendants owned, beneficially owned or controlled stock in the profiled companies and, in certain instances, that some defendants were, or expected to be, compensated for promoting companies profiled on Red Hot and the amount of compensation received or to be received, and (c) because the defendants engaged in an undisclosed pattern of acquiring stocks profiled on Red Hot with the intent to sell the stock in coordination with the tout, while recommending that investors purchase the stock. THE DEFENDANTS 2. James E. Franklin ("Franklin"), age 40, resides in San Diego, California. Franklin orchestrated the fraudulent scheme to tout companies on the Red Hot website and then sell the stocks of the companies profiled in the reports. Franklin is the trustee of defendant Avalon Trust. Franklin was a registered representative of a brokerage firm from 1984 to 1989. 3. Dieter Raabe ("Raabe"), age 61, resides in Malibu, California. Raabe was a participant in the fraudulent scheme and issued trading instructions for a significant portion of the trades in defendant Vector Keel, Ltd.'s brokerage account. 4. Samuel Wolanyk ("Wolanyk"), age 31, resides in San Diego, California. Wolanyk was a participant in the fraudulent scheme. He operated the Red Hot website, interviewed some of the companies, drafted some or all of the Red Hot profiles and caused the profiles to be disseminated on the Internet. 5. Vector Keel Ltd. ("Vector Keel") is a foreign corporation registered and located in Turks & Caicos, British West Indies. Raabe is the "Administrative Director" of Vector Keel and Franklin is the "Assistant Managing Director." Franklin and Raabe acquired and sold shares of the companies profiled on Red Hot through a Vector Keel brokerage account at Union Securities in Canada. 6. Initial Public Offering Consultants ("IPO") is a Nevada corporation previously located and doing business in San Diego, California. IPO is Franklin's corporate financial consulting firm. IPO had consulting contracts to provide public relation services with some of the companies profiled on Red Hot. IPO also maintained brokerage accounts, controlled by Franklin, through which Franklin sold shares of the companies Red Hot profiled. 7. Net Income is a Nevada corporation. Franklin, through a third party, organized Net Income to operate Red Hot. 8. Avalon Trust is a private trust controlled by its trustee, Franklin. Avalon Trust maintained a brokerage account at Union Securities in Canada that was used to trade one of the stocks Red Hot profiled. JURISDICTION 9. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d) and 77v(a), and Sections 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(3)(A), 78u(e) and 78aa. 10. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of conduct constituting violations of the laws alleged herein occurred within the Southern District of California and because certain of the defendants reside therein. GENERAL ALLEGATIONS The Role of the Defendants in the Fraudulent Scheme 11. Red Hot is an Internet website that first appeared in January 1997. It claimed to be a market analysis and stock profile newsletter that "searches for undiscovered growth companies with strong upside potential." It profiled largely unknown companies that were not traded on major stock exchanges and made recommendations regarding the purchase of stock in these companies. Red Hot e-mailed reports directly to its subscribers. However, anyone could log-on to the website and read the company profiles during the relevant period. A subscription to Red Hot was free, although in March 1997, Red Hot requested voluntary donations of $30 per month or $300 per year to its parent company, Net Income. 12. Net Income is the company that Franklin created to operate the Red Hot website. Franklin caused Net Income to be formed in a manner that attempted to conceal that he was a principal of, or associated with, Red Hot. Franklin provided funds and detailed instructions to a third-party to set up Net Income as the company to operate Red Hot. Franklin instructed the third-party to use a service to incorporate Net Income, provide assistance with its bank account and provide nominee officer and director services. Franklin paid the fees to form Net Income. The third party forwarded Net Income's corporate kit, minutes, stock, resolutions, and bank account information, including a signature stamp of the nominee officer, to Franklin. The third party also forwarded correspondence and/or forms that he received regarding Net Income to Franklin. 13. Franklin devised the fraudulent scheme describe herein. Red Hot, in many instances, profiled clients of defendant IPO, consistent with consulting agreements entered into by Franklin/IPO and the profiled companies that called for IPO to provide public or investor relations services. Franklin negotiated Red Hot's fee for profiling at least one of the companies. Franklin told at least one company when it would be profiled on Red Hot and took credit for certain of the RHS reports. Franklin also arranged for himself and certain of the other defendants to acquire stock at a nominal cost in some of the companies profiled on Red Hot. 14. For instance, Franklin arranged for himself and Raabe to obtain stock through private offerings of three companies -- Amalgamated Explorations, Inc., NetUSA, Inc. and Easy Cellular, Inc. These companies had hired Franklin's financial advisory firm, defendant IPO, to, among other things, raise capital and provide public and investor relations services. Franklin advised each of these companies to conduct private stock placements wherein he and Raabe ultimately received large blocks of cheap stock. 15. The Vector Keel account and other accounts in which Franklin had a beneficial interest traded stocks Red Hot profiled after Red Hot issued buy recommendations. Franklin conducted some of the stock trading in the scheme through nominee offshore accounts. 16. Trading profits from the scheme were transferred to defendants in accounts beneficially owned by them. From approximately February 1997 to March 1998, Net Income's bank account primarily was funded with monies that originated in the Vector Keel account from trading in stocks profiled on Red Hot. Net Income used the funds it received to pay expenses associated with operating Red Hot including, but not limited to, Wolanyk's compensation, the fees for the Internet service provider and advertising costs. 17. Wolanyk actively participated in the fraudulent scheme. He operated the Red Hot website day to day, interviewed some of the profiled companies and authored some or all of the Red Hot profiles. Under a written agreement dated February 7, 1997, Net Income was to pay Wolanyk to design, implement and manage Internet web pages and perform all matters of electronic publishing, multimedia, copy writing and advertising for three years. Net Income paid Wolanyk approximately $35,000 from April 1997 to February 1998. Prior to that time, IPO paid Wolanyk approximately $4,000 in January 1997. In March 1998, Net Income paid Wolanyk $33,000. 18. Wolanyk laid the technical groundwork for operating Red Hot. Prior to Red Hot going on-line, Wolanyk arranged for an Internet service provider for Red Hot. Net Income paid the fees for these services. Wolanyk served as Red Hot's contact with the Internet service provider during the relevant time period. Wolanyk also arranged advertising for Red Hot and received Net Income's mail until July 1997. 19. Raabe actively participated in the fraudulent scheme. Raabe placed many of the violative trades in the Vector Keel account and issued numerous instructions for wire transfers of funds disbursing the trading profits to entities controlled by him and Franklin, including transferring monies that Net Income used to operate Red Hot. Raabe repeatedly sold the stocks of companies profiled on the Red Hot website shortly after Red Hot issued buy recommendations on those companies. 20. Franklin and Wolanyk were principals or affiliates of Net Income. Together, they were joint or group publishers of the Red Hot website and its contents, because of either their financial, administrative or creative relationships with Red Hot or its clients. Franklin, Wolanyk, Raabe and the other defendants acted together to implement the fraudulent scheme and achieve their objectives. Each has unique knowledge of the facts and circumstances surrounding the alleged scheme. However, Franklin, Wolanyk and Raabe have refused to disclose any facts to the Commission in response to investigative subpoenas served upon them. Instead, they asserted their Fifth Amendment privileges. Materially False or Misleading Statements 21. Defendants Franklin, Wolanyk, and Net Income, through Red Hot, disseminated profiles and recommendations for the purchase of stocks that were materially false or misleading because: (a) they contained unreasonable price predictions; and (b) failed adequately to disclose that defendants owned, beneficially owned, or controlled stock in the profiled companies and, in certain instances, that defendants were compensated or expected to be compensated to write or disseminate the profiles, and the amount of compensation received or to be received. 22. Statements in the Red Hot profiles, updates and recommendations for the purchase of stocks also were materially false or misleading because defendants Franklin, Raabe, Vector Keel, IPO, Avalon Trust and Wolanyk engaged in a pattern of acquiring the stock of companies to be profiled on Red Hot with the intent to sell in coordination with the tout, while Red Hot recommended that others purchase the stock. The pattern and timing of defendants' sales were contrary to the stated belief in Red Hot's reports that the stocks were good investments. This type of fraudulent conduct is known as "scalping." Particular Facts Relating to the Companies Profiled on Red Hot Amalgamated Explorations, Inc. 23. In January 1997, Red Hot profiled its first company, Amalgamated Explorations, Inc. ("AXPL"), an oil, gas and gold exploration company. Approximately one year earlier, Franklin and IPO arranged a reverse merger with a public shell owned, in part, by Raabe. The shell changed its name to AXPL. The acquisition and reorganization agreement provided that IPO would be paid $25,000 and was to act as a consultant and public relations firm to AXPL. IPO billed AXPL $24,500 from January through September 1997 for consulting work it performed for the company. 24. Franklin advised AXPL's President and long-time friend to raise capital through a private offering of stock. On March 1, 1996, AXPL authorized 500,000 shares of stock to be issued to raise $50,000. Franklin, the "contact person" on the deal, told AXPL's President that he had found New York investors to purchase the shares. In May and June 1996, AXPL received bank checks and a brokerage firm check totaling $49,750 as payment for the AXPL shares. In fact, Franklin, not the New York investors, was the true purchaser of the AXPL stock having paid for it with bank checks and a brokerage firm check that concealed his identity. Franklin used the New York investors as a "conduit" to obtain AXPL shares to sell after the Red Hot tout on AXPL. 25. In mid-August 1996, 500,000 shares of AXPL stock were mailed to the New York investors. Shortly thereafter, Franklin asked for the shares back. The New York investors executed blank stock powers to transfer to Franklin all but 30,000 of the AXPL shares. The stock powers and AXPL certificates for 470,000 shares were sent to Franklin. 26. On Friday, January 17, 1997, Red Hot issued a "strong buy" recommendation for AXPL stock. On the next trading day, Monday, January 20, the price of AXPL stock increased from $6½ to $16 during the day, and closed at $9. The trading volume increased to 252,900 shares on January 20, from 9,800 on January 17. 27. The January 17, 1997 Red Hot profile embellished the capabilities of the company's devise that purportedly detected hydrocarbons. The report also made overly optimistic projections regarding the industry (e.g., that the electrotelluric survey industry could reach $1 billion in yearly sales, there is no other technology like it and once the industry learns about it, it will cause a frenzy) and the price of AXPL stock, including the claim that "we expect the near-term price of this stock to go through the roof" and "it's a must buy." 28. Red Hot posted "updates" on AXPL on January 28, 1997, January 31, 1997, March 17, 1997, April 18, 1997, May 20, 1997 and June 13, 1997. Many of these were reprints of AXPL press releases with Red Hot buy recommendations added. For instance, the January 28, 1997 update rated the stock a "buy" at prices up to $14 and recommended holding the stock. Red Hot further stated that they would not be surprised to see the stock at $25 just on short-term buying and that upon subsequent events, "the sky's the limit. $50 or $100." 29. The January 31, 1997 update reiterated the "buy and hold" recommendation and stated that Red Hot believed that the stock would be a great performer for years to come. By March 1997, even though AXPL stock was trading in the $10 range, Red Hot continued to issue buy recommendations. Specifically, the March 17, 1997 update recommended that the Red Hot subscribers average down and take a less-expensive position in the company. The May 20, 1997 update summarized recent electrotelluric surveys and further stated that AXPL is too good to pass up and Red Hot will be investing in the company eventually. The June 13, 1997 update was a reprint of AXPL's press release announcing the acquisition of additional properties. 30. Wolanyk made the arrangements with Red Hot's Internet service provider to disseminate the January 17 report. At or about that time, Wolanyk worked at IPO's office. IPO paid Wolanyk approximately $4,000 in January 1997 for his work related to the Red Hot website. Beginning in April 1997, Net Income paid Wolanyk approximately $2,500 almost every month and paid him additional sums throughout the time that Red Hot was touting AXPL. 31. Franklin and Raabe immediately began selling the AXPL stock held by IPO, Vector Keel and Avalon Trust from January 1997 through April 1997, in coordination with Red Hot's tout of AXPL, realizing a total of approximately $2.3 million in trading profits. Approximately 219,500 of the 470,000 AXPL shares that the New York investors forwarded to Franklin were sold through the Vector Keel, IPO and Avalon Trust brokerage accounts during this time. The remaining 250,500 AXPL shares that Franklin received from the New York investors were deposited into accounts controlled by Raabe or Franklin, but not sold during this period. 32. IPO began selling AXPL on January 17,1997, the day the first Red Hot profile was disseminated. IPO sold a total of 90,000 AXPL shares for total profits in excess of $900,000 between January 17, 1997 and January 29, 1997. 33. On January 27, 1997, 100,000 shares of AXPL were deposited into Vector Keel's brokerage account at Union Securities in Canada. Vector Keel immediately began liquidating its position in the stock per Raabe's trading instructions. The bulk of the AXPL shares were sold during the first two weeks of February at prices ranging from $12.25 to $14.34. By the end of April, Vector Keel sold the entire 100,000 share block for total profits of approximately $1.2 million. 34. Franklin's Avalon Trust brokerage account at Union Securities in Canada received 29,500 shares of AXPL on January 21, 1997. Avalon Trust sold 15,500 shares from January 28, 1997 through February 4, 1997, realizing profits of more than $180,000. 35. The Red Hot profiles of January 17, 1997, January 28, 1997 and January 31, 1997 were silent as to whether Red Hot had a financial interest or position in AXPL. 36. The Red Hot updates of March 17, 1997, April 18, 1997, May 20, 1997 and June 13, 1997 falsely stated "we hold no position in the companies we profile, we are not compensated by companies we profile, and we have no relationship whatsoever with any brokers or market makers. You can be assured that our information has no monetary basis." The June 13, 1997 update also included an additional false and contradictory disclaimer that Red Hot's owners, employees, associates, affiliates, agents and their friends may have financial position in profiled companies. 36. The statements in the Red Hot profile and updates were materially false or misleading because they contained unreasonable price predictions and they failed to disclose that Franklin's company, defendant IPO, had received $25,000 pursuant to a written agreement with AXPL dated February 1996, under which IPO, among other things, agreed to perform various public relations activities. The profiles and updates also failed to disclose that IPO/Franklin expected to be compensated for promoting AXPL on Red Hot at the time that the AXPL reports were disseminated. The profile and updates also failed to disclose that Franklin and Raabe owned, beneficially owned, or controlled AXPL stock throughout Red Hot's tout of AXPL. Finally, the statements in the profile and updates and the recommendations for the purchase of stock were materially false or misleading because Franklin and Raabe, through IPO, Vector Keel and Avalon Trust acquired AXPL stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. 37. Franklin and/or Raabe's sales of AXPL in the accounts of defendants Vector Keel, IPO and Avalon Trust also constituted an unregistered distribution of stock. NetUSA, Inc. 38. In February 1997, Red Hot profiled its second company, NetUSA, Inc. ("NTSA"). More than one year earlier, NTSA's founder entered into a written agreement with Franklin and IPO to take his private software development company public. Under the agreement, IPO, among other things, was to reorganize the company, provide a public shell, and provide public/investor relations services for three years. The agreement stated that IPO was to receive cash (at an hourly rate of $50 and not to exceed $5,000 per month) and stock as compensation for its services. IPO billed NTSA $2,500, on a monthly basis, from December 1996 through May 1997 for consulting services. NTSA paid IPO approximately $6,800 during this period. 39. Franklin agreed to raise capital for NTSA and orchestrated a private offering of common stock. One New York investor purchased 200,000 shares at $.05 per share in the private offering and received the shares in November 1996. One week later, Franklin purchased the 200,000 shares from the New York investor. Virtually all of the 200,000 NTSA shares that the New York investor sold to Franklin ultimately were deposited in the Vector Keel account in February and March, 1997. 40. Franklin discussed promoting NTSA over the Internet with the founder as part of the public relations campaign for the company. Franklin arranged for Red Hot to interview the founder of NTSA for Red Hot's profile of the company. 41. On Friday, February 21, 1997, Red Hot profiled NTSA. The profile stated that it was being released for the opening of trading on February 24, 1997. On February 24, the price of NTSA stock soared briefly to a high of $25, up $16¾ over the February 21 close, and eventually closed at $12 on greatly increased volume. The Red Hot profile stated "[T]he stock could hit $20 to $25 within six months." Red Hot conveyed that the stock was a bargain up to $15 per share and told its subscribers, "If you're considering taking a position in the company, now is the time!" 42. On March 5, 1997, Red Hot issued an update on NTSA reprinting a company press release. On April 18, 1997, Red Hot issued another update. It was a reprint of the company's press release of April 4, 1997, and further stated that NTSA stock is a "bargain." Red Hot issued an update on June 13, 1997, reprinting a NTSA press release announcing a recent contract. 43. Net Income paid Wolanyk $2,500 in March 1997 and $2,500 in April 1997 for his work on the Red Hot website. Net Income reimbursed Wolanyk $700 in April 1997 for "internet expenses" and paid him an additional $1,030 in June 1997. Wolanyk, on behalf of Red Hot, also received invoices from Red Hot's Internet service provider during this time period. 44. Between February 21 and March 12, 1997, per Raabe's trading instructions, the Vector Keel account sold approximately 120,000 shares of NTSA it had acquired from the New York investor. Total profits on the sales were more than $1.1 million. 45. The February 21 NTSA profile had no disclosure concerning whether Red Hot, or its affiliates, had a financial interest in NTSA. The March 5 and June 13 updates had false and contradictory disclaimers, one stating that "[W]e hold no position in these companies we profile" while the other stated that "[A]ffiliates of Red Hot may have a financial position in profiled companies." The April 18 update repeated the false disclaimer that it had no position in the company. 46. The statements in the Red Hot NTSA profile and updates were materially false or misleading because they included unreasonable price projections and because they failed to disclose that Franklin's company, defendant IPO, had entered into a written consulting agreement with NTSA to provide public/investor relations services, that IPO/Franklin expected to be compensated for promoting NTSA on Red Hot at the time that the NTSA profile and updates were disseminated and that IPO had received approximately $6,800 from NTSA in April 1997. The profile and updates also failed to disclose that Franklin and Raabe owned, beneficially owned, or controlled NTSA stock through Red Hot's tout of NTSA. Finally, the statements in the profile and updates, and the recommendations for the purchase of stock, were materially false or misleading because Franklin and Raabe, through the Vector Keel account, acquired NTSA stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. Easy Cellular 47. In May 1997, Red Hot profiled Easy Cellular ("EZCL"), a company that provides pre-paid cellular services. EZCL had entered into a consulting agreement with Franklin and IPO one month earlier. Under the agreement, IPO was to raise $1 million for EZCL through a private offering and receive 5% of the outstanding shares, or 250,000 shares. Franklin told a director/officer of EZCL, and her husband, that he had experience with new companies and that it would be easy to raise money. IPO failed to raise $1 million for EZCL. However, in about May 1997, Franklin arranged for EZCL to authorize a private offering of 250,000 shares at $.25 per share. Franklin also arranged for defendant Vector Keel to buy the shares. Defendant Raabe completed the stock subscription agreement on behalf of Vector Keel. 48. Franklin and Raabe obtained additional EZCL stock from a shareholder who had acquired shares in a June 1996 private stock offering for $.25 a share. In April 1997, Franklin sent letters to the original shareholders offering to buy the stock at 50 cents, a 100% profit. One original shareholder accepted the offer. That shareholder sold 150,000 shares through a brokerage firm that bought the shares as a principal for $.50 per share, and re-sold the shares to defendant Vector Keel for $.52 per share. 49. Defendant Wolanyk interviewed EZCL's director/officer at EZCL's office, prior to Red Hot's profile on EZCL. Wolanyk said he was with Red Hot and was prescreening EZCL. Net Income issued two checks to Wolanyk in the amounts of $2,500 and $1,030 on June 4, 1997, for his work related to the Red Hot website. 50. The Red Hot profile touting EZCL was released on May 30, 1997. Red Hot issued a "strong buy" for EZCL. The profile stated, "the long-term target price is $25 per share with a short-term buy limit of $10...[A]t prices up to $10 per share- BUY." In the May 30, 1997 profile, Red Hot falsely stated that employees, associates and others may or may not have a financial interest in the companies profiled. A June 13, 1997 update on EZCL had contradictory and false disclaimers, one stating that "[W]e hold no position in these companies we profile" while the other stated that "[A]ffiliates of Red Hot may have a financial position in profiled companies." 51. Pursuant to defendant Raabe's trading instructions, defendant Vector Keel began selling its position in EZCL on May 30, 1997, the day that Red Hot released its EZCL recommendation. EZCL stock, which closed at $1 5/30 on May 30, opened at $5 the next trading day, Monday, June 2, 1997. EZCL reached a high of $6 on June 2, 1997, and closed at $3 5/8 on very high volume. Vector Keel sold heavily on June 2, 1997, and continued selling its position in EZCL through December 1997. Vector Keel's sales profits were more than $840,000 from trading EZCL stock. 52. The statements in the Red Hot profile and update were materially false or misleading because they contained unreasonable price predictions and failed to disclose that Franklin and Raabe owned, beneficially owned or controlled shares of EZCL through Red Hot's tout of EZCL. The profiles also failed to disclose that Franklin and IPO expected to be compensated for promoting EZCL on Red Hot and the amount to be received, as evidenced by IPO's bill to EZCL for $7,500 for consulting services from March through May 1997. In addition, the statements in the profile and update, and the recommendations for the purchase of stock, were materially false and misleading because defendants Franklin and Raabe, through defendant Vector Keel's account, acquired EZCL stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. American Technologies Group 53. In February 1998, Red Hot profiled American Technologies Group ("ATEG"), a NASDAQ bulletin board company engaged in the development of patented technologies. In early February 1998, Franklin and another individual told ATEG's former President, CEO and major shareholder that Red Hot wrote reports that were published on the Internet and that Red Hot would profile ATEG for 100,000 shares of ATEG stock. ATEG's former President agreed to put up his own stock as compensation for the Red Hot profile after receiving approval from ATEG's then current management. The shares were transferred to an escrow account for the benefit of Red Hot. 54. The former President subsequently called defendant Wolanyk to inform him that the financial arrangements required for him to start the ATEG report had been made. In early 1998, Wolanyk interviewed ATEG's President and an individual who handled investor relations at ATEG. The Red Hot profile on ATEG was published on February 13, 1998, within a couple of weeks of the interview. Defendant Net Income paid Wolanyk $2,500 in January 1998, and approximately $3,400 in February 1998, for his work and expenses in connection with the Red Hot website. 55. In November and December 1997, defendant Vector Keel purchased 70,000 shares of ATEG in the market for approximately $145,000. Red Hot issued the profile on ATEG on Friday, February 13, 1998. The price of the stock closed on that day at $2 15/16 with heavy volume of 664,700. The following trading day, February 17, 1998, ATEG hit $3 3/32 on heavy volume of 559,600. The Vector Keel account began selling ATEG stock, per Raabe's trading instructions, after Red Hot's profile had been issued and made $5,816 in profits. 56. The Red Hot profile on ATEG stated, "At prices up to $5.00 per share, ATEG represents a strong speculative buy." The disclaimer at the end of the Red Hot profile falsely stated, in part, "Redhotstocks owners, employees, associates, affiliates, agents and their friends and families may have a financial position in profiled companies." 57. The statements in the profile were materially false or misleading because they contained an unreasonable price prediction and because they failed to disclose that defendants Franklin and Raabe owned, beneficially owned or controlled shares of ATEG and Red Hot expected to be compensated for profiling ATEG under an arrangement discussed with Franklin and Wolanyk and the amount of the compensation to be received. Finally, the statements in the profile, and the recommendation for the purchase of stock, were materially false and misleading because defendants Franklin and Raabe, through defendant Vector Keel's account acquired ATEG stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. Neotherapeutics 58. On March 28, 1997, Red Hot profiled Neotherapeutics, Inc. ("NEOT"), a biotech company specializing in neurodegenerative diseases such as Alzheimer's. This profile referenced prior Red Hot profiles on AXPL and NTSA and stated "our stock selections routinely double or triple in value almost immediately. Therefore, we admonish our subscribers, in order to protect themselves from the ravages of the market makers, to ALWAYS SPECIFY BUY AND SELL LIMITS." The Red Hot profile further stated "the price can't go lower and with recent news announcements, we feel things are about to heat up for this company." Red Hot recommended that investors specify a limit of $8.00 for any purchases. Red Hot rated NEOT a "strong buy up to $8." Defendant Net Income paid Wolanyk a total of $5,000 for his services for March and April 1997 related to his work for Red Hot. 59. On Thursday, March 27, 1997, the day before the NEOT profile, NEOT stock closed at $4 13/16 on volume of 37,800. On March 31, 1997, the first day of trading after the profile, the stock closed at $5 7/16 on significantly higher volume of 674,600. Defendant Vector Keel bought in the market 20,000 NEOT shares of stock and 20,000 warrants just prior to the announcement. Vector Keel sold its 20,000 shares and 20,000 warrants immediately after the announcement and made a profit of $24,000. 60. The Red Hot profile had false and contradictory disclaimers, one stating, "We wish to restate that we hold no position in the companies we profile, we are not compensated by companies we profile, and we have no relationship whatsoever with any brokers or market makers. You can be assured that our information has no monetary basis," while the other stated "Affiliates of Redhotstocks may have financial positions in profiled companies." 61. The statements in the profile were materially false or misleading because they contained an unreasonable price prediction and failed to disclose that defendants Franklin and Raabe owned, beneficially owned or controlled shares of NEOT. In addition, the statements in the profile, and the recommendation for the purchase of stock, were materially false and misleading because defendants Franklin and Raabe acquired NEOT stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. Finally, the statement in the report that "the price [of NEOT] can't go lower..." was materially false or misleading. LCA Vision 62. Red Hot profiled LCA Vision ("LCAV") on April 25, 1997. LCAV developed eye care centers that perform laser surgery. Red Hot urged its subscribers "to take a position in the company now" and rated this company a "STRONG BUY at prices up to $8.50 per share." Red Hot further predicted that the stock should see the year's high price of $12 again shortly. The profile also falsely stated, "We wish to restate that we hold no position in the companies we profile, we are not compensated by companies we profile, and we have no relationship whatsoever with any brokers or market makers. You can be assured that our information has no monetary basis." Net Income paid Wolanyk $2,500 for his services for April 1997 related to the Red Hot website. 63. The Red Hot profile was issued on Friday, April 25, 1997. On that day, the stock closed at $6 ¼ on volume of 15,000. On Monday, April 28, 1997, the stock closed at $7 1/8 on volume of 120,200. Prior to the Red Hot profile, defendant Vector Keel bought in the market 20,000 shares of LCAV on February 28, 1997, and 48,000 shares of LCAV between April 14, 1997 and April 25, 1997. Vector Keel sold immediately following the Red Hot recommendation, on April 28, 1997 through May 5, 1997, for profits of approximately $46,000. 64. The statements in the profile were materially false or misleading because they contained an unreasonable price prediction and failed to disclose that defendants Franklin and Raabe owned, beneficially owned or controlled shares of LCAV. The statements in the profile and the recommendation for the purchase of stock also were materially false and misleading because defendants Franklin and Raabe, through defendant Vector Keel's account acquired LCAV stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. Columbia Capital Corp. 65. On Friday, October 31, 1997, Red Hot profiled Columbia Capital Corp. ("CLCK"), a credit card processing company that provided back room support for banks and financial institutions. The price of CLCK at the time of the Red Hot report was approximately $4.50 per share. Red Hot stated "[W]e believe the company's stock will quickly rise from the current price of $4.50. We expect a double in value for the short term, with steady growth as more news is made available. At prices up to $9, CLCK is a Strong Buy!" At the end of the report, Red Hot falsely stated that, "Redhotstocks owners, employees, associates, affiliates, agents and their friends and families may have financial positions in profiled companies." Net Income paid Wolanyk approximately $2,300 in October 1997 for work related to the Red Hot website. 66. The Red Hot profile failed to move the market for CLCK. The closing price of CLCK on November 3, 1997, the Monday following the Red Hot profile, was $4 5/8 on heavy volume of 277,600 shares. The price of CLCK declined through November, reaching a low of $2 5/8 on November 13, 1997. Defendant Wolanyk purchased 5,555 shares of CLCK on the open market on October 29, 1997, two days before the report was released, and subsequently sold his CLCK holdings on November 3, 1997 for a loss of $641. 67. The statements in the profile were materially false or misleading because they contained an unreasonable price prediction and failed to disclose that defendant Wolanyk, in fact, owned shares of CLCK. The statements in the profile and the recommendation for the purchase of stock, also were materially false and misleading because defendant Wolanyk acquired CLCK stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. Waterpur International 68. On December 5, 1997, Red Hot profiled Waterpur International ("WPUR"), a water filtration company. The Red Hot profile predicted that Waterpur should be valued at 15 to 20 times earnings "giving us a near-term target price of $9 to $13." The Red Hot profile further stated, "At prices up to $4, WPUR is a buy!" and "considering the upside potential of Waterpur, shares at these prices represent a tremendous value with low risk." At the end of the profile, Red Hot falsely stated that "Redhotstocks owners, employees, associates, affiliates, agents and their friends and families may have financial positions in profiled companies." Net Income paid Wolanyk approximately $9,500 in December 1997 for, among other things, his work related to the Red Hot website. 69. Defendant Vector Keel bought 400,000 shares of WPUR stock on the open market on October 9, 1997 and sold approximately 200,000 shares of WPUR following the Red Hot report for profits of approximately $106,000. Wolanyk purchased a total of 41,400 shares of WPUR on the open market on December 1, 1997 and December 2, 1997. On Friday, December 5, 1997, the date of the Red Hot profile, the stock closed at $1.28 on volume of 1,077,800. On Monday, December 8, 1997, however, the stock closed down at $1.20 on volume of 2,053,900. Wolanyk sold his WPUR holdings on December 8, 1997, for a loss of approximately $1,600. 70. The statements in the Red Hot profile were materially false or misleading because they contained an unreasonable price prediction and failed to disclose that defendants Vector Keel and Wolanyk owned shares of WPUR. In addition, the statements in the profile and the recommendation for the purchase of stock also were materially false or misleading because Vector Keel and Wolanyk acquired WPUR stock with the intent to sell the stock in coordination with the tout, while Red Hot recommended that investors purchase the stock. FIRST CLAIM FOR RELIEF FRAUD IN THE OFFER OR SALE OF SECURITIES (Violations of Section 17(a) of the Securities Act Against Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust) 71. Paragraphs 1 though 70 are realleged and incorporated herein by reference. 72. Defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust, by engaging in the conduct described above with respect to AXPL, NTSA, EZCL, ATEG, NEOT, LCAV, CLCK and WPUR, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by the use of the mails: (a) with scienter, employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or by omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities. 73. By reason of the foregoing, Defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust violated, and unless permanently enjoined will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). 74. Franklin, as president of IPO, sole trustee for Avalon Trust, undisclosed principal of Net Income, and Assistant Administrative Director of Vector Keel, exercised control over IPO, Avalon Trust, Net Income and Vector Keel. Franklin was therefore a controlling person of IPO, Net Income, Avalon Trust and Vector Keel pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). In the alternative to Franklin's liability for his direct violations of Section 17(a) of the Securities Act, Franklin, by engaging in the conduct described above, is liable as a controlling person, pursuant to Section 20(a) of the Exchange Act, for IPO, Avalon Trust, Net Income and Vector Keel's violations of Section 17(a) of the Securities Act. 75. Raabe, as Administrative Director of Vector Keel, exercised control over Vector Keel. Raabe, therefore was a controlling person of Vector Keel pursuant to Section 20(a) of the Exchange Act. In the alternative to Raabe's liability for his direct violations of Section 17(a) of the Securities Act, Raabe, by engaging in the conduct described above, is liable as a controlling person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for Vector Keel's violations of Section 17(a) of the Securities Act. SECOND CLAIM FOR RELIEF FRAUD IN CONNECTION WITH THE PURCHASE OR SALE OF SECURITIES (Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Against Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust) 76. Paragraphs 1 through 70 are realleged and incorporated herein by reference. 77. Defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust, by engaging in the conduct described above with respect to AXPL, NTSA, EZCL, ATEG, NEOT, LCAV, CLCK and WPUR, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons. 78. By reason of the foregoing, defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust violated and, unless permanently enjoined, will continue to violate, 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. 79. Franklin, as president of IPO, sole trustee for Avalon Trust, undisclosed principal of Net Income, and Assistant Administrative Director of Vector Keel, exercised control over IPO, Avalon Trust, Net Income and Vector Keel. Franklin was therefore a controlling person of IPO, Net Income, Avalon Trust and Vector Keel pursuant to Section 20(a) of the Exchange Act. In the alternative to Franklin's liability for his direct violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Franklin, by engaging in the conduct described above, is liable as a controlling person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for IPO, Avalon Trust, Net Income and Vector Keel's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 80. Raabe, as Administrative Director of Vector Keel, exercised control over Vector Keel. Raabe was therefore a controlling person of Vector Keel pursuant to Section 20(a) of the Exchange Act. In the alternative to Raabe's liability for his direct violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Raabe, by engaging in the conduct described above, is liable as a controlling person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for Vector Keel's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. THIRD CLAIM FOR RELIEF TOUTING (Violations of Section 17(b) of the Securities Act Against Franklin, Wolanyk and Net Income) 81. Paragraphs 1 through 70 are realleged and incorporated herein by reference. 82. Defendants Franklin, Wolanyk and Net Income, by engaging in the conduct described above with respect to AXPL, NTSA, EZCL and ATEG, used the means or instruments of interstate transportation, or communication in interstate commerce, or the mails, to publish or circulate communications which described securities for a consideration received or to be received, directly or indirectly from the issuers, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof. 83. By reason of the foregoing, defendants Franklin, Wolanyk and Net Income violated, and unless permanently enjoined will continue to violate, Section 17(b) of the Securities Act, 15 U.S.C. § 77q(b). 84. Franklin, as undisclosed principal of Net Income, exercised control over Net Income. Franklin was therefore a controlling person of Net Income pursuant to Section 20(a) of the Exchange Act. In the alternative to Franklin's liability for his direct violations of Section 17(b) of the Securities Act, Franklin, by engaging in the conduct described above with respect to AXPL, NTSA, EZCL and ATEG, is liable as a controlling person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. §78t(a), for Net Income's violations of Section 17(b) of the Securities Act. FOURTH CLAIM FOR RELIEF OFFER AND SALE OF UNREGISTERED SECURITIES (Violations of Sections 5(a) and 5(c) of the Securities Act Against Franklin, Raabe, Vector Keel, IPO and Avalon Trust) 85. Paragraphs 1 through 70 are realleged and incorporated herein by reference. 86. Defendants Franklin, Raabe, Vector Keel, IPO and Avalon Trust, and each of them, by offering to sell and/or selling AXPL securities, directly or indirectly: (a) made use of means or instruments of transportation or communication in interstate commerce or of the mails to sell securities through the use or medium of any prospectus or otherwise; (b) carried or caused to be carried through the mails or in interstate commerce, by means or instruments of transportation, securities for the purpose of sale or for delivery after sale; or (c) made use of means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy, through the use or medium of any prospectus or otherwise, securities. 87. No registration statement was filed or in effect for the AXPL securities offered and sold by defendants Franklin, Raabe, Vector Keel, IPO and Avalon Trust; nor were those offerings or sales exempt from registration. 88. By reason of the foregoing, defendants Franklin, Raabe, Vector Keel, IPO and Avalon Trust and each of them, violated, and unless permanently enjoined will continue to violate, Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and (c). 89. Franklin, as president of IPO, sole trustee for Avalon Trust and Assistant Administrative Director of Vector Keel, exercised control over IPO, Avalon Trust, and Vector Keel. Franklin was therefore a controlling person of IPO, Avalon Trust and Vector Keel pursuant to Section 20(a) of the Exchange Act. In alternative to Franklin's liability for his direct violations of Sections 5(a) and (c) of the Securities Act, 15 U.S.C. §§ 77e(a) and (c), Franklin, by engaging in the conduct described above with respect to AXPL, is liable as a controlling person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for IPO, Avalon Trust and Vector Keel's violations of Sections 5(a) and (c) of the Securities Act. 90. Raabe, as Administrative Director of Vector Keel, exercised control over Vector Keel. Raabe was therefore a controlling person of Vector Keel pursuant to Section 20(a) of the Exchange Act. In the alternative to Raabe's liability for his direct violations of Sections 5(a) and (c) of the Securities Act, Raabe, by engaging in the conduct described above with respect to AXPL, is liable as a controlling person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for Vector Keel's violations of Sections 5(a) and (c) of the Securities Act. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court: I. Issue findings of fact and conclusions of law that the defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust engaged in the alleged violations. II. Issue orders permanently enjoining defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust, and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. III. Issue orders permanently enjoining defendants Franklin, Wolanyk and Net Income and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Section 17(b) of the Securities Act. IV. Issue orders permanently enjoining defendants Franklin, Raabe, Vector Keel, IPO and Avalon Trust and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Sections 5(a) and (c) of the Securities Act. V. Enter an order that defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust disgorge all profits gained directly or indirectly from the illegal conduct, together with prejudgment interest thereon. VI. Enter an order that defendants Franklin, Raabe, Wolanyk, Vector Keel, IPO, Net Income and Avalon Trust 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. § 78(d)(3). VII. Enter an order requiring defendants, and each of them, to pay for an accounting to determine the full amount of monies received as a result of their conduct as alleged herein, said accounting to be performed by persons or entities not unacceptable to the Commission. VIII. Retain 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. IX. Grant such other and further relief as this Court may determine to be just and necessary.
http://www.sec.gov/litigation/complaints/complr17311.htm
|