MICHAEL R. MACPHAIL (Colo. Attorney Reg. No. 26382)
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges the following facts in support of its complaint against the defendant, Christina Skousen, also d/b/a CSK Securities Research ("Skousen").
1. Between May 1999 and December 2000, Skousen, a self-styled "analyst" with a high school education and no formal securities training, wrote research reports touting eight microcap companies. Skousen's reports for seven of the companies contained false and misleading financial and stock price projections. The projections lacked a reasonable basis because, among other reasons, all of the companies had poor financial track records, and four of the companies were the subject of going concern audit opinions.
2. Skousen's revenue projections exceeded the companies' most recently reported revenue figures by as much as 260,913%, and exceeded the companies' most recently reported income figures by as much as 30,089%. Skousen's reports additionally failed to disclose that six of the companies required significant additional financing, which was not assured, to implement their business plans or continue in operation. Skousen's reports for the same seven companies also contained arbitrary projected stock prices, which exceeded the companies' current stock prices by as much as 18,650%.
3. In addition, Skousen falsely represented that one company was "well-capitalized" when it had previously disclosed that it required additional working capital in order to continue as a going concern.
4. Moreover, Skousen, who typically was paid in cash for all of the reports, failed to disclose her receipt of compensation in two instances where she personally published the reports.
5. Skousen's reports caused the price and/or volume of the stock of six of the seven companies to increase significantly in the short term.
6. Skousen has, directly and indirectly, engaged in, and unless restrained and enjoined by this Court will engage in transactions, acts, practices and course of business that violate Section 17(b) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(b)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
II. JURISDICTION AND VENUE
7. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77u(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§78u(e) and 78aa]. Venue lies in this Court pursuant to Section 22(a) of the Securities Act and Section 27 of the Exchange Act.
8. In connection with the transactions, acts, practices, and courses of business described in this Complaint, the defendant, directly and indirectly, has made use of the means or instrumentalities of interstate commerce, of the mails, and/or of the means and instruments of transportation or communication in interstate commerce.
9. Defendant Skousen resides within this judicial district. Additionally, certain of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district.
10. Christina Skousen, age 49, resides in Novato, California. Doing business as CSK Securities Research ("CSK"), she writes analyst research reports regarding microcap companies. Skousen's formal education consists of one year of college and 18 months of secretarial training at a business college. Skousen has had no formal training in analyzing financial statements or stocks.
SKOUSEN'S RESEARCH REPORTS
11. Between May 14, 1999 and December 4, 2000, Skousen wrote research reports touting eight companies. Reports touting four companies, Packetport.Com, Inc. ("Packetport"), Nanopierce Technologies, Inc. ("Nanopierce"), Integrated Communication Networks, Inc. ("Integrated") and Searchhound.Com, Inc. ("Searchhound"), were issued under the name of Stockreporter.de and did not mention Skousen's name or otherwise suggest her involvement. The dates of these reports are set forth in Appendix A.
12. Stockreporter.de's principals posted Skousen's reports on their Internet website and issued press releases announcing the reports. The principals of the Stockreporter.de website have been enjoined by a U.S. District Court from future violations of Section 17(b) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The court's order further required the defendants to pay disgorgement and civil penalties. SEC v. Torsten Prochnow d/b/a Stockreporter.de et al., No. C00-3199-MJJ (N.D. Cal. Sept. 15, 2000).
13. Skousen also wrote reports touting four other companies (Infe.Com, Inc. ("INFE"), Winners Internet Network, Inc. ("Winners"), AXYN Corp. ("AXYN") and MyWeb Inc.Com. ("MyWeb") under the name CSK. Skousen printed copies of these reports and distributed them to the touted companies.
14. Skousen received approximately $5,000 for each report as compensation except for INFE, which agreed to pay her but did not do so.
15. Skousen received compensation for the CSK reports either directly from the companies or indirectly through the Stockreporter.de principals. Two of the four CSK reports (Winners and MyWeb) failed to disclose Skousen's compensation.
16. In preparing her reports, Skousen typically interviewed officers of each company to obtain information regarding the company's business and competitors. Skousen also reviewed documents provided by the company, including business plans and the company's public filings with the Commission.
BASELESS FINANCIAL PROJECTIONS
17. Skousen's reports touting seven companies, INFE, Winners, AXYN, Packetport, Nanopierce, Integrated and Searchhound, contained false and misleading financial projections. The reports predicted that these companies would realize revenues of as much as $1,025,000,000 within one and four fiscal years of the dates of the reports, and that six of the companies would realize income of as much as $425 million within the same periods. See Appendix A for details.
18. The reports stated that Skousen's financial projections were "conservative" or "very realistic and achievable," or that her projections could "easily" be exceeded.
19. The financial projections lacked a reasonable basis because they were not supported by each company's historical financial performance. The revenue projections for four of the seven companies (AXYN, Packetport, Integrated and INFE) lacked a reasonable basis because they represented increases of as much as 260,913% from each company's most recent yearly revenue figures. See Appendix A for details.
20. Skousen projected that a fifth company, Nanopierce, would achieve revenues of as much as $123 million, whereas it had reported zero revenues during the previous fiscal year. See Appendix A for details.
21. Skousen projected that two companies (Winners and Searchhound) would achieve revenues that represented increases of as much as 4,703% from the revenues reported during the first nine months of each company's fiscal years. See Appendix A for details.
22. Skousen's income projections lacked a reasonable basis because they represented increases of as much as 30,089% from the companies' most recent income figures. See Appendix A for details.
23. In addition, four of the companies (AXYN, Nanopierce, Winners and INFE) were the subject of going concern opinions by the companies' auditors. Searchhound's management had expressed doubt in a November 15, 2000 Form 10Q-SB filed with the Commission about its ability to continue as a going concern. None of Skousen's reports disclosed these adverse facts.
24. Skousen's projections for six of the seven companies (AXYN, Nanopierce, Winners, Searchhound, Integrated, and Packetport) were additionally undermined by the fact that the projections were contingent upon the issuers' receipt of substantial funding, which was not assured.
25. The companies' business plans stated that the projections were based on assumptions that the issuers would receive significant additional financing. None of the reports prepared by Skousen disclosed this contingency.
26. Skousen's projections for two of the companies (Winners and INFE) lacked a reasonable basis because, among other things, they were inconsistent with the companies' internal projections and/or Skousen's own previous projections.
27. Skousen's financial projections for Winners were significantly higher than management's internal projections.
28. Skousen's financial projections for INFE were inconsistent with management's internal projections. For the first year following the issuance of the INFE report, Skousen projected revenues of $240 million and net income of $22,538,000; but the company projected revenues of only $85 million and net income of $4.2 million for that year.
29. Just six weeks before she wrote this report, Skousen had written a report touting INFE, which was issued under the name Stockreporter.de, which included the much lower projections of management.
BASELESS STOCK PRICE PROJECTIONS
30. Skousen's reports predicted that the price of seven companies' stocks would reach prices as high as $105 per share between one and three years. See Appendix A for details.
31. These stock price projections lacked a reasonable basis because they were not based on any rational methodology and none of the stock price projections was supported by the companies' historical stock prices.
32. Skousen's stock price projections represented increases of as much as 18,650% from the companies' then-current stock prices. See Appendix A for details.
33. The Winners stock price projections were based on the assumption that the number of the company's issued and outstanding shares of stock would remain constant at 16 million. This was a false assumption because the company was planning significant private placements.
34. None of the companies' stock prices has reached the stock prices predicted by Skousen.
FALSE STATEMENT ABOUT SEARCHHOUND'S FINANCIAL CONDITION
35. Skousen's report for Searchhound stated that the company was "well-capitalized."
36. This statement was false since a Form 10Q-SB filed by Searchhound with the Commission just two weeks before the release of this report stated that the company would require additional working capital to remain a going concern.
FAILURE TO DISCLOSE COMPENSATION
37. Skousen prepared and published a report regarding MyWeb on or about May 14, 1999.
38. MyWeb paid Skousen $5,000 to prepare and publish this report.
39. Skousen's MyWeb report did not disclose her receipt of this compensation.
40. The Stockreporter.de principals paid Skousen $5,000 to prepare a report regarding Winners. The $5,000 came from the sale of Winners stock received by the principals.
41. Skousen's Winners report did not disclose her receipt of this compensation.
42. Following the release of Skousen's reports, the stock price and/or volume of six of the seven touted issuers increased significantly.
SKOUSEN ACTED FRAUDULENTLY
43. Skousen knew that her financial projections were undermined by the companies' historical financial performance and need for financing and therefore lacked a reasonable basis.
44. Skousen was aware of each companies' historical financial performance and the going concern opinions regarding four companies at the time she wrote her reports. She also knew about the six issuers' need for financing, yet she failed to disclose their need for financing in her reports.
45. Skousen was aware of the then-current stock prices of these issuers when she wrote her reports and therefore was reckless in not knowing that these historical prices did not provide a basis for her predicted stock prices.
46. Skousen had reviewed the most recent Form 10Q-SB regarding Searchhound and therefore knew that the company was not "well-capitalized."
47. Skousen continued to issue reports containing baseless financial and stock price projections for several months after May 2000, when she was first made aware of the Commission staff's concerns about her projections.
V. FIRST CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act and Rule 10b-5
[15 U.S.C. § 78 j (b) and 17 C.F.R. § 240.10b-5]
48. Paragraphs 1 through 47 are hereby realleged and incorporated by reference.
49. Defendant Skousen directly and indirectly, with scienter, in connection with the purchase or sale of securities, by use of the means or instrumentalities of interstate commerce or by use of the mails, has employed devices, schemes, or artifices to defraud; has made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or has engaged in acts, practices, or courses of business which have been and are operating as a fraud or deceit upon the purchasers or sellers of such securities.
50. By reason of the conduct described above, Skousen violated, is violating, and unless restrained and enjoined will violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder [15 U.S.C. § 78 j (b) and 17 C.F.R. § 240.10b-5].
VI. SECOND CLAIM FOR RELIEF
Violations of Section 17(b) of the Securities Act
[15 U.S.C. § 77q(b)]
51. Paragraphs 1 through 47 are hereby realleged and incorporated by reference.
52. Defendant Skousen, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly, published, gave publicity to, or circulated communications, which, though not purporting to offer a security for sale, described such securities for a consideration received or to be received, directly or indirectly from an issuer without fully disclosing such consideration and the amount thereof.
53. By reason of the conduct described above, Defendant Skousen has violated, is violating and, unless restrained and enjoined, will continue to violate Section 17(b) of the Securities Act [15 U.S.C. §§ 77q(b)].
VII. PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
Find that Skousen committed the violations alleged.
Enter an injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining the defendant and persons in active concert or participation with her, from violating, directly or indirectly, Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)], Rule 10b-5 thereunder [17 C.F.R. §240.10b-5], and Section 17(b) of the Securities Act [15 U.S.C. § 77q(b)].
Order Defendant and her agents, servants, employees and attorneys to disgorge all ill-gotten gains received or benefits, totaling $30,000, received from her alleged illegal conduct with respect to Packetport, Nanopierce, Integrated, Searchhound, Winners, and AXYN, together with pre-judgment and post-judgment interest as provided by law.
Order Defendant to pay civil penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)] and Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] in an amount to be determined by the Court.
Grant such other relief, as this Court may deem just or appropriate.