Litigation Release No. 15907 / September 24, 1998
SEC SUES CHATTANOOGA-BASED MICROCAP COMPANY IN FRAUDULENT "PUMP AND DUMP" SCHEME
Securities and Exchange Commission v. Mohamed Khairy Mohamed Zayed, II, Michael W. Rehtorik, and Herbert Woll, C.P.A. (United States District Court, E.D. Tenn., Civil Action No. 1:98CV327, )
The Securities and Exchange Commission announced that today it filed civil fraud charges in the United States District Court for the Eastern District of Tennessee against two former officers and the former accountant of Genesis International Financial Services, Inc. for their roles in an illegal "pump and dump" scheme involving Genesis stock. Mohamed Khairy Mohamed Zayed, II, age 35, formerly resided in Ringgold, Georgia. Zayed, who was indicted by a federal grand jury in 1997 and charged with fraudulently operating a bonding and insurance business, is now a fugitive. Michael W. Rehtorik, age 40, resides in West Chester, Pennsylvania. Herbert Woll, age 77, resides in Marietta, Georgia. The Commission previously suspended trading in Genesis stock.
In its complaint, the SEC alleges that Zayed, Rehtorik and Woll engaged in securities fraud in the promotion and sale of the Genesis stock by using fraudulent financial statements and press releases calculated to deceive prospective investors. According to the SEC's complaint:
* Zayed, Rehtorik and Woll prepared and filed with the SEC in 1996 two Form 10 registration statements which falsely claimed that Genesis had total assets in excess of $138 million, including certain "Certificates of Deposit" with a claimed value of more than $100 million.
* Woll misrepresented himself as an "independent" auditor in the financial statements contained in the Form 10 registration statements Genesis filed with the SEC.
* Zayed and Rehtorik failed to disclose in at least one Form 10 registration statement Rehtoriks recent securities laws violations and civil injunctive history, as required under the federal securities laws.
* Zayed and Rehtorik issued a series of press releases from February to April, 1997, misrepresenting that Genesis was going to sell its subsidiary, Congress Re-insurance Corporation, for $117 million to an international purchasing syndicate.
The SECs lawsuit further charges that Zayed and Rehtorik devised a scheme to raise the demand and price of Genesis stock by issuing the fraudulent press releases and SEC filings described above. Once the price of the stock had been inflated artificially through their efforts, the SEC alleges that Zayed and Rehtorik sold Genesis stock through nominee accounts, then booked a portion of the proceeds as income to Genesis. The complaint alleges that the nominee accounts sold $1.9 million in Genesis stock. On April 30, 1997, the SEC suspended trading in Genesis stock.
The SEC seeks in its lawsuit permanent injunctions and civil money penalties against Zayed, Rehtorik, and Woll, and disgorgement of Zayed and Rehtoriks ill-gotten profits. The complaint alleged that Zayed, Rehtorik and Woll violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and rule 10b-5 thereunder.
The SEC thanks the Tennessee Department of Insurance and Commerce, Federal Bureau of Investigation, and the United States Attorneys Office for the Eastern District of Tennessee for the substantial assistance they provided in connection with the investigation leading to this action.
This enforcement action is one of several cases filed today in an effort to address abuses in the microcap market. It is also part of the Commission's four-pronged approach to minimizing microcap fraud: enforcement, inspections, investor education and regulation. For more information about the SEC's response to microcap fraud, visit the SEC's Microcap Fraud Information Center at http://www.sec.gov/news/extra/microcap.htm.