UNITED STATES SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION v WANG ET AL. CV 99-4917-JG (E.D.N.Y.)
Litigation Release No. 16256 / August 19, 1999
SECURITIES AND EXCHANGE COMMISSION FILES COMPLAINT ALLEGING THAT VICTOR M. WANG, GREGG A. THALER, CHARLES T. BENNETT AND JEFFREY S. HONIGMAN MANIPULATED THE MARKET OF PARAVANT COMPUTER SYSTEMS, INC. SECURITIES
The Securities and Exchange Commission filed an injunctive action, today in the United States District Court for the Eastern District of New York against: Victor M. Wang, the former Chief Executive Officer of Duke & Company, Inc. ("Duke"), a broker-dealer, and Gregg A. Thaler, Charles T. Bennett, and Jeffrey S. Honigman, who were former principals of, and brokers at, Duke. In its complaint, the Commission alleged that Wang, Thaler, Bennett and Honigman orchestrated a massive market manipulation designed to increase the price of Paravant Computer Systems, Inc. ("Paravant") securities, which Duke had taken public, from approximately June 3, 1996 through June 21, 1996.
Specifically, the Commission alleges in its Complaint that:
In June 1996, Duke served as the underwriter for Paravant's initial public offering ("IPO") of common stock and warrants. In the IPO, Paravant's common stock was offered to the public at $5.00 per share and its warrants were offered at $0.10 per warrant. On June 3, 1996, the IPO was declared effective and trading commenced in Paravant securities. During the first day of trading, the price of Paravant's common stock shot up to $9.875 per share and the price of the warrants increased to $8.4375 per warrant.
The price of Paravant common stock dramatically increased because Duke, which served as a market maker for Paravant securities, and Wang, Thaler, Bennett and Honigman artificially restricted the supply of Paravant common stock and created significant demand for the common stock. For instance, Wang and Thaler allocated a large percentage of the common stock issued in the Paravant IPO to certain affiliated customer accounts on the condition that these customers immediately flip this common stock back to Duke after the commencement of trading following the IPO. This arrangement ensured that Duke had a large supply of Paravant common stock in its inventory account. Prior to the IPO, Bennett and Honigman, as well as other Duke RRs, pre-solicited customers to purchase Paravant common stock once aftermarket trading in Paravant securities commenced to ensure demand for the common stock. Thus, as a result of the artificially small supply of common stock and the artificially created demand, once aftermarket trading commenced, the price of Paravant common stock increased. On June 4, 1996, after the price of Paravant common stock had increased to prices ranging from $10.75 to $13.375 per share, Duke resold the common stock that it had repurchased from the affiliated customer accounts, as well as stock Duke did not own (thus taking an enormous short position in the stock), to the retail customers Duke had pre-solicited to purchase common stock. To facilitate these sales, Bennett and Honigman, and other Duke RRs, made material misrepresentations (and failed to disclose material information) to their retail customers. As a result of its manipulative activities in connection with Paravant common stock, Duke generated over $1,885,137 in ill-gotten gains.
Duke and Wang, Thaler, Bennett and Honigman also manipulated the market for Paravant warrants. Just as Duke had done with Paravant common stock, Duke restricted the supply of warrants by allocating a large block of Paravant warrants in the IPO to the affiliated customer accounts, who had agreed to flip the warrants back to Duke immediately after trading commenced. From June 3, 1996 to June 20, 1996, Duke repurchased the Paravant warrants from the affiliated customer accounts and then continued to purchase Paravant warrants in the market until it had amassed a huge inventory of approximately 1.2 million warrants (approximately 74% of the available supply of Paravant warrants). While Duke accumulated this massive position of warrants, the price of the warrants gradually increased to a price of $12.00 per warrant on June 21, 1996. On June 21, 1996, Duke then dumped over one million warrants on its retail customers at $12.00 per warrant. To facilitate these sales, Duke's RRs employed high-pressure sales tactics to induce their retail customers to purchase the Paravant warrants. Duke generated over $8,444,445 in ill-gotten gains from its manipulation of the market for Paravant warrants.
In its Complaint, the Commission alleged that Wang, Thaler, Bennett and Honigman violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 10b-6 thereunder. Additionally, the Commission alleged that Wang, Thaler, Bennett and Honigman aided and abetted Duke's violations of Sections 10(b) and 15(c) of the Exchange Act and Rules 10b-3 and 15c1-2. The Commission is seeking to enjoin the Defendants from future violations of these provisions of the federal securities laws. The Commission is also seeking disgorgement and civil penalties from each of the Defendants.