SECURITIES AND EXCHANGE COMMISSION
LITIGATION RELEASE NO. 16881 / January 31, 2001
Securities and Exchange Commission v. Jerome E. Rosen, Diversified Corporate Consulting Group, Joseph D. Radcliffe, and William A. Calvo III, Civil Action No. 01-0369-CIV-Middlebrooks (S.D. Fla.)
Securities and Exchange Commission v. Wall Street Management Group, Robert Ciofalo, Calvin Moore, Thomas Clines, Heidi DeConde Clines, And Kathleen Connell, Civil Action No. 01-Civ-0726 (GD) (S.D.N.Y.)
SEC SUES WELL-KNOWN PENNY STOCK TRADER AND ACCOMPLICES FOR FRAUD FOR ROLE IN SYSTEMS OF EXCELLENCE MANIPULATION; SEVEN OTHERS CHARGED WITH REGISTRATION VIOLATIONS; AMOUNT RECOVERED FOR VICTIMS NOW APPROACHES $15 MILLION
The Securities and Exchange Commission announced that it filed two lawsuits on January 30, 2001 against a total of ten defendants to recover ill-gotten gains arising from the manipulation of Systems of Excellence, Inc. ("SOE") stock. The Commission has now filed eight separate enforcement actions, assisted in obtaining four criminal convictions, deregistered the securities of SOE, and recovered almost $15 million for defrauded investors as a result of more than four years of investigative work.
The Complaint Against Rosen, Diversified, Radcliffe, and Calvo
The Commission's first complaint, filed in the United States District Court for the Southern District of Florida, alleges that Jerome "Jerry" Rosen, a well-known penny stock trader working from a south Florida branch office of J. Alexander Securities, Inc. ("J. Alexander"), accepted a bribe in the form of SOE stock from Charles Huttoe ("Huttoe"), then the President of SOE, to manipulate the price of SOE stock. According to the complaint, Rosen conspired with (i) Huttoe, (ii) Sheldon Kraft ("Kraft"), a promoter previously charged in this scheme, and (iii) defendants Joseph D. Radcliffe ("Radcliffe") and Diversified Corporate Consulting Group ("Diversified") to obtain an exclusive supply of SOE stock, at favorable prices, to support his fraudulent and manipulative trading activity. Rosen, the trader at J. Alexander exclusively responsible for the firm's market making activity in SOE, sold stock short to other market makers, only to cover his sales at no risk with stock first supplied by Kraft, then by Huttoe, and finally by Radcliffe and Diversified, a company controlled by Radcliffe and William A. Calvo III ("Calvo") and others. The complaint alleges that Rosen earned $112,468 in compensation from his fraudulent SOE market-making activities at J. Alexander, and that Rosen also received ill-gotten gains of $503,496 from the unregistered resale of the SOE stock he received as bribes from Huttoe. The complaint further alleges that Radcliffe, Diversified and Calvo also resold SOE stock through unregistered, non-exempt transactions for unlawful profits of at least $2,457,118.
The complaint alleges the following specific conduct by Rosen:
The Commission charged Rosen, Radcliffe and Diversified with violations of: (i) the antifraud provisions, Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and (ii) the registration provisions, Sections 5(a) and 5(c) of the Securities Act. Calvo was also charged with violations of Sections 5(a) and 5(c) of the Securities Act. The Commission is seeking disgorgement of all ill-gotten gains, prejudgment interest, imposition of civil penalties and injunctive relief.
Without admitting or denying the Commission's allegations, defendant Radcliffe consented to the entry of an order permanently enjoining him from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and requiring him to: (i) disgorge $383,586 plus prejudgment interest thereon of $156,133, (ii) surrender possession of various worthless securities, (iii) disgorge the appraised fair market value of a 1996 Lincoln Towncar limousine in his possession but acquired by Diversified, and (iv) pay a $75,000 civil penalty.
The Complaint Against WSMG, Ciofalo, Moore, Clines, DeConde, and Connell
The Commission's second complaint, filed on January 30, 2001 in the United States District Court for the Southern District of New York, alleges that Defendants Wall Street Management Group ("WSMG"), Robert Ciofalo ("Ciofalo"), Calvin Moore ("Moore"), Thomas Clines ("Clines"), Heidi DeConde Clines ("DeConde"), and Kathleen Connell ("Connell") unlawfully resold SOE securities in violation of the strict-liability registration provisions of the federal securities laws. Defendants were issued the vast majority of these shares for free. Collectively, Defendants reaped approximately $860,077 in trading profits when they resold these securities into an artificially inflated market that was being manipulated by others. Shortly after Defendants resold their shares, the manipulation unraveled, leaving many innocent investors with worthless shares.
The Commission's complaint alleges that in multiple transactions from January through March 1996, Defendants WSMG, Ciofalo, Moore, Clines, DeConde, and Connell acquired a total of 920,000 newly-issued, facially-unrestricted shares of SOE common stock by allegedly exchanging services for the shares, including assistance with SOE's acquisition of ICMX Federal Systems, Inc. ("ICMX"), a provider of video teleconferencing equipment. In addition, Defendant Connell also acquired another 209,484 newly-issued shares of SOE common stock in a so-called "private placement" in early 1996. None of the "consulting" shares and private placement shares were acquired in transactions that were registered or exempt from registration.
The distribution of unregistered shares was part of a massive fraud perpetrated by SOE, its chairman Charles O. Huttoe ("Huttoe") and others. Monies raised through Connell's private purchase of SOE securities, for example, provided SOE with needed cash and allowed Huttoe and others to carry on the operations of SOE and to further manipulate the market for SOE stock.
On October 4, 1996, the Commission suspended trading in the securities of SOE for a ten-day period pursuant to Section 12(k) of the Exchange Act, in part, because of questions regarding the illegal distribution and resale of millions of unregistered SOE shares. Prior to the trading suspension, Defendants had illegally resold the vast majority of the shares they had acquired directly from SOE.
The complaint alleges the following specific conduct by each defendant:
Because none of the shares acquired in these various transactions were registered or exempt from registration, Defendants violated the strict liability registration provisions of the federal securities laws when they resold their shares or, in the case of Moore, when he directed the resale of shares held by a nominee. In its complaint, the Commission seeks a permanent injunction against future violations of Sections 5(a) and 5(c) of the Securities Act, disgorgement with prejudgment interest, and a civil penalty against each Defendant.
With the forthcoming payment by the settling defendant, Radcliffe, the Commission will have collected almost $15 million in disgorgement. These funds will be distributed by the Court-appointed receiver to victims of the SOE fraud in the coming months.
The Commission previously has made several announcements concerning these matters. See Lit. Rel. 16804 (November 20, 2000); Lit. Rel. 16695 (September 11, 2000); Lit. Rel. 16632a (July 21, 2000); Securities Exchange Act Rel. 42616 (April 4, 2000); Lit. Rel. 16343 (October 27, 1999); Lit. Rel. 15996 (December 9, 1998); Lit. Rel. 15906 (September 24, 1998); Lit. Rel. 15888 (September 18, 1998); Lit. Rel. 15617 (January 14, 1998); Lit. Rel. 15600 (December 22, 1997); Lit. Rel. 15571 (November 25, 1997); Lit. Rel. 15490 (September 12, 1997); Lit. Rel. 15286 (March 12, 1997); Lit. Rel. 15237 (January 31, 1997); Lit. Rel. 15185 (December 12, 1996); Lit. Rel. 15153 (November 7, 1996); Securities Exchange Act Rel. No. 33791 (October 7, 1996).
This enforcement action is part of the Commission's four-pronged approach to attacking Microcap abuses: enforcement, inspections, investor education and regulation. For 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.