U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18780 / July 12, 2004
Securities and Exchange Commission v. Carl R. Rose, et al., Civil Action No. H-04-CV-2799 (S.D. Texas)
On July 9, 2004, the United States Securities and Exchange Commission filed a civil complaint against Harris D. "Butch" Ballow and twelve other individuals, alleging that they carried out a manipulation of two stocks, EpicEdge, Inc., and EVTC, Inc. The complaint alleges that Ballow orchestrated the manipulation, and the other defendants include three associates of Ballow (Hector J. Garcia, Marvin M. "Mike" Barnwell, and Frank H. Moss) two former officers of EVTC (George J. Cannan, Sr. and David A. Keener), two former officers of EpicEdge (Charles H. Leaver and Carl R. Rose), three registered representatives at securities firms where Ballow and his associates traded the stocks (Mark K. Menzel, Earl Shawn Casias, and George J. Cannan, Jr.) and two other securities industry professionals (Lawrence A. Clasby, an investment adviser, and Stacey J. Blake, a former registered representative).
All defendants are charged with violating the antifraud provisions of the federal securities laws, Sections 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. Defendant Clasby is also charged with violating the antifraud provisions in Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). Defendants Ballow, Garcia, Barnwell, Cannan, Sr., Cannan, Jr., Menzel, Casias, Clasby and Blake are charged with violating Rule 101 or 102 of Regulation M, an antimanipulation rule that prohibits persons involved in a stock distribution from purchasing stock during the distribution. Defendants Ballow, Garcia, Barnwell, Moss, and Cannan, Sr. are charged with violating the stock ownership reporting provisions in Sections 13(d)(1) and 16(a) of the Exchange Act and Rules 13d-1, 13d-2, and 16a-3 thereunder. Defendants Ballow, Garcia, Barnwell, Moss, Cannan, Sr., Keener, Cannan, Jr., Menzel, Casias, Clasby and Blake are charged with violating the securities registration provisions in Sections 5(a) and 5(c) of the Securities Act. Defendants Cannan, Sr., Keener, Leaver, and Rose are charged with aiding and abetting violations by EVTC or EpicEdge of the periodic reporting provisions, Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 12b-20 thereunder. Defendants Garcia and Blake are charged with acting as unregistered broker-dealers, in violation of Section 15(a)(1) of the Exchange Act.
The stock prices for EVTC and EpicEdge followed similar trajectories after Ballow, a four-time convicted felon, acting with the approval of management of each company, allegedly began systematically acquiring undisclosed but significant interests in the companies in 1999. According to the complaint, Ballow, acting largely through off-shore corporations, engaged in heavy trading designed to create artificial volume in the stocks and interfere with the true supply and demand for the stocks. Both stocks rose sharply throughout most of 2000, then simultaneously collapsed in September 2000 when Ballow was no longer able to support the prices. The collapse not only hurt investors, but also the broker-dealers who made large margin loans to Ballow's off-shore companies and to Cannan, Sr.
The complaint alleges that the scheme began when Ballow and Moss engineered a merger between a private company owned by Rose and a public shell, creating EpicEdge. EpicEdge then issued new stock to Ballow, registered on Form S-8, which put Ballow in control of the EpicEdge public float. Ballow then gained control over EVTC by acquiring restricted stock and used his EpicEdge stock to finance massive purchases of EVTC stock, enabling Ballow to take control of the market for EVTC stock as well. Cannan, Sr. helped the scheme by purchasing large amounts of EpicEdge stock in the market, using his own EVTC stock as collateral, thereby propping up the value of Ballow's EpicEdge stock and enabling Ballow to continue buying EVTC stock.
Garcia and Barnwell participated in the scheme by ordering trades through accounts controlled by Ballow at various brokerage firms and by selling EpicEdge and EVTC stock owned by Ballow in off-market transactions designed to raise cash for Ballow without depressing the price of the stocks. Blake and Clasby also participated in these off-market sales, promoted the stocks to friends and, in Clasby's case, clients. Keener, Leaver, and Rose provided Ballow with information necessary to carry out the schemes. Cannan, Jr. and Menzel executed trades for Ballow and Cannan family members, and Casias executed trades for Ballow, that carried out the scheme, at a time when they perceived or recklessly disregarded red flags that Ballow was engaging in a manipulation. The manipulative trades included marking the close, massive purchases of EVTC stock on margin by off-shore companies that dried up the float of EVTC, and simultaneous or near-simultaneous buying and selling of the stocks.
The Commission seeks permanent injunctions against all defendants, as well as equitable relief in the form of disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.