U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19101 / February 28, 2005
Securities and Exchange Commission v. Custom Designed Compressor Systems, Inc. and Shelby E. Ball, Civil Action No. CIV-05-213 DJS ACT (D. New Mexico)
On February 25, 2005, the United States Securities and Exchange Commission filed a civil complaint against Custom Designed Compressor Systems, Inc. (“CDC”) and its chief executive officer Shelby E. Ball alleging that they engaged in a fraudulent distribution of unregistered stock. CDC is a Delaware corporation based in Bloomfield, New Mexico, which purports to be in the business of supplying compressors for use in the production and distribution of natural gas. CDC’s stock is not registered with the Commission and is quoted on the National Quotation Bureau Pink Sheets. According to the complaint, Ball, who lives in Dallas, Texas, worked with a group of stock promoters to cause CDC to issue stock to a purported accredited investor under Rule 504 of Regulation D. The complaint further alleges that the accredited investor was actually a conduit for the subsequent transfer of the stock to the promoters who sold it to the public, using the Pink Sheets to generate quotations for the stock. The promoters generated over $4.6 million through their public distribution of CDC stock, and returned $737,000 of the proceeds to CDC.
The complaint alleges that while the distribution was occurring, Ball created and distributed to the public 18 press releases that included false and misleading information about the company. Among other things, these press releases falsely claimed that CDC’s innovative compressor system was available to the public and that CDC would receive revenue from compressors currently operating, when in fact the company did not have any compressors ready for sale or in operation, but simply had plans to develop and manufacture compressors if sufficient funds were raised from investors. They also claimed that CDC had received an order to place compressors on ten wells owned by a major natural gas producer, when in fact no such order existed, and that CDC owned an inventory of compressor parts worth $600,000 to $800,000 when in fact CDC had purchased the parts at an auction for $50,000. The complaint also alleges that CDC and Ball filed a Form D with the Commission that made numerous false and misleading statements about the nature of CDC’s stock offering.
The complaint alleges that CDC’s stock climbed from an initial trading price of $.50 per share to $9.00 per share (split adjusted) while the fraudulent press releases were publicly distributed. CDC then issued a series of clarifying press releases beginning October 22, 2004, acknowledging inaccuracies in the items discussed above. When this information was made public, CDC’s stock price collapsed to $.20 per share.
CDC and Ball are charged with violating the securities registration provisions of the federal securities laws, Sections 5(a) and (c) of the Securities Act of 1933 (“Securities Act”), and the antifraud provisions, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 thereunder. The Commission seeks permanent injunctions against CDC and Ball, an order against CDC to provide an accounting, orders of disgorgement plus prejudgment interest, civil penalties, and an officer and director and penny stock bar against Shelby Ball.
SEC Complaint in this matter