U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19582 / March 1, 2006
SEC v. Allen Z. Wolfson, et al., 2:02 CV-1086 (TC) (D. Utah)
Craig H. Brown and Mervyn A. Phelan, Jr. Permanently Enjoined in SEC Fraud Action
The Securities and Exchange Commission announced today that on February 22, 2006, in the Commission's Freedom Surf market manipulation action, the U.S. District Court in Salt Lake City permanently enjoined two defendants, Craig H. Brown and Mervyn A. Phelan, Jr. ("Phelan Jr."), from violating the antifraud and registration provisions of the federal securities laws, specifically, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, and Sections 5(a) and 5(c) of the Securities Act of 1933. Each defendant was also permanently barred from participating in any offerings of penny stock; and Brown was additionally barred from serving as an officer or director for any public company.
Brown and Phelan Jr., respectively residents of Orange and Los Angeles Counties, California, consented to the entry of the judgments against them without admitting or denying the allegations in the Commission's complaint. The Commission's complaint, filed on September 30, 2002, alleges, in part, that Brown and Phelan Jr. aided and abetted Phelan Jr.'s father, defendant Mervyn A. Phelan, Sr. ("Phelan Sr."), one of the coordinators of the manipulative scheme, which lasted from at least July through October 2000. The Commission alleged that Phelan Sr. sought to control the amount of Freedom Surf securities that entered the market while the other architect of the scheme, defendant Allen Wolfson, manipulated the public trading market for Freedom Surf securities in order to artificially increase the price of the securities. Wolfson then sold a block of Freedom Surf securities at a discount to a retail broker, which in turn marked up the securities and sold them to investors. Brown and Phelan Jr. also participated in unregistered sales of Freedom Surf securities between March and July 2001 out of certain accounts they controlled.
In January 2004, Phelan Jr. pled guilty to securities fraud charges in criminal proceedings related to this action, and in March 2004, was sentenced to a prison term of fifteen months, which he has completed. In March 2004, Brown likewise pled guilty to securities fraud charges in criminal proceedings related to this action, and in August 2004, was sentenced to a prison term of five months, which he is currently serving. In January 2004, Wolfson pled guilty to securities fraud charges in the same criminal proceedings, but has not yet been sentenced. In November 2004, in the same criminal proceedings, Phelan Sr. was convicted by a jury of securities fraud, and in April 2005, was sentenced to three years in prison. Two other defendants in this action, Kevin Kirkpatrick and Robert Pozner, were sentenced to prison terms of five and three months, respectively, in August 2005 and September 2005, in the same criminal proceedings. Pozner has completed his service.
For more information about this case, see the Commission's Litigation Release No. 17756, dated September 30, 2002; Litigation Release No. 18486, dated December 3, 2003; Litigation Release No. 18230, dated July 14, 2003; Litigation Release No. 18646, dated March 29, 2004; Litigation Release No. 19054, dated January 27, 2005; Litigation Release No. 19201, dated April 21, 2005.