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U.S. Securities and Exchange Commission

SEC Charges 23 Companies and Individuals in Cases
Involving Broad Spectrum of Internet Securities Fraud

FOR IMMEDIATE RELEASE

2001-24

Nationwide crackdown continues with fifth internet "sweep";
Total number of internet cases filed now stands at over 200

Washington, D.C., March 1, 2001 – In its fifth nationwide Internet fraud sweep, the Securities and Exchange Commission today announced 11 enforcement actions against 23 companies and individuals that used the Internet to defraud investors. The sweep consists of cases involving both publicly-traded securities and privately-held companies. The alleged perpetrators used the Internet to "pump" the market capitalization of the stocks involved by more than $300 million and raise $2.5 million in proceeds from investors in the U.S. and abroad. The frauds were accomplished by a variety of online means, including "spam" emails, electronic newsletters, websites, hyperlinks, message boards and other Internet media.

SEC Director of Enforcement Richard H. Walker said, "Today's cases are a sobering reminder for investors that, on the Internet, there is no clearly defined border between reliable and unreliable information. Therefore, investors must exercise extreme caution when they receive investment pitches online." Mr. Walker added, "These actions involve a virtual checklist of common securities fraud techniques. Perpetrators lured investors with promises of fast and easy profits in thinly-traded, or even privately-held, development stage companies that operate in 'hot button' industries."

The common securities fraud techniques in the cases brought today involve:

  • False Promises of Imminent IPO – including one private company that used "spam" email and a website to announce that its upcoming, SEC-approved IPO (at a price of $20 to $50 per share) was imminent and that it would realize at least $1 billion through online eyewear sales. The SEC alleges that, in reality, the company never received SEC approval for an IPO, the company had no offices, no inventory, and no products or services; moreover, the SEC alleges that the company's owner misappropriated investor funds for a variety of personal expenses, including securities purchases through personal brokerage accounts and expenses at restaurants, gambling casinos, and adult entertainment clubs (SEC v. Chidwhite Enterprises, Inc. and Jerry L. Chidester). In another "pre-IPO" case, principals of a private company used a large portion of the $2.4 million in investor funds for unauthorized business and personal expenses, including automobile purchases, trips to Cabo San Lucas, Florida, Hawaii and California, and home mortgage payments (SEC v. Smart-Mart, Inc., Timothy A. McMurray and Bradley D. Woy);
  • Baseless Financial Projections – including one company that issued a press release claiming it would "quickly reach a significant market share in the $400+ million" study aids market. The company's share price nearly tripled an hour after the release, eventually increasing more than 1000% within two days. The SEC alleges that, in reality, the company's internal projections anticipated a year's time to reach, at most, a mere 5% market share of the $160 million study aids market, and that, in support of their projections, the company had only $30 in gross sales during the entire 14-month period prior to the issuance of the press release (SEC v. PinkMonkey.com, Inc. and Patrick R. Greene);
  • False Track Records and Resumes – including a former roofer turned online expert stock analyst that claimed he had a proprietary computer trading system, over 14 years of investing experience and an 85% success rate. The SEC alleges that, in reality, the ex-roofer had limited personal securities trading experience, never received any securities training, never worked for a securities or investment firm, and used a software program available for purchase by the public which could be accessed over the Internet. Gaspard has acknowledged that his success rate claims were misleading or false and not supported by his track record (In the Matter of WallStreet Prophet and Ricky Laine Gaspard;
  • Analyst Coverage "Bought and Paid For" – including one public company that provided hyperlinks on its website to the reports of a purportedly independent analyst who actually was paid 12,500 shares of the company's stock in undisclosed compensation for publishing the reports. These reports, in essence, merely reprinted the company's fraudulent, upbeat claims, including the company's assertion that it had profitable business relationships with 14 "blue chip" companies. The SEC alleges that, in reality, these alleged relationships were outright lies or gross exaggerations (SEC v. Internet Solutions for Business, Inc. and Lawrence Shaw; In the Matter of Imcadvisors, Inc. and Stuart Bockler); and
  • Inflated Performance Claims and Fake Testimonials – including a group of three websites that boasted a stock-picking track record of 60% to 240% returns, published glowing testimonials, and supposedly used a "team of experienced traders." The SEC alleges that, in reality, the returns were merely hypothetical, the so-called "team" of experts was, in fact, a single individual, and the testimonials on two of the sites were copied almost verbatim from the third site (SEC v. Sunset Investment Group, Inc., James Brown, Pinnacle Capital Advisors, and Austin Tanner).

Today the SEC also released an online "Survivor Checklist" to warn investors about stock fraud on the web. The brochure is available at www.sec.gov/investor/pubs/fraudsurvivor.htm.

The SEC has now brought more than 200 Internet-related enforcement actions, nearly half of which have been brought in the last 14 months. These actions have involved a total of over 750 named individuals and entities. Previous sweeps targeted online frauds involving the touting of publicly-traded companies (October 1998 and February 1999), the sale of bogus investment opportunities (May 1999) and the perpetration of "pump-and-dump" stock schemes (September 2000).

For more information about Internet fraud, visit www.sec.gov/divisions/enforce/internetenforce.htm. For more advice on saving, investing, and avoiding fraud online, visit www.sec.gov/investor/pubs.shtml. To report suspicious activity involving possible Internet fraud, visit the SEC's Enforcement Complaint Center at www.sec.gov/complaint.shtml.

Case Summaries & SEC Contact List

1. SEC v. Sunset Investment Group, Inc., James Brown, Pinnacle Capital Advisors and Austin Tanner
(U.S. District Court, District of Colorado)
(SEC Contact: Katherine S. Addleman, 303-844-1070)

The SEC alleges that Sunset Investment Group, Inc., James Brown, Pinnacle Capital Advisors, and Austin Tanner made false and misleading performance claims and testimonials that appeared on three different websites OptionInvestor.com, SplitTrader.com, and NetBulls.com and in press releases. All three sites provide stock and market analysis and publish a stock advisory newsletter offering stock analysis, trading strategies, and trading recommendations. All are operated by Sunset Investment Group and its president and sole shareholder, Brown, a resident of Littleton, Colorado. Tanner, from Westchester, Illinois, and his company, Pinnacle Capital, were hired by Brown to create the homepages of the websites. According to the complaint, OptionInvestor.com claimed actual returns ranging from 60% to 240% for subscribers who followed its trading philosophy and trading recommendations. The SEC alleges that all of the performance claims were hypothetical, not actual, and that it was impossible for subscribers to achieve similar results. The SEC also alleges that SplitTrader.com and NetBulls.com posted on their homepages false and misleading testimonials that praised the performance of the sites. The SEC claims that the testimonials were copied almost verbatim from the OptionInvestor.com homepage and had nothing to do with the performance of either SplitTrader.com or NetBulls.com. Without admitting or denying the allegations in the complaint, Sunset Investment Group and Brown consented to the entry of an order that enjoins them from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 under the Exchange Act, and agreed together to pay a civil money penalty of $70,000. The SEC also seeks permanent injunctive relief and civil money penalties against Pinnacle Capital and Tanner.

 
2. In the Matter of Log Point Technologies, Inc. and Samuel P. Shanks
(SEC Contacts: Helane L. Morrison 415-705-2450 and Marc J. Fagel 415-705-2449)

The SEC alleges that Log Point Technologies, Inc. of Mountain View, California, and its president, Samuel P. Shanks, misled investors about financing arrangements and revenue projections in a series of press releases and in an SEC filing. Between March and September 2000, Log Point issued four press releases claiming that it had received a $20 million financing commitment from a venture capital firm. According to the SEC, these press releases were misleading because they failed to disclose that the financing was contingent on Log Point first raising $5 million to secure the financing. At the time, Log Point had approximately $67 in cash and no other sources for raising the $5 million. The first of these press releases which was disseminated over news wires and discussed on Internet stock discussion boards caused an 1800% increase in trading volume, driving Log Point's stock price up 50%, from $2.00 to $3.00 per share. Log Point repeated the misleading statements about the financing in a quarterly SEC report. Log Point also issued a press release in September 2000 in which it projected revenue of $75 million to $90 million over the next two years. The SEC found that the projection was false and misleading at the time of the press release, Log Point was still in the development stage, had no product sales, and had no realistic ability to generate the projected revenue. The press release caused a 2300% hike in trading volume, driving Log Point's stock price up 29%. In its order, the SEC found that Log Point and Shanks violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and that Log Point violated, and Shanks aided and abetted and caused a violation of, Section 13(a) of the Exchange Act and Exchange Act Rules 13a-13 and 12b-20. The SEC ordered Log Point and Shanks to cease and desist from committing or causing violations of those provisions. The SEC accepted an offer of settlement in which Log Point and Shanks, without admitting or denying the SEC's findings, agreed to the entry of the SEC's order.

 
3. SEC v. Chidwhite Enterprises, Inc. and Jerry L. Chidester
(U.S. District Court, Western District of Texas (Austin Division))
(SEC Contact: Spencer C. Barasch, 817-978-6425)

The SEC alleges that Chidwhite Enterprises, Inc. and its sole shareholder and chief executive officer, Jerry L. Chidester, age 26, of Austin, Texas, used "spam" e-mail and a web page to defraud over 6,000 investors throughout the United States and abroad. The company raised nearly $96,000 in the fraudulent offering of so-called "free" stock credits to those who paid an "administrative fee" of $10. Defendants claimed that investors could redeem their stock credits for common stock when Chidwhite Enterprises completed a purportedly imminent IPO. The SEC's complaint alleges that the defendants made numerous misrepresentations and omissions of material facts in connection with the offering, including that the SEC had approved the offering, that Chidwhite Enterprises would conduct an IPO upon completion of the offering, and that Chidwhite Enterprises stock would be valued at $20 to $50 per share at the time of its IPO. In fact, the SEC never approved the offering and Chidwhite Enterprises never undertook any meaningful steps to conduct an IPO. Moreover, Chidwhite Enterprises never established offices, never acquired any inventory, and never offered any products or services. The SEC also claims that Chidester misappropriated all of the administrative fees generated in the promotional offering and converted the fees to his own use. The SEC seeks permanent injunctions against future violations of the registration and antifraud provisions of the federal securities laws, as well as disgorgement of ill-gotten gains and prejudgment interest, against Chidester and Chidwhite Enterprises.

 
4. SEC v. Smart-Mart, Inc., Timothy A. McMurray and Bradley D. Woy
(U.S. District Court, Northern District of Texas (Dallas Division))
(SEC Contact: Spencer C. Barasch, 817-978-6425)

The SEC alleges that Smart-Mart, Inc., an Internet company based in Dallas, Texas, its founder, Timothy A. McMurray, and its president, Bradley D. Woy, conducted a fraudulent securities offering in which they raised approximately $2.4 million from approximately 720 investors located nationwide and in Canada through the sale of common stock. The SEC alleges that Smart-Mart, McMurray and Woy knowingly made false and misleading statements to investors regarding a purportedly imminent IPO, the business prospects of the company, the use of investor funds, the liquidity of the investment and projected returns on investment. Despite these representations, Smart-Mart never took any significant steps to conduct an IPO and the company had only minimal business operations. Moreover, Smart-Mart's financial and other business records reveal that McMurray and Woy used a large portion of investor funds for unauthorized business and personal expenses. In addition, McMurray failed to disclose critical information regarding his background, including his conviction on bank fraud charges for a check-kiting scheme in January 1993, for which he was sentenced to five years probation. The complaint charges the defendants with violating the securities registration and antifraud provisions of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. The SEC seeks permanent injunctive relief against Smart-Mart, McMurray and Woy, as well as disgorgement with prejudgment interest, an accounting and civil money penalties.

 
5. SEC v. PinkMonkey.com, Inc. and Patrick R. Greene
(U.S. District Court, Southern District of Texas (Houston Division))
(SEC Contact: Spencer C. Barasch, 817-978-6425)

The SEC alleges that PinkMonkey.com, Inc., an online publisher located in Houston, Texas, and Patrick R. Greene, its founder and controlling shareholder, issued a fraudulent press release that caused a 950% increase in the price of PinkMonkey's common stock. The release announced the "launch" of a new website service that could "quickly reach a significant market share in the $400+ million" study aids market; however, according to the SEC's complaint, the website was neither newly-launched nor likely to realize any significant market share. As of the date of the release, PinkMonkey had operated the website for 14 months and generated only $30 in sales. Furthermore, PinkMonkey and Greene actually anticipated needing one year to capture up to 5% of a market totaling only $160 million. Before the release, PinkMonkey's stock was thinly-traded, at a price of $1.50 or less. Within an hour after the release, PinkMonkey shares traded for as much as $4.375 per share, on heavy volume. The price peaked two days later at $17 per share, a more than 1000% increase from just two days earlier, before closing at $13.50 per share. At its zenith, PinkMonkey's market capitalization exceeded $200 million, although the company had only four full time employees and nominal sales. After PinkMonkey and Greene issued a clarifying press release, the company's stock price fell to $7.25 per share by the close of trading that day. PinkMonkey has never realized significant revenues, and its stock now trades for about $0.20 per share. Without admitting or denying the SEC's allegations, the defendants consented to the entry of permanent anti-fraud injunctions, and Greene has agreed to pay a $20,000 civil penalty.

 
6. In the Matter of WallStreet Prophet and Ricky Laine Gaspard
(SEC Contact: Spencer C. Barasch, 817-978-6425)

The SEC alleges that Ricky Laine Gaspard, a former roofing contractor and sole owner and operator of WallStreet Prophet, a stock recommendation website, disseminated false and misleading statements on the website concerning WallStreet Prophet's stock selection system, Gaspard's investing experience, and his performance history in making successful stock recommendations. Gaspard claimed WallStreet Prophet's system had "an 85% success rate" and that testimonials claimed returns of up to 860%. Gaspard has since acknowledged that his success rate claims were misleading or false and not supported by his track record. Gaspard also portrayed himself as an experienced trader with over 14 years of investing expertise, when he actually has very limited personal securities trading experience and has never received any formal securities training or license, and has never worked for a securities or investment firm. Without admitting or denying the SEC's allegations, WallStreet Prophet and Gaspard have agreed to the entry of an order requiring them to cease and desist from any future violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 and to provide a copy of the SEC's order to all current and prospective WallStreet Prophet subscribers for a period of one year from the date of the entry of the order.

 
7. SEC v. Internet Solutions for Business, Inc. and Lawrence Shaw
(U.S. District Court, Southern District of Nevada (Las Vegas Division))
In the Matter of Stuart Bockler and Imcadvisors, Inc.
(SEC Contact: Spencer C. Barasch, 817-978-6425)

The SEC alleges that Internet Solutions For Business, Inc. (ISFB), a publicly traded Internet company located in Coventry, England, and its founder and CEO, Lawrence Shaw, fraudulently promoted ISFB. ISFB held itself out as a sophisticated, high-tech Internet company with new, cutting-edge products and profitable business relationships with established "blue chip" companies. ISFB hyped these products and relationships on its website, in press releases and through reports it paid to have published, all of which were authorized by Shaw. The SEC alleges that ISFB's supposed cutting-edge products never reached the point of commercial viability. For example, a "$4.1 billion website audit service," repeatedly hyped by the company, was nothing more than a concept which was never developed. Similarly, announcements of business relationships with "blue chip" companies were either outright lies or gross exaggerations. Further, ISFB's stock price projections (300% increase over the mid-term) were without any reasonable basis and were made at a time during which the company was in a precarious financial position. Notwithstanding dire financial problems, ISFB's stock price and trading volume substantially increased contemporaneously with the company's fraudulent promotional activities. The SEC seeks permanent injunctions against future violations of the antifraud provisions of the federal securities laws, against ISFB and Shaw. The SEC also seeks a civil monetary penalty against Shaw. In a related matter, the SEC found that Imcadvisors, a New Jersey corporation, and its owner, Stuart Bockler, violated the anti-touting provisions of the Securities Act of 1933 in the promotion of ISFB stock. Without admitting or denying the SEC's findings, Imcadvisors and Bockler consented to the entry of an order requiring them to cease and desist from committing or causing any violation and any future violation of Section 17(b) of the Securities Act.

 
8. SEC v. Kenneth W. Schilling
(U.S. District Court, District of Arizona)
In the Matter of iBIZ Technology Corp.
(SEC Contact: Katherine S. Addleman, 303-844-1070)

The SEC alleges that Kenneth W. Schilling disseminated false revenue and stock price projections on the Internet for iBIZ Technology Corp., a computer company headquartered in Phoenix, Arizona. The complaint alleges that Schilling, president of iBIZ, provided false financial projections to a purported analyst for use in research reports recommending the purchase of iBIZ stock, and that Schilling approved and placed 17 press releases on iBIZ's website which contained direct hyperlinks to the analyst reports. The SEC further alleged that, in a press release, iBIZ characterized the analyst as "independent" even though iBIZ, through its investor relations firm, had agreed to pay the analyst 200,000 shares of iBIZ common stock for the report. The SEC alleged that the false financial projections, which appeared on the Internet, fueled a rise in both the price and the trading volume of iBIZ's common stock. Without admitting or denying the SEC's allegations against him, Schilling consented to the entry of an order enjoining him from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 and ordering him to pay a civil penalty of $20,000. In a related action, the SEC issued an order requiring iBIZ to cease and desist from committing or causing any violation or any future violation of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. iBIZ consented to the cease-and-desist order without admitting or denying any of the SEC's findings.

 
9. SEC v. RumorSearch.com, Inc. and Jeremy Johnson
(U.S. District Court, District of Utah)
(SEC Contact: Kelly Bowers, 323-965-3924)

The SEC alleges that RumorSearch.com, a St. George, Utah company, that purportedly researches stock rumors for paying subscribers, and its principal, Jeremy Johnson, age 25, made false statements about, and touted the stock of, Far East Ventures, Inc. (FEVI). According to the complaint, Johnson profiled FEVI as RumorSearch's "Stock Pick of the Month," sent several emails to RumorSearch subscribers and others praising FEVI, and received a total of 95,000 FEVI shares in payment for the touting. In these touts, Johnson and RumorSearch misrepresented, or omitted to disclose, material information regarding FEVI, the reliability of reported information and Johnson's receipt of compensation for the touting. While touting FEVI through his false and misleading releases, Johnson sold 66,500 FEVI shares at a profit of $315,848. The defendants consented, without admitting or denying the SEC's allegations, to the entry of final judgments permanently enjoining them from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, as well as Section 17(b), the anti-touting provision of the Securities Act of 1933, with the amounts of disgorgement and civil penalties to be determined.

http://www.sec.gov/news/headlines/internet5.htm


Modified:03/01/2001