UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") herby moves for an order approving the Commission's Proposed Plan for Distribution of Disgorged Profits ("Plan"), a copy of which has been filed contemporaneously with this Motion. In support of its Motion, the Commission submits the following points and authorities.
1. On March 7, 2001, Plaintiff filed its Complaint ("Complaint") seeking a permanent injunction and other relief against Defendant Lloyd E. Wollmershauser a/k/a the PennyStockMan ("Wollmershauser"). The Complaint alleged that Wollmershauser violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77e(a), 77e(c), and 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder, and Sections 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers Act") [15 U.S.C. §§ 80b-6(1) and (2)] in connection with trading in the common stock of Thermotek International, Inc. ("TTKI").
2. The Complaint alleged that Wollmershauser, age 55, of Eastlake, Ohio, was the sole proprietor and operator of PennyStockMan, an Internet web site and newsletter service primarily devoted to microcap (penny) stock recommendations and trading techniques. Acting through his PennyStockMan web site, newsletters, and private e-mails, Wollmershauser provided investment advice from approximately April 1999 to July 2000.
3. The Complaint further alleged that TTKI is a Delaware corporation based in Burlington, Iowa claiming to have developed technology that takes organic substances from waste and converts them into useable products such as fuel, charcoal, and electricity. On June 28, 2000 TTKI began trading for the first time in the over-the-counter market with market makers published in the National Quotation Bureau pink sheets.
4. The Complaint alleged that between March and June 2000, Wollmershauser obtained 2,016,000 shares of TTKI stock from the issuer and, during the same period, touted TTKI stock to his advisory clients in his PennyStockMan web site, newsletters, and in private e-mails. The Complaint alleged that Wollmershauser falsely stated to his advisory clients that he had inside information allowing him to project TTKI's price; that the TTKI stock price would likely rise to $20 by the end of the first day of trading; and that he was "long on TTKI" and did not intend to sell shares of TTKI stock that he owned in the short term. The Complaint further alleged that Wollmershauser recommended that his advisory clients place limit buy orders for TTKI common stock up to a price of $5.05 per share but, failed to inform them that he held over two million shares of TTKI stock and that he had placed limit sell orders for over one million shares of TTKI stock that were calculated to take advantage of his advisory clients' limit buy orders.
5. The Complaint alleged that on June 28, 2000, TTKI opened at $4.75 per share and closed at $4.00 on volume of 175,376 shares, and that most of the trading in TTKI stock on June 28, 2000 was between $4.00 and $5.00 per share. The Complaint alleged that on June 29, 2000, TTKI rose to a high of $4.75 per share and closed at $1.50 on volume of 279,655 shares. The Complaint further alleged that on these same dates, while his advisory clients bought TTKI stock based upon his recommendation, Wollmershauser sold 97,750 shares for proceeds of $436,660. That Complaint alleged that after June 29, 2000 the price of TTKI stock fell to below $1.00 per share.
6. On December 18, 2000, without admitting or denying the allegations in the Complaint, Wollmershauser consented to the entry of a Final Judgment and Order Granting Permanent Injunction and Other Relief ("Final Order"). Among other things, Wollmershauser agreed to disgorge $436,660 plus prejudgment interest thereon, representing his illicit trading profits from his sale of 97,750 shares of TTKI common stock on June 28, 2000 and June 29, 2000. Based on Wollmershauser's demonstrated financial inability to pay the entire disgorgement, the disgorgement in excess of $205,000 was waived by the Commission. On March 14, 2001, the Court entered the Final Order against Wollmershauser, ordering him to disgorge $205,000. Wollmershauser has satisfied his disgorgement obligation under the terms of the Final Order against him by paying $205,000 to the Office of the Comptroller, Securities and Exchange Commission, which has been forwarded to the United States Treasury.
7. Courts have held that the Commission is vested with broad discretion in fashioning distribution plans for funds like the disgorgement fund in this case. SEC v. Certain Unknown Purchasers, 817 F.2d 1018 (2d Cir. 1987). See also SEC v. Levine, 881 F.2d 1165 (2d Cir. 1988) (Commission's discretion includes flexibility to decide which claimants receive payments and which do not); SEC v. Qualified Pensions, Inc., 1998 U.S. Dist. LEXIS 942, at * 14-*18 (approving proposed distribution as "fundamentally fair" despite "multiple and conflicting interests"); SEC v. Wang, 944 F.2d 80, 84 (2d Cir. 1991) (court will approve distribution plan if it is "fair and reasonable").
8. The Commission believes that the Plan submitted to the Court represents a fair and reasonable distribution of the disgorgement proceeds. Because of the limited disgorgement that the Commission staff was able to obtain from the defendant, the Commission staff sought to create a Plan that does not require the use of a Receiver, as the costs associated with a Receiver would significantly diminish the funds to be distributed.
9. According to the trading records obtained by the Commission, as alleged in the Complaint, the majority of the purchases of TTKI common stock on June 28, 2000 and June 29, 2000 were between $4.00 and $5.00 per share. The proposed Plan allows all traders who bought TTKI common stock on June 28, 2000 and June 29, 2000 to recover a pro rata amount based on the amount available in the Disgorgement Fund divided by the total amount of net shares purchased by all Eligible Claimants (the number of shares of TTKI common stock purchased during those dates is reduced by the number of shares sold).
10. Although a trader who purchased TTKI common stock for $4.00 per share will recover the same amount per share as a trader who paid $5.00 per share, the plan is fair and reasonable. If the Commission staff had to calculate the amount of recovery based on each individual trader's specific purchase price and sales price (if any), and then calculate that amount against the available Disgorgement Fund, the time and complexity involved would force the Commission to hire a Receiver and significantly reduce the amount available for distribution. A more simplified calculation for distribution will maximize the funds available for claimants and minimize the administrative costs to distribute those funds. The Plan as fashioned by the Commission is fundamentally fair and fits squarely within the Commission's discretion.
WHEREFORE, the Commission respectfully requests that the Court grant its motion for approval of its Proposed Plan of Distribution of Disgorged Profits.
DATED this ________ day of _____________, 2001.
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing Motion for Approval of Proposed Plan For Distribution of Disgorged Profits and Memorandum in Support Thereof has been served by first-class U.S. mail to counsel for the Defendant at the following address:
Christopher M. Ernst, Esq.
On this ____ day of June, 2001.