SECURITIES EXCHANGE ACT OF 1934
Release No. 43300 / September 18, 2000
File No. 3-10287
|In the Matter of
George E. Mahfouz, Jr.
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING PENNY STOCK BAR|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted against George E. Mahfouz, Jr. (the "Respondent") pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except that he admits the jurisdiction of the Commission over him and over the matters set forth herein, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Penny Stock Bar (the "Order") by the Commission.
Accordingly, IT IS ORDERED that proceedings pursuant to Section 15(b) of the Exchange Act be, and hereby are, instituted.
On the basis of this Order and the Offer submitted by Respondent, the Commission finds1 that:
1. CancerOption.com, Inc. ("CancerOption") is a Florida corporation with operations in Scottsdale, Arizona, and Vancouver, British Columbia. CancerOption operates an Internet website focusing on alternative treatments for cancer and sells cancer-related nutritional supplements. In November 1999, CancerOption filed a Form 10-SB registration statement with the Commission that was withdrawn on March 3, 2000. CancerOption has not filed reports with the Commission pursuant to Section 13(a) of the Exchange Act. At all relevant times, CancerOption stock was quoted on the Bulletin Board (a service of the Nasdaq Stock Market, Inc.). CancerOption's stock is a penny stock within the meaning of Sections 15(b)(6) and 3(a)(51) of the Exchange Act and Rule 3a51-1 thereunder.
2. Thor Equity, is an Arizona company, with its principal place of business in Scottsdale. Thor Equity served as CancerOption's public relations and investor relations firm from October 1998 through March 2000.
3. Mahfouz, age 36, a resident of Scottsdale, Arizona, has been member manager of Thor Equity since 1997. Mahfouz was involved in almost all aspects of CancerOption's business operations including, formulating CancerOption's business plan, developing and operating CancerOption's website, drafting and issuing company press releases, negotiating contracts, hiring and firing CancerOption employees, and paying CancerOption's bills.
4. In May and June 1999, Mahfouz arranged for two analysts to draft research reports regarding CancerOption. In August 1999, the analysts issued highly favorable research reports recommending the purchase of CancerOption stock based on revenue and stock price projections for the company that were without reasonable basis. One report projected CancerOption would earn revenues based on Internet sales alone of: $5 million in 2000; $10 million in 2001; $30 million in 2002; and $120 million in 2003. The report also stated that CancerOption's share price would climb from $4 per share in 1999 to $22 per share in 2000. The second report projected CancerOption would earn revenues based on Internet sales of: $550,000 for July through December, 1999; $4.3 million for 2000; $9,675,000 in 2001; $33,862,500 in 2002; and $101,587,500 in 2003. The report also stated that CancerOption could trade at a short-term target price of $15.50 per share and a 24 month target price of $30.00 per share.
5. The projections contained in both analyst reports were without reasonable basis. The projections had no basis in prior sales revenues since CancerOption had just entered the business of Internet sales of cancer-related nutritional supplements in August 1999 and had no sources of revenue prior to that time. Moreover, CancerOption's website experienced substantial technical difficulties in 1999 and was not fully functional until February 2000, substantially impairing the company's ability to earn revenue from Internet sales. In addition, the projections exceeded estimates Mahfouz and CancerOption's Chief Financial Officer calculated in June 1999. Mahfouz knew of this information but failed to disclose these adverse facts which seriously undermined the accuracy of the projections. In fact, CancerOption only earned approximately $6,000 in revenue in 1999, a fraction of which was from Internet sales.
6. Mahfouz made the false information contained in the reports available to the analysts. Mahfouz placed the reports on CancerOption's website, where they appeared from August 1999 through January 2000. During the same time period, Mahfouz hired Internet newsletter operators ("Internet touters") referring them to the analysts' reports for information regarding CancerOption. The Internet touters redistributed false information from the analysts' reports to hundreds of thousands of potential investors. Mahfouz also drafted and issued press releases announcing that the two analysts initiated coverage of the company issuing strong buy recommendations. Mahfouz drafted and issued an August 6, 1999 press release falsely characterizing one of the analysts as the "first independent analyst" to cover the company and release an investment opinion, even though Thor Equity had agreed to pay the analyst a fee of 5000 shares of CancerOption stock to draft the report.
7. According to CancerOption's president, he told Mahfouz that he believed the projections were inflated. Mahfouz failed to correct the false projections or remove them from the Internet notwithstanding their knowledge that the projections were false and the complaints of CancerOption's president.
8. The false financial projections which appeared on the Internet fueled a dramatic rise in both the price and the trading volume of CancerOption's common stock. The price of CancerOption common stock rose from approximately $3.00 per share in June 1999 to $4.50 per share in August 1999, after CancerOption posted the analyst reports on its website. During the time the Internet touters disseminated information about CancerOption, the stock price rose from approximately $3.50 per share in September 1999 to $5.00 per share on October 26, 1999. Trading volume also was affected, wherein the average daily volume between July and October 1999, increased by more than 20 times that of prior months.
9. After Mahfouz posted the analyst reports on CancerOption's website and throughout the time the Internet touters distributed information on CancerOption, Mahfouz sold over 350,000 shares of CancerOption stock for profits of more than $180,000.
10. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, prohibit persons from, directly or indirectly, in connection with the purchase or sale of securities by use of any means or instrumentality of interstate commerce or of the mails, employing any device, scheme or artifice to defraud; making any untrue statement of a material fact or omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the sellers and purchasers of CancerOption securities. Respondent violated the antifraud provisions of the Exchange Act by posting on the Internet analyst reports with false revenue and stock price projections for CancerOption and issuing a press release characterizing a paid analyst as an independent analyst.
11. On September 11, 2000, Mahfouz and Thor Equity were enjoined from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Mahfouz was ordered to pay disgorgement of $180,038.51 and a civil money penalty of $50,000. No civil penalty was imposed against Thor Equity based on its demonstrated financial inability to pay.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Respondent's Offer.
Accordingly, IT IS ORDERED that:
Respondent be, and hereby is, barred for five years from participating in any offering of a penny stock including: (i) acting as a promoter, finder, consultant, or other person who engages in actions with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock; or (ii) inducing or attempting to induce the purchase or sale of any penny stock.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to the Offer of Settlement of Respondent and are not binding on any other person or entity in this or any other proceeding.