UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") for its complaint alleges as follows:
I. SUMMARY OF THE ACTION
1. Defendants Robert Papalia ("Papalia") and David Hunter ("Hunter") while acting as officers and/or directors of Nano World Projects Corporation ("Nano World"), disseminated several false and misleading statements about Nano World's business relationships with, and financing commitments from, other companies. The false and misleading statements are contained in press releases, unsolicited ("spam") e-mail messages, and a Form 8-K that Nano World and Papalia filed with the Commission and materially affected the price and volume of the company's stock. Additionally, Nano World through its chief executive officer, Papalia, has failed to file timely periodic reports with the Commission since December 2000.
2. Defendant Papalia has, directly and indirectly, engaged in, and unless restrained and enjoined by this Court will engage in, transactions, acts, practices, and courses of business that violate the anti-fraud provisions of Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] of the Securities Exchange Act of 1934 ("Exchange Act"). Further, defendant Papalia aided and abetted and caused Nano World's violations of the periodic reporting provisions of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, and 240.13a-13].
3. Defendant Hunter has, directly and indirectly, engaged in, and unless restrained and enjoined by this Court will engage in, transactions, acts, practices, and courses of business that violate the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
4. The Commission brings this action pursuant to the authority conferred upon it by Sections 21(d) and (e) of the Exchange Act [15 U.S.C. §§ 78u(d) and (e)], which give it authority to seek injunctions and other equitable relief against defendants who are violating the federal securities laws.
II. JURISDICTION AND VENUE
5. This Court has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].
6. In connection with the transactions, acts, practices, and courses of business described in this Complaint, each of the defendants, directly and indirectly, has made use of the means or instrumentalities of interstate commerce, of the mails, and/or of the means and instruments of transportation or communication in interstate commerce.
7. Venue lies in this Court pursuant to Section 27 of the Exchange Act. During part of the time period relevant to this Complaint, Nano World maintained its principal office in South Bothell, Washington. Moreover, Defendants Papalia and Hunter engaged in the transactions, acts, practices and courses of business constituting the violations of law within this judicial district.
8. Defendant Robert Papalia, age 57, is a resident of Vancouver, British Columbia, Canada. Papalia has been a member of Nano World's board of directors since April 11, 2000, chairman of the board since August 21, 2000, and its chief executive officer since December 12, 2000.
9. Defendant David Hunter, age 48, is a resident of Surrey, British Columbia, Canada. Hunter was Nano World's chief executive officer, president and a member of the board of directors from April 10, 2000 through August 21, 2000.
A. FALSE PRESS RELEASE ABOUT FINANCING
10. Between April 2000 and January 2001, Nano World issued several press releases announcing financing commitments from, and strategic business relationships with, other companies. Hunter or Papalia reviewed and approved the press releases before dissemination.
11. On April 20, 2000, Hunter issued a press release from Seattle, Washington entitled "Nano World Project Corporation Announces Financing." In this press release, which was reviewed and approved by Hunter prior to dissemination, the company stated that it had "negotiated a private placement financing of one million (section 144) shares at a price of $15.00 per share" and that Voyager Securities Ltd. ("Voyager") had "committed to finance the Company for fifteen million dollars effective immediately."
12. The statements in Nano World's April 20 press release were false. At the time this press release was issued, Hunter knew that Voyager had not agreed to provide Nano World with $15 million in financing immediately, but had merely agreed on a best-efforts basis to solicit subscriptions for purchase of one million shares at a price of $15 per share. Hunter participated in negotiation of, and signed the informal letter agreement setting out the limited terms of the underwriting arrangement.
B. FALSE PRESS RELEASES ABOUT PARTNERSHIP WITH FIAT
13. From September 2000 through January 2001, Nano World issued a series of press releases falsely and misleadingly touting a "strategic partnership" with Centro Ricerche Fiat ("Fiat"), the research and development arm of the Fiat Group, and representing that it had received related financing commitments from third parties. Each of these press releases was reviewed and approved by Papalia.
14. In five press releases issued over the Business Wire on September 12, 2000 from Seattle, Washington, on September 25, 2000, November 21 and 22, 2000, and January 22, 2001 from New York, Papalia repeatedly represented that Nano World had a viable "long-term contract" with Fiat and characterized the company's relationship with Fiat as a "strategic partnership" and a "joint venture" that would "speed commercialization of an advanced new technology."
15. The statements in the foregoing press releases were false or materially misleading for several reasons. Papalia knew that Nano World's relationship with Fiat was not a "partnership" and was contingent on the ability of Nano World to locate and obtain at least $3,000,000 in financing, a fact that Papalia failed to disclose in the press releases.
16. Although Nano World announced in its January 22, 2001 press release that it was current on all obligations to Fiat, Papalia knew that Nano World had not made its second payment of $300,000 to Fiat, which was due on December 31, 2000, and that Nano World did not have the current ability to make the other payments required by the contract. Nano World made only two of the twelve payments that it was required to make under its agreement with Fiat.
C. FALSE PRESS RELEASES ABOUT FINANCIAL BACKING
17. In addition to touting Nano World's new partnership with Fiat, the press release issued on September 12, 2000 represented that the new alliance had "financial backing from Venture Capital USA Inc." And in a September 27, 2000 press release, Nano World stated that the company had "the backing of a strong and supportive group of shareholders, international partners and the financial community[.]"
18. Papalia reviewed and approved both press releases. Papalia knew these statements were false and misleading because Nano World did not have any binding financing commitments with Venture Capital USA or the financial community at the time it issued the foregoing press releases.
D. FALSE PRESS RELEASE ABOUT EUROINKS AGREEMENT
19. On November 22, 2000, Nano World issued a press release and filed a Form 8-K with the Commission announcing that it had acquired a company named Euroinks s.r.l. ("Euroinks"). The headline of the release, a copy of which was filed with the Form 8-K, stated: "Nano World Acquires Euroinks, Adds Revenues, Significant Client Base, Strong Business Synergies." In addition to signing the Form 8-K, Papalia reviewed and approved the Euroinks press release prior to its public release.
20. On November 29 and 30, 2000, Papalia also participated in a massive "spam" e-mail campaign to further distribute Nano World's press release concerning the Euroinks acquisition.
21. Papalia knew the November 22 press release and Form 8-K were false and misleading because Nano World never acquired Euroinks. Papalia knew from his negotiation of the agreement that Nano World had a mere tentative agreement with Euroinks that was non-binding, subject to further negotiation and formalization of terms, and contingent upon Nano World's procuring $1.75 million in financing for the deal within four months, which facts were not disclosed in the press release and Form 8-K.
E. FALSE PRESS RELEASE ABOUT FREFAX AGREEMENT
22. On January 30, 2001 Nano World issued a press release announcing an immediate loan from, and a broader financing "agreement in principle" with, Frefax, Inc. ("Frefax"). While stating that the agreement with Frefax was subject to further formalization and shareholder approval, the press release stated that, in consideration for Nano World's execution of the agreement, Frefax had "committed itself to providing Nano World with an immediate loan of $500,000[.]"
23. The January 30 press release further represented that pursuant to the parties' agreement, Nano World would retain a 15% interest in the business ventures being financed by Frefax, as well as full ownership rights to its own technology. Papalia reviewed and approved the Frefax press release before it was issued.
24. Papalia knew the Frefax press release contained false and misleading statements and omissions. Papalia knew from his negotiation of the agreement that the "agreement in principle" referenced in the press release was a letter of intent that Frefax did not sign. Moreover, Papalia knew that Frefax did not contractually obligate itself to make an immediate loan of $500,000 to Nano World.
25. In addition, Papalia knew that contrary to the press release's representations, the Frefax arrangement did not allow Nano World to retain a 15% interest in profits or to retain ownership interests in its technology. Rather, the letter of intent provided Frefax with an option to purchase Nano World's remaining 15% interest in profits as well as its ownership interests in technology - i.e., all of Nano World's remaining assets.
26. Papalia also failed to disclose that the entire Frefax arrangement was contingent on Frefax's ability to quickly locate nearly $4.8 million to fund Nano World's financial obligations, when he knew that Frefax's financial statements showed only $85 in the bank and no discernable assets or prospects.
27. Accordingly, Papalia materially misrepresented the nature, terms, enforceability and viability of its tentative agreement with Frefax in Nano World's January 30, 2001 press release.
28. During the time period when Papalia was issuing these false and misleading press releases, he sold at least 62,000 shares of Nano World stock for proceeds of approximately $30,522.50.
F. PRESS RELEASES INCREASE TRADING ACTIVITY
29. Contemporaneously with, and apparently in response to, several of the false and misleading statements made by Nano World, the price and/or volume of the company's stock increased significantly.
30. For example, compared to the average daily price and volume for the five-day period preceding the April 20, 2000 press release, the closing price of Nano World stock on April 20 rose by approximately 14% from $17.68 to $20.13, with volume increasing approximately 477% from 13,580 to 78,400 shares per day.
31. Compared to the average daily price and volume for the five-day period preceding September 12, 2000, the date on which Nano World announced its partnership with Fiat, the closing price of Nano World stock on September 12 rose by approximately 40% from $8.19 to $11.50, with volume increasing approximately 257% from 30,320 to 108,200 shares per day.
32. When Nano World announced the acquisition of Euroinks, the price of its stock increased from $8.00 on November 21 to $8.47 on November 22, 2000 and trading volume increased from 600 shares on November 22, 2000 to 28,900 shares within two days. From November 28 to November 30, 2000, the dates the Euroinks press release was republished in the Internet spams, the trading volume of Nano World increased from 13,900 to 124,6000 shares.
33. When Nano World announced the agreement with Frefax, the volume of shares traded increased from 126,800 shares on January 30, 2001, to 275,000 shares on January 31, 2001, the day after the announcement.
G. NANO WORLD'S DELINQUENT FILINGS
34. Nano World, whose common stock is registered under Section 12(g) of the Exchange Act, is obligated to file annual and quarterly reports with the Commission under Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.
35. Notwithstanding its continuing obligation to file annual and quarterly reports with the Commission, Nano World filed its last report with the Commission, a Form 10-QSB for the quarter ending October 31, 2000, on December 15, 2000. Accordingly, Nano World has failed to file two annual reports for the fiscal years ending April 30, 2001 and April 30, 2002. Nano World has also failed to file quarterly reports for the quarters ending January 31, July 31, and October 31, 2001, January 31, July 31, and October 31, 2002, and January 31, 2003.
36. Papalia, as Nano World's chief executive officer, was responsible for the company's reporting obligations during the entire time period for which the company failed to file mandatory periodic reports with the Commission. Papalia knew of Nano World's obligation to prepare and file quarterly and annual reports because he participated in the preparation and signing of earlier periodic reports by Nano World. Papalia knowingly caused and aided and abetted Nano World violations of the reporting provisions by failing to prepare and file the quarterly and annual reports during 2001, 2002 and 2003.
37. Nano World is also obligated to file reports on current events on Form 8-K with the Commission under Section 13(a) of the Exchange Act and Rule 13a-11. Rule 12b-20 requires that in addition to information required to be in a report, there shall be included such further material information as is necessary to make the required statements not misleading.
38. As discussed above in paragraphs 19 and 21, Papalia knowingly caused and aided and abetted Nano World's violations of Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 by causing Nano World to file a false and misleading Form 8-K with the Commission on November 22, 2000.
FIRST CLAIM FOR RELIEF
(Violations by Papalia and Hunter of Exchange Act Section 10(b) and Rule 10b-5)
39. Paragraphs 1 through 38 are hereby realleged and incorporated by reference.
40. Defendants Papalia and Hunter, with scienter, in connection with the purchase or sale of securities, by the use of any means or instrumentality of interstate commerce or of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omitted 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 (c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers or sellers of such securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
41. By reason of the foregoing, Defendants violated, are violating, and unless restrained and enjoined will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
SECOND CLAIM FOR RELIEF
(Papalia Aided and Abetted Nano World's Violations of
42. Paragraphs 1 through 38 are hereby realleged and incorporated by reference.
43. Nano World violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder by filing a Form 8-K with the Commission that contained materially false and misleading information and omissions.
44. In addition, Nano World violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder by failing to file annual reports for the fiscal years ending April 30, 2001 and April 30, 2002, and failing to file quarterly reports for the quarters ending January 31, July 31, and October 31, 2001, January 31, July 31, and October 31, 2002, and January 31, 2003.
45. Papalia knowingly provided substantial assistance in the conduct described in paragraphs 41 through 42.
46. By reason of the foregoing, Papalia aided and abetted Nano World's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 and unless restrained and enjoined will continue to do so.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
Find that the Defendants, and each of them, committed the violations alleged.
Enter an Injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining defendants Papalia and Hunter from violating, directly or indirectly, the provisions of law and rules alleged in this complaint.
Order defendants Papalia and Hunter to pay civil penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)] in an amount to be determined by the Court.
Enter an Order barring defendants Papalia and Hunter from serving as an officer or director of any publicly held company pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)].
Grant such other relief as this Court may deem just or appropriate.
Dated this 17th day of March 2003.