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NICOLAS MORGAN, Cal. Bar # 166441
Securities and Exchange Commission
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows: JURISDICTION This Court has jurisdiction over this action pursuant to Sections 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(d)(1) & 77v(a), Sections 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(3)(A), 78u(e) & 78aa. Venue is proper in this district pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of conduct constituting violations of the laws alleged herein occurred within the Central District of California. SUMMARY 1. This case involves false and misleading press releases concerning Hitsgalore.com, Inc. ("Hitsgalore") issued by the company and its then-president, Stephen J. Bradford ("Bradford"). Between April 16 and May 10, 1999, Hitsgalore and Bradford issued three press releases regarding: (1) a $10 million private placement investment by Life Foundation Trust ("Life Foundation") in Hitsgalore; and (2) an agreement in principle between Life Foundation and Hitsgalore for an additional $100 million investment in Hitsgalore. Bradford drafted all three press releases. Life Foundation's Jeanette B. Wilcher ("Wilcher") conducted all negotiations on Life Foundation's behalf and assisted Bradford in drafting, reviewing and approving the April 16 press release prior to its dissemination. The press releases falsely indicated that Life Foundation would be making immediate payments to Hitsgalore in return for shares in the company, and that Life Foundation would be holding all of its Hitsgalore shares as a long-term investor. However, Life Foundation was not required to make any payments until one year after the agreements and it sold most of its Hitsgalore shares within weeks of issuance of the press releases. 2. Bradford and Hitsgalore, by engaging in the above conduct, violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Wilcher and Life Foundation, by engaging in the above conduct, aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In addition, Life Foundation, by engaging in the above conduct, violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) and (c). THE DEFENDANTS 3. Stephen J. Bradford ("Bradford") resides in Branson, Missouri. He was the co-founder, sole officer and director of Hitsgalore until it began publicly trading in March 1999, at which time he became the company's president, secretary and treasurer. On June 21, 2000, the Hitsgalore board of directors accepted Bradford's resignation from all official capacities with the company. 4. Hitsgalore.com, Inc. ("Hitsgalore") is a Nevada corporation that (after the events alleged herein) changed its name to "Diamond Hitts Productions, Inc." and is located in Irvine, California. Hitsgalore began trading publicly on March 19, 1999. Its stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is quoted on the OTCBB under the symbol "DHTT." 5. Life Foundation Trust ("Life Foundation") is a for-profit trust operated in Scottsdale, Arizona, established in November of 1995. 6. Jeanette B. Wilcher ("Wilcher"), resides in Scottsdale, Arizona. Since 1989, she has been employed by Life Foundation and is its trustee and administrator. GENERAL ALLEGATIONS A. The False and Misleading Press Releases 7. From April 16, 1999 to May 10, 1999, Hitsgalore issued three press releases that contained false and misleading claims concerning Life Foundation's proposed and actual investments in Hitsgalore. Bradford drafted the press releases. Life Foundation's Wilcher conducted all negotiations on Life Foundation's behalf and assisted Bradford in drafting, reviewing and approving the April 16 press release prior to its dissemination. The press releases caused Hitsgalore's stock price to increase from $6.3125 on April 15, 1999, to a record high of $20.125 on May 10, 1999.
8. On April 15, 1999, Hitsgalore and Life Foundation entered into a letter of intent for the private placement of Hitsgalore stock. Bradford negotiated and executed the letter of intent with Life Foundation. Under the letter of intent, Life Foundation would receive two million Hitsgalore shares subject to a one year lock-up agreement in return for its promise to pay $10 million. Even though Life Foundation was entitled to receive the two million shares immediately, the letter of intent specified that it was not obligated to pay $10 million until a year later. Nevertheless, Hitsgalore issued a press release that suggested the $10 million payment was imminent. 9. On April 16, 1999, at 10:59 a.m. EDT, Hitsgalore issued a press release entitled "Hitsgalore.com, Inc. Attracts $10 Million Investment." Life Foundation's Wilcher conducted all negotiations on Life Foundation's behalf and assisted Bradford in drafting, reviewing and approving the April 16 press release prior to its dissemination. 10. The press release stated that Life Foundation had assets "in excess of $1 billion" and that Hitsgalore had entered into a letter of intent with Life Foundation for a $10 million investment in the company in exchange for two million shares of stock. The press release also stated that Life Foundation would hold the shares pursuant to a lock-up agreement. The press release quoted Bradford that Life Foundation's investment would enable Hitsgalore to gain market share and continue development and expansion into other "technologies that are now being readied for release, many of which should occur by the end of this quarter." Finally, the press release referred to Life Foundation as being "a long-term holder of Hitsgalore.com stock." 11. The April 16 press release was misleading because it stated that Life Foundation had assets in excess of $1 billion, when in fact, the primary assets on Life Foundation's unaudited balance sheet were assignments in oil leases and an asset management agreement in a stamp collection. Life Foundation valued the oil lease assignments at $900 million and the stamp collection asset management agreement at $20 million, both of which values were inflated. The press release also suggested that Hitsgalore would receive and use a $10 million cash infusion from Life Foundation in the near term (indeed, before the end of the quarter) when, in fact, Life Foundation had no obligation to pay the money for a year. Further, rather than being a potential long-term holder of Hitsgalore stock, in its negotiations with Bradford, Life Foundation had insisted on receiving, and ultimately did receive, shares without restrictive legends. 12. On April 21, 1999, at 3:45 p.m. EDT, Hitsgalore issued the second press release, "Hitsgalore.com, Inc. Completes $10 Million Private Placement," which stated that Life Foundation had fulfilled its obligations under the letter of intent and that Hitsgalore would issue two million shares of its stock to be held under the terms of a lock-up agreement. There was no mention in the press release that Life Foundation would have one year to provide the $10 million infusion. 13. The April 21 press release was misleading because it stated that Hitsgalore had completed a $10 million private placement -- and that Life Foundation had fulfilled its obligations under the letter of intent -- when Life Foundation had yet to provide any capital to Hitsgalore and in fact had another year to pay the $10 million. Further, despite the "lock-up agreement" referenced in the press release, on April 19, two days prior to the press release, Hitsgalore's Bradford instructed its transfer agent to transfer 250,000 unrestricted Hitsgalore shares to Life Foundation. Life Foundation began selling these shares in June 1999. 14. The Defendants distributed the April 16 and 21, 1999 releases through Business Wire and posted the press releases on Hitsgalore's website.
15. On May 10, 1999, Hitsgalore and Life Foundation entered into an agreement in principle, which set the parameters for Life Foundation's additional $100 million investment in Hitsgalore. During negotiations, Life Foundation's Wilcher insisted to Bradford that Hitsgalore issue as many unrestricted shares as possible to Life Foundation. Under the agreement however, Life Foundation was to receive four million restricted Hitsgalore shares in exchange for an agreement to pay $100 million after one year. During negotiations, Life Foundation informed Bradford that the agreement would be collateralized by an unsecured debenture from a private company. 16. On May 10, 1999, at 9:56 a.m. EDT, Hitsgalore issued a press release, "Hitsgalore.com Announces Agreement in Principle for $100 Million Equity Investment." The press release stated that Life Foundation's investment was to help Hitsgalore "bring to market new technologies currently under development." The release further stated that Life Foundation will "transfer investment securities" to Hitsgalore in exchange for four million shares of company stock at $25 per share to be held pursuant to a lock-up agreement. The press release also stated that completion of the transaction was subject to execution of definitive agreements, due diligence and the confirmation of certain legal matters. The press release further stated that authorization of the issuance of the additional shares would be submitted to the shareholders for approval. Finally, the press release identified Life Foundation as a "long-term" investor. 17. Hitsgalore's and Bradford's representations in the May 10 press release were misleading in their characterization of the Life Foundation investment. The press release failed to disclose that Life Foundation's $100 million investment to help Hitsgalore "bring to market new technologies currently under development," did not have to be made for one year. Further, the press release failed to disclose that the "investment securities" to be transferred to Hitsgalore consisted only of an unsecured debenture from a private company. Moreover, the release stated that Life Foundation is a "long-term investor." In fact, in discussions before and after the May 10 release, Life Foundation's Wilcher had insisted to Bradford that as many Hitsgalore shares as possible issued to Life Foundation should be unrestricted. 18. The Defendants distributed the May 10, 1999 release through Business Wire and posted it on Hitsgalore's website.
19. The issuance of Hitsgalore's press releases misrepresented the nature of Life Foundation's investments in Hitsgalore, thereby causing a dramatic increase in the price and trading volume of Hitsgalore's securities. On April 15, 1999 (the last trading day before the first press release at issue here), Hitsgalore stock closed at $6.3125 per share on trading volume of 288,700 shares. As a result of the April 16 press release, Hitsgalore's stock price rose to $9 on April 16, a 42.6 percent increase from the previous closing price, and trading volume nearly doubled from the previous day to 544,900 shares. As a result of the April 21 press release, Hitsgalore's stock price rose from $9.625 on April 20 to $11.125 on April 21, a 15.6 percent increase. As a result of the May 10 press release, Hitsgalore's stock price soared to an all-time high of $20.125 on May 10, 1999, after the previous day's closing price of $15.50. Likewise, trading volume increased from 381,900 shares on the previous trading day to 945,600 shares on May 10 and further to 3,657,600 shares on May 11. On May 11, 1999, a Bloomberg news article publicly revealed that the Federal Trade Commission had obtained a judgment against a Hitsgalore officer for conduct unrelated and prior to his involvement in Hitsgalore. As a result, Hitsgalore's stock price decreased to $9 3/8, and, over the next year, the stock price steadily declined to under $0.50 per share.
20. Contrary to all previous statements about Life Foundation being a "long term" holder of shares subject to a lock-up agreement, between June 1 and July 15, 1999, Life Foundation sold a total of 190,000 shares of Hitsgalore stock. 21. Hitsgalore made Life Foundation's stock sales possible by (on or about April 20, 1999) instructing one of its major shareholders ("Major Shareholder") to swap 250,000 unrestricted Hitsgalore shares owned by the Major Shareholder for 250,000 restricted shares issued by Hitsgalore. Also on or about April 20, 1999, Hitsgalore instructed its transfer agent to issue two share certificates for Life Foundation: one for 1,750,000 restricted shares and one for 250,000 unrestricted shares. Life Foundation began selling the 250,000 shares in June 1999 and completed the sales by July 15, 1999. 22. Life Foundation made a profit of $1,024,418.50 on the sales, but never invested any capital in Hitsgalore and, thus, never paid Hitsgalore for those shares. FIRST CLAIM FOR RELIEF
23.Paragraphs 1 through 22 are realleged and incorporated herein by reference. 24. Defendants Hitsgalore and Bradford, by engaging in the conduct described above, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter:
25. By reason of the foregoing, Defendants Hitsgalore and Bradford violated and, unless permanently enjoined, will continue to violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. SECOND CLAIM FOR RELIEF
26. Paragraphs 1 through 25 are realleged and incorporated herein by reference. 27. Bradford and Hitsgalore, by engaging in the conduct alleged above, violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 28. Defendants Life Foundation and Wilcher, by engaging in the conduct alleged above, knowingly and substantially assisted Hitsgalore's and Bradford's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 29. By reason of the foregoing, defendants Life Foundation and Wilcher aided and abetted Hitsgalore and Bradford's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and unless restrained and enjoined Life Foundation and Wilcher are likely to aid and abet such violations in the future. THIRD CLAIM FOR RELIEF
30. Paragraphs 1 though 22 are realleged and incorporated herein by reference. 31. Defendant Life Foundation, by engaging in the conduct described above, directly or indirectly:
32. No registration statement has been filed with the Commission or has been in effect with respect to the above securities. 33. By reason of the foregoing, Life Foundation violated, and unless restrained and enjoined will continue to violate, Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) & 77e(c). PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court: I. Issue findings of fact and conclusions of law that Defendants Hitsgalore, Bradford, Life Foundation and Wilcher engaged in the alleged violations. II. Issue orders permanently enjoining Defendants Hitsgalore Bradford, Life Foundation and Wilcher, and their officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. III. Issue orders permanently enjoining Defendant Life Foundation, and its officers, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating, directly or indirectly, Sections 5(a) and (c) of the Securities Act. IV. Enter an order that Defendants Life Foundation and Wilcher disgorge all profits gained directly or indirectly from the illegal conduct, together with prejudgment interest thereon. V. Enter an order that Defendant Life Foundation pay civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act and that Defendants Bradford and Wilcher pay civil penalties pursuant to Section 21(d)(3) of the Exchange Act. VI. Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court. VII. Grant such other and further relief as this Court may determine to be just and necessary.
http://www.sec.gov/litigation/complaints/complr7249htm
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