THOMAS A. ZACCARO, Cal. Bar No. 183241
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") for its Complaint alleges:
JURISDICTION and VENUE
1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1), and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(b), 77t(d)(1) and 77v(a), and Sections 21(d)(1) and (3), 21(e), and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d)(1) and (3), 78u(e) and 78aa. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of facilities of a national securities exchange in connection with the transactions, acts, practices, and courses of business alleged herein.
2. Venue is proper in this district and division because certain of the acts alleged herein occurred in, and certain of the defendants transact business in, this district.
3. The Commission brings this action to stop a classic pump and dump scheme orchestrated by defendant Marcelino Colt, a Panamanian resident, to manipulate the market for securities in New Energy Corp. ("New Energy"). In early 2001, Tor Ewald started MegaWatt Energy Corporation ("MegaWatt") to manufacture and sell solar generators that used high concentration photovoltaic ("HCPV") technology. Even before MegaWatt generated any revenues, Ewald let it be known -- to unidentified Mexican bankers -- that he was looking for investors. Ewald connected with Marcelino Colt, who poses as an investment banker affiliated with Panamanian-based Geneva Financial Ltd. Ewald and Colt used a "reverse merger" with a publicly traded shell corporation to create New Energy as publicly traded company that was allegedly the marketing agent for MegaWatt's HCPV generators.
4. New Energy and Colt hired Magnum Financial Group LLC, a financial communications firm, and Colt provided Magnum's president, Michael Manahan, with a draft research report that touted New Energy shares as "one of the highest recommended BUYS ever published" (emphasis in original). After themarket closed on December 18, 2001, Manahan published the research report on the Internet as the view of "Stratos Research LLC," and issued a press release from New Energy announcing the initiation of "coverage" by Stratos. The published research report contained several false and misleading statements, particularly in view of the fact that New Energy and its "strategic partner" MegaWatt had no revenues, no production facilities, and no firm agreements of any significance with either a supplier or a purchaser. When the market opened on December 19, the price of New Energy stock increased by almost fifty percent, and Colt and Geneva Financial, through nominees, began selling New Energy shares into the hyped market.
5. The selling continued after New Energy, Colt, and Manahan issued a press release on January 3, 2002, which falsely announced that New Energy had signed a ten year contract to sell HCPV solar energy to a large agricultural concern, and contained a made-up quote from the President of New Energy's customer praising the deal. On January 10, 2002, Colt repeated to several broker-dealers at least two of the false and misleading comments that appear in the research report, during a teleconference about New Energy that had been put on by Magnum. On January 18, the Commission suspended trading in New Energy shares. Between December 19, 2001, and January 17, 2002, Colt through nominees sold over 50,000 New Energy shares, and derived over $450,000 in profits from all of the sales of New Energy shares. Almost immediately after the trades cleared, Colt caused the proceeds from the sales of New Energy shares to be transferred from the nominee's brokerage account to its bank account, and then disbursed to the relief defendants and others.
6. The Commission alleges that the conduct of Colt, Geneva Financial, Ewald, New Energy, Manahan, and Magnum violated the antifraud provisions of the securities laws, and seeks injunctive relief, disgorgement of ill-gotten gains, prejudgment interest, and civil penalties. The Commission alleges that the third-parties who received the proceeds of the sale of New Energy shares would be unjustly enriched if permitted to keep the proceeds of the illegal conduct, and requests that the Court order the relief defendants to disgorge the monies they received.
7. New Energy Corp. ("New Energy") is a Utah corporation with offices in San Diego, California. New Energy does not manufacture any products and has no revenues. New Energy has a marketing agreement with MegaWatt Energy Corp. ("MegaWatt"), a California corporation that plans on manufacturing solar generators that will use high concentration photovoltaic ("HCPV") technology. MegaWatt does not have any revenues or an operable manufacturing facility.
8. Tor Ewald, age 36, resides in La Jolla, California. Ewald owns the majority of the stock of New Energy and is its Secretary and Treasurer. Ewald serves as the Vice President of Sales and Marketing for both New Energy and MegaWatt.
9. Geneva Financial Ltd. ("Geneva"), a Nevis corporation, holds itself out as an investment banking firm.
10. Marcelino Colt ("Colt"), is a Panamanian citizen who resides in Panama and Mexico. Colt is the President, Secretary, and Treasurer of Geneva.
11. Magnum Financial Group LLC ("Magnum"), a California limited liability company based in Los Angeles, California, is a financial communications, corporate development, and financial advisory firm. Magnum is affiliated with Stratos Research L.L.C. ("Stratos"), a financial research firm that focuses on micro-cap companies. Stratos publishes its research on its Internet site at www.stratosresearch.com. Magnum and Stratos share the same address and telephone numbers.
12. Michael S. Manahan, age 46, a resident of Harbor Springs, California, is the President of Magnum.
13. Hector Campa, is a resident of San Ysidro, California, and received proceeds from the sale of New Energy shares from Colt's nominees. Campa is associated with Geneva.
14. Barclay Davis, age 54, is a resident of Las Vegas, Nevada. Barclay is married to Loretta Davis, and they are the grantors and trustees of the BLD Trust. In 1997, Barclay pled guilty to one count of conspiracy to commit securities and bank fraud, and one count of money laundering. In 1998, Barclay was enjoined from violating the antifraud, registration, manipulation, and reporting provisions of the federal securities laws.
15. Loretta Davis, age 58, a resident of Las Vegas, Nevada, is married to Barclay Davis.
16. BLD Trust is a revocable family trust created on March 15, 1999, by Barclay and Loretta Davis, who are its sole trustees. BLD Trust received New Energy shares from Colt and Geneva's nominee, and sold shares during the manipulation.
17. Burke T. Maxfield, age 52, a resident of Kaysville, Utah, was the President of UbetIgolf Corp. prior to the reverse merger that created New Energy. Maxfield transferred New Energy shares to Colt and Geneva, and received from Colt and Geneva proceeds from the sale of New Energy shares.
18. York Chandler resides in Salt Lake City, Utah. Chandler issued instructions to New Energy's transfer agent to transfer shares to Geneva, and received from Colt and Geneva proceeds from the sale of New Energy shares.
THE FRAUDULENT SCHEME
The Defendants Create "New Energy"
19. In April 2001, Tor Ewald incorporated MegaWatt Energy Corporation as a California corporation to manufacture and market solar generators based uponhigh concentration photovoltaic ("HCPV") solar cell technology. After incorporating the company, Ewald let it be known to unidentified bankers in Mexico that he was interested in finding investors for his solar cell company.
20. In or about August 2001, Ewald was contacted by and met Marcelino Colt, who identified himself as an investment banker based in Panama affiliated with a company called Geneva Financial. Colt told Ewald that he represented international interests and had a group of investors interested in Ewald's solar energy concepts.
21. In September 2001, Ewald formed a new California corporation named New Energy Corp. ("NEC") to be a sales and marketing company that would sell the HCPV generators that MegaWatt planned to manufacture. Ewald was the sole shareholder of NEC.
22. Colt and Ewald met in Mexico where Ewald discussed his solar energy concepts. Ewald took Colt to a warehouse in Tijuana where Ewald has stored parts that he had acquired over time. These pieces allegedly can be used to manufacture HCPV generators. Colt expressed interest in financing a public company, and proposed that Ewald agree to a reverse merger of NEC into a shell company that Colt would provide, named UbetIgolf Corp. UbetIgolf Corp. is a Utah corporation that had listed its shares for trading on the OTC Bulletin Board. Colt also proposed, and Ewald agreed, that Ewald contribute the parts stored in the warehouse in Tijuana to the merged company.
23. On or about November 17, 2001, Ewald and one of his associates in MegaWatt, Donald Nixon, met with Colt in California. Colt produced an agreement for the acquisition of NEC by UbetIgolf, which provided that UbetIgolf would acquire 100% of the issued and outstanding shares of NEC in return for 1,667,000 shares of UbetIgolf. Ewald signed the documents for UbetIgolf to acquire NEC. Colt also produced a "Joint Marketing Agreement" between NEC and MegaWatt. This was the first time that Ewald had seen such an agreement,which provided that NEC would receive 40% of the profits on sales of MegaWatt products and MegaWatt would receive 60% of any profits. Ewald executed the Joint Marketing agreement on behalf of NEC, and Nixon signed on behalf of MegaWatt.
24. Colt, and Geneva Financial, never discussed compensation with Ewald, and Colt did not have any agreement to be compensated for his services by Ewald, NEC, or MegaWatt. Ewald did not ask how Colt or Geneva Financial were being compensated for arranging the transaction between UbetIgolf and NEC.
25. On or about November 18, 2001, the Board of Directors of UbetIgolf approved by unanimous written consent the acquisition of NEC, resolved to effect a six for one stock split of UbetIgolf shares, and appointed John McDonald as President of the company and Ewald as Secretary and Treasurer. After Ewald took control of UbetIgolf, he changed the name of the company to New Energy Corp. ("New Energy"), and applied for the new stock symbol "NECO." Ewald also received an additional 6 million shares of stock from Burke Maxfield, one of the relief defendants and the former President of UbetIgolf.
26. After the reverse merger was complete and the shares were split six for one, the former owners of UbetIgolf retained over 3.5 million shares of freely trading New Energy stock.
27. New Energy began trading under the new symbol NECO on the OTC Bulletin Board on December 13, 2001. At the time it began trading, New Energy had no office space, no revenues, and no paid employees. New Energy's marketing partner, MegaWatt, similarly had no revenues, and it had no assets, no production facility, and no approved product.
Colt Receives 800,000 Shares of New Energy Stock
28. After the reverse merger, Colt received a total of 800,000 shares of New Energy stock. The stock was transferred to Geneva Financial at the directionof Burke T. Maxfield, the former President of UbetIgolf, and York Chandler.
29. On or about December 10, 2001, Geneva entered into an agreement with Peregrine Financial Group, Inc. ("Peregrine"). The President of Peregrine is an associate of Colt. Under the agreement, Peregrine agreed to hold 300,000 shares of New Energy stock that it received from Geneva, and to deliver the shares or the proceeds of the sale of any shares as instructed by Geneva.
30. On December 14 and 20, 2001, Colt caused 300,000 shares of New Energy stock to be deposited into Peregrine's brokerage account. On or about January 3, 2002, Colt caused Peregrine to transfer 10,000 shares of New Energy stock to another account at the same brokerage firm held in the name of BLD Trust.
31. On December 28, 2001, 500,000 shares of New Energy stock was deposited into a brokerage account in Dallas, Texas, held in the name of Geneva.
Colt Causes the Issuance of a
32. At some time in early December, Colt contacted Ewald about hiring Magnum to provide investor relations services for New Energy, including issuing press releases. Ewald agreed to have New Energy hire Magnum. Colt volunteered to meet with Magnum on New Energy's behalf and to pay for its services in December. Ewald knew that Colt and Magnum would be issuing press releases about New Energy.
33. On or about December 4, 2001, Colt contacted Michael Manahan, the President of Magnum, and asked him to provide investor relations services for New Energy. Manahan had not met Colt before this, and had not had any dealings with either Colt or any company affiliated with Colt, including Geneva. Colt provided Manahan with a research report on New Energy that allegedly had been written by an affiliate of Geneva named Barrington Research. Manahan did not have any prior knowledge of Barrington Research. At some point thereafter, Colt askedManahan to prepare and distribute a research report on New Energy, which contained a "buy" recommendation, based upon the Barrington Research report that Colt had provided to Manahan. Manahan agreed to issue a report on New Energy.
34. After the market closed on December 18, 2001, just five days after New Energy stock began trading under the symbol NECO, Magnum published a research report on New Energy. The report identifies itself as being produced by Stratos Research LLC. Stratos Research is affiliated with Magnum. The report was published on Stratos Research's Internet site. On the same date, New Energy through Magnum issued a press release announcing that Stratos Research had initiated coverage on it. The press release was published on the Internet, and contained a link to the research report at Stratos Research's Internet site. Neither the press release nor the research report disclosed that Magnum was affiliated with Stratos Research. The research report disclosed that Stratos Research "was paid a fee by New Energy Corporation for preparing this report." In fact, Magnum was paid a total of $8,000 after the report was published, by Colt through a nominee, from proceeds from the sale of New Energy stock by Colt's nominees.
35. The research report recommended New Energy as a "buy," and stated that "`NECO' promises to be one of the fastest growing stock companies of the next 36 months! This is one of the highest recommended BUYS ever published." (Emphasis and italics in original). When the market opened on December 19, 2001, the price of New Energy stock opened at $7.50 per share, an increase of over 57% from the prior day's closing price. Trading volume in NECO increased 453% from 5,400 shares on December 18 to 29,900 shares on December 19, 2001.
36. Beginning on December 19 and continuing through January 2, 2002, Colt caused at least 35,000 shares of New Energy stock to be sold through Peregrine's account, at prices ranging from $5.63 to $7.65 per share. Between December 21 and January 2, 2002, Colt caused over $300,000 to be wired from Peregrine's brokerage account to its bank account.
37. The research report contained several false and misleading statements about New Energy. The false and misleading statements appear in the report prepared by Geneva's affiliate Barrington that Colt gave to Manahan. A comparison of the reports shows that Manahan essentially copied the report supplied by Colt, changing the heading to put it under the name of Stratos Research, adding the "buy" recommendation, and making some minor stylistic changes.
38. The research report claimed that New Energy had over $50 million in orders "in hand." According to the research report, the value of New Energy's orders "exceeds the reported revenues" of another Nasdaq-listed solar energy company whose market capitalization is "approaching $600 million." This statement was false and misleading because, as of December 18, 2001, New Energy had virtually no orders. New Energy's alliance partner, MegaWatt, had at best received approximately $36 million in potential orders prior to New Energy's incorporation, and no orders since the Joint Marketing Agreement had been signed. Even if New Energy were entitled to its share of MegaWatt's preexisting orders, its 40% share of profits would only provide it with the profits on 40% of the revenues, or approximately $13 million of revenue.
39. The research report claimed that New Energy through its relationship with MegaWatt "has all service provider contracts in-place to implement the market emergence of the MegaWatt energy system product line" and lists several providers. The research report further claimed that "Various Major Utility Companies - purchase all surplus energy generated by the New Energy solar generator systems." In fact, MegaWatt did not have service provider contracts in-place with the companies identified in the research report. Further, neither MegaWatt nor New Energy had manufactured and sold a single solar generator, and no utility companies, major or otherwise, were purchasing any energy generated by any New Energy solar generator system. In fact, neither New Energynor Megawatt had derived any significant revenue from any source.
40. The research report claimed that New Energy through its association with MegaWatt has "purchase orders in-place for the delivery of over 100MW of Silicone and Gallium Arsenide HCPV solar cells from the only two volume-manufacturers of HCPV solar cells in the world: Spectrolab Corp. and SunPower Corp." The report claimed that New Energy had "in effect, ordered the HCPV solar cell output for the world for the next two years," providing an advantage over potential competitors and giving New Energy a "virtual lock on the HCPV solar energy market." This claim was repeated in another paragraph of the report which asserted that New Energy would benefit from MegaWatt's claimed "virtual monopoly position and lock on current worldwide production of HCPV solar cells" (italics in original). These claims were false and misleading because, in fact, neither New Energy nor MegaWatt had purchase orders with either Spectrolab or SunPower for the delivery of any significant number of solar cells; it would take over 6,100,000 solar cells to produce 100 megawatts of energy. In fact, during twelve months preceding the publication of the report, MegaWatt had made only one purchase, of 50 solar cells, from Spectrolab, at a cost of approximately $600. During the same period, MegaWatt had made one purchase, of 50 solar cells, from SunPower, at a cost of approximately $600. New Energy had not purchased any solar cells from either Spectrolab or SunPower. Neither MegaWatt nor New Energy had a monopoly position or lock on any HCPV solar cell production.
41. The research report claimed that New Energy's "strategic partner" MegaWatt "is currently working with the City of Los Angeles and the Department of Water and Power of the City of Los Angeles" "to prepare the city for the Company's HCPV Solar Energy Generators" and "is the only solar energy related `Green Team Partner.'" This statement was false and misleading. In fact, the LA DWP program is called "Green Power Partner," and neither MegaWatt nor New Energy was a member of the program. The only proposal that MegaWatt hadsubmitted to the LA DWP had been rejected before August 2001. At the time the report was issued, there was no working relationship between either MegaWatt or New Energy and the LA DWP.
42. The research report claimed that New Energy had a joint venture partnership with an entity called the "Energy Company of Mexico," and that the Energy Company of Mexico "is negotiating with 107 Coca Cola Bottlers in the Republic of Mexico for 100 Therms per hour generators at $928,000 each. New Energy Corporation forecasts total sales of its energy systems for an aggregate 150 Megawatts at $ 1 Billion by year end 2003." (Emphasis and italics in original). The purported contract with 107 Coca Cola bottlers would allegedly have a value in excess of $92 million. In fact, any negotiations have been on hold since the September 11, 2001 terrorist attacks on the United States, and Coca Cola halted construction on all bottling facilities because of an attack on a facility in India immediately after September 11, 2001. New Energy admitted that no agreement with Coca Cola bottlers can be reached until the construction halt is lifted.
43. The person or persons responsible for writing and publishing the research report on New Energy, including New Energy, Ewald, Colt, Geneva Financial, Manahan, and Magnum, knew or were reckless in not knowing, that the above-referenced statements in the research report were false or materially misleading.
New Energy Issued a False and Misleading
44. On or before January 3, 2002, Colt supplied to Manahan and Magnum a draft press release concerning a purported ten year contract between New Energy and an entity described as "the third-largest agricultural concern in the United States." Magnum issued the press release at the market opening on January 3, 2002. The press release stated that New Energy had entered into a ten yearcontract, and stated that the agricultural concern planned to increase its solar electricity needs to 100 megawatts during that time. The press release included a quote from the President of the agricultural concern. The press release was false and misleading. In fact, the term of the contract was only for five years, with an option on the part of the purchaser to increase it another five years. The agricultural concern only plans to increase its solar energy to 10 megawatts, not 100 megawatts. Finally, the President of the agricultural concern did not supply the quote contained in the press release.
45. The press release identified New Energy as the source of the release, and Manahan of Magnum Financial as the contact for additional information. Magnum published the report via Business Wire. The report was also posted on New Energy's Internet site at www.newenergy.com.
46. The January 3, 2002 press release had a positive effect on the price of New Energy shares. New Energy stock closed at $7.65 per share on January 2, before the press release was issued. New Energy stock opened at $8.125 per share on January 3, a 6 % increase, and traded as high as $8.25 per share before closing at $7.75 per share.
47. Between January 3 and January 9, Colt caused Peregrine to sell 7,425 shares of New Energy stock, for proceeds of approximately $59,000.
48. Between January 3 and 14, 2002, Barclay Davis and Loretta Davis caused the BLD Trust to sell the 10,000 New Energy shares that it had received from Colt through Peregrine, at prices ranging from $7.70 to $9.30 per share, for proceeds of approximately $79,000.
49. New Energy, Ewald, Colt, Manahan, and Magnum, knew or were reckless in not knowing that the January 3, 2002 press release was false and materially misleading.
Colt Makes Misrepresentations About New Energy
50. On January 10, 2002, Magnum organized and held a conference call on New Energy. Colt participated in the call, as did four brokers from registered broker-dealers. During this call, Colt stated that New Energy had between $50 and $60 million in orders in hand. Colt also stated that the deal referred to in the research report that was being negotiated between New Energy, its partner the Energy Company of Mexico, and107 Coca Cola Bottlers in Mexico, had been signed. These statements were false and misleading. New Energy did not have such new orders. The deal with the Coca Cola Bottlers in Mexico had not been signed.
51. Colt knew, or was reckless in not knowing, that the statements made during the January 10, 2002 call about New Energy were false or misleading.
Colt Causes the Proceeds from the Sale of New Energy
52. Beginning on December 21, 2001, and continuing as additional stock sales cleared, Colt caused the proceeds of the sale of New Energy stock in the Peregrine brokerage account, in the amount of approximately $416,000, to be wired to a bank account controlled by Peregrine called the "New Energy escrow account." Beginning on December 22, 2001, and continuing as additional monies were transferred into the bank account, Colt caused the proceeds of the sale of New Energy stock to be paid out to the relief defendants.
53. During the period from December 22, 2001 to January 18, 2002, Colt and Geneva instructed Peregrine to send approximately $120,020 from the New Energy escrow account to relief defendant Hector Campa.
54. During the period from December 22, 2001 to January 18, 2002, Colt and Geneva instructed Peregrine to send approximately $82,500 sent from the New Energy escrow account to relief defendant York Chandler.
55. During the period from December 22, 2001 to January 18, 2002, Colt and Geneva instructed Peregrine to send approximately $159,250 from the New Energy escrow account to relief defendant Burke Maxfield.
FIRST CLAIM FOR RELIEF
Violations of Section 17(a) of the
56. Paragraphs 1 through 53 are realleged and incorporated herein by reference.
57. The defendants, Colt and Geneva, and each of them, by engaging in the conduct described above, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by use of the mails:
(a) with scienter, employed devices, schemes or artifices to defraud;
(b) obtained money or property by means of untrue statements of material fact or by omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities;
in violation of Section 17(a) of the Securities Act.
58. By reason of the foregoing, each of the defendants violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act.
SECOND CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act,
59. Paragraphs 1 through 53 are realleged and incorporated herein by reference.
60. The defendants, New Energy, Ewald, Colt, Geneva, Manahan, and Magnum, and each of them, with scienter, 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:
(a) employed devices, schemes or artifices to defraud;
(b) made untrue statements of material fact or omitted to state a material fact 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 other persons;
in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
61. By reason of the foregoing, each of the defendants violated, and unless restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
Issue findings of fact and conclusions of law that the defendants committed the alleged violations;
Issue in a form consistent with Fed. R. Civ. P. 65, orders temporarily, preliminarily and permanently enjoining the defendants and their officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Sections 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
Issue in a form consistent with Fed. R. Civ. P. 65, a temporary restraining order and a preliminary injunction freezing the assets of each of the relief defendants and prohibiting each of the defendants from destroying documents;
Grant such other and further relief as this Court may determine to be just, equitable and necessary, including, but not limited to, disgorgement with prejudgment interest;
Enter an Order directing each defendant to pay civil penalties under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990; and
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.