U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19805 / August 17, 2006
SEC v. Jeffery Steven Stone, et al., Case No. 06-CIV-6258 (HB) (S.D.N.Y. filed Aug. 17, 2006)
SEC Charges Ex-Con in Stock Manipulation Scheme Involving San Francisco-Based Tech Company
The Securities and Exchange Commission today charged a former felon and his wife with orchestrating a fraud scheme to inflate the price of WebSky, Inc., a San Francisco-based penny stock company, using spam email. The couple pocketed more than $1 million in proceeds as a result of the scam.
The Commission's complaint alleges that Jeffery Steven Stone of Greenwich, Connecticut, and his wife, Janette Diller Stone, using entities they controlled, acquired massive amounts of WebSky stock under false pretenses, hired stock promoters to hype the stock in false spam emails, and then dumped their shares into the unsuspecting market. Stone is a recidivist securities law violator, having been convicted of fraud in a prior market manipulation scheme and found liable in civil proceedings by the Commission.
According to the complaint, Stone and Diller bought 288 million shares from WebSky based on false promises that the shares were being acquired for investment purposes and not as a means of distributing shares to the public. Within days, the two began selling the shares to third parties. Stone and Diller also engineered a spam email campaign that falsely portrayed WebSky - a start-up Internet company with virtually no revenues or profits - as having a successful joint venture in Argentina that would result in over $40 million in annual revenues. In reality, WebSky's CEO had forbidden them from sending the spam email and informed them that WebSky's Argentina deal was no longer viable.
The complaint alleges that, as a result of Stone and Diller's fraud, WebSky's stock price soared by over 300% on trading volume almost 20 times greater than normal, after which Stone and Diller sold their WebSky shares. Combined with proceeds from other stock sales during the scheme, Stone and Diller received more than $1 million in proceeds.
The Commission also brought charges against WebSky and its CEO, Douglas Haffer, of Oakland, California, for selling WebSky shares in a subsequent transaction to an entity controlled by Stone and Diller without registering the transaction or securing an exemption from registration. Subject to court approval, WebSky and Haffer have agreed to settle the action, without admitting or denying the allegations, by disgorging the $35,000 received in the sale and consenting to a permanent injunction against future violations of the registration provisions of the federal securities laws. Haffer also has agreed to pay a $25,000 civil penalty.
The complaint, filed in federal court in New York, New York, charges Stone and Diller with violating the antifraud, registration, and other provisions of the federal securities laws. The complaint also names two entities controlled by the Stones, Crescent Fund, LLC, based in New York, New York, and Pedracar, Inc, a Pennsylvania company.