Litigation Release No. 16131A / May 4, 1999
SECURITIES AND EXCHANGE COMMISSION v. GILBERT A. ZWETSCH
AND JAMES H. RIDINGER, U.S. District Court for the District of Columbia,
Civil Action Number 99-1088 (LFO) (May 4, 1999) (D.D.C.)
SEC CHARGES GILBERT A. ZWETSCH AND JAMES H. RIDINGER WITH
ILLEGAL SALES OF MARKET AMERICA STOCK; CEASE-AND-DESIST ORDER
ISSUED AGAINST MARKET AMERICA AND RICHARD D. HALL, JR.
The Securities and Exchange Commission today filed a Complaint in the United States District Court for the District of Columbia against Gilbert A. Zwetsch ("Zwetsch"), 59, a former stockbroker from Spokane, Washington, and James H. Ridinger ("Ridinger"), 47, of Greensboro, North Carolina. Ridinger is president and CEO of Market America, Inc. ("Market America"), a North Carolina direct marketing company. The Complaint alleges that the two defendants violated the antifraud and other provisions of the federal securities laws in connection with an unregistered distribution of Market America stock and other activities.
Both defendants, without admitting or denying the Complaint's allegations, consented to final judgments permanently enjoining them from future violations of the antifraud, securities registration and reporting provisions of the federal securities laws, and requiring them to pay a total of more than $2 million in disgorgement, interest, and civil penalties. Both also agreed to Orders prohibiting them from participating in any future offering of penny stock. In a related matter, the Commission issued a Cease-And-Desist Order against Market America and Richard D. Hall, Jr. ("Hall"), Ridinger's attorney, issued pursuant to offers of settlement submitted by Market America and Hall, in which they neither admit nor deny the findings contained in the Order. The Cease-And-Desist Order found that Hall was a cause of violations of the antifraud and registration provisions of the securities acts for having substantially assisted in effectuating transactions which were part of a fraudulent unregistered distribution of Market America stock, and that Market America violated the Securities Exchange Act of 1934's ("Exchange Act") reporting provisions for having filed periodic reports with the Commission which failed to disclose Zwetsch's and Ridinger's respective interests in Market America stock.
The Complaint alleges the following:
Zwetsch arranged a series of fraudulent "blank check" public offerings to create shell companies that would appear to have securities that could be publicly traded without registration under the federal securities laws. Specifically, on six occasions between 1989 and 1994, Zwetsch formed shell companies with no appreciable assets, and had family members and acquaintances serve as nominee officers and directors. He had these shells file materially false and misleading registration statements with the Commission that, among other false statements, failed to disclose that Zwetsch owned all the stock and controlled the companies. Once the registration statements became effective, Zwetsch conducted sham initial public offerings as a result of which the shells appeared to have freely trading shares. Zwetsch sold both the nominee director/officer shares and the "public" offering shares to persons seeking a corporation with publicly tradable shares. Zwetsch's proceeds from the sale of three of the shells, and from his efforts to register a fourth shell, totalled $341,475.
With regard to Market America, instead of selling the shell for cash, Zwetsch agreed to provide half of the stock of a shell styled Atlantis Ventures, Inc. ("Atlantis") to defendant Ridinger, who was to use the shell to take Market America public. Ridinger's attorney Hall negotiated the terms of an agreement between Ridinger and Zwetsch that provided, among other things, that a Ridinger "group" and a Zwetsch "group" would "fund" Atlantis. The monies that Ridinger provided to fund Atlantis in August 1993 were used to close Atlantis' initial public offering. The agreement also stated that, after a contemplated reverse merger between Atlantis and Market America, the two defendants would have an interest in all of the stock of the surviving corporation. Zwetsch and Ridinger also agreed that once Market America obtained an NASD Bulletin Board listing and began trading, Zwetsch would handle the sales of their free trading stock, and divide the proceeds with Ridinger.
Hall assisted Ridinger in establishing an offshore trust (AAA Plus Trust) to hold the free trading Market America shares in which Ridinger had an interest. Zwetsch, with Hall's assistance, concealed his and Ridinger's interest in Market America's stock from the NASD in order to obtain a Bulletin Board listing. Zwetsch and Ridinger stimulated interest in Market America's stock among Market America's distributors through presentations at a Market America "leadership conference," at a Market America convention and through publications disseminated to Market America distributors. Zwetsch also paid the author of an investment newsletter to promote the stock. Zwetsch and Ridinger did not disclose to prospective investors or others their interest in all of the stock that would be available for purchase or their agreement pursuant to which Zwetsch would handle the sales of their stock and split the proceeds on a dollar for dollar basis. Market America's Commission filings likewise failed to disclose those facts.
When Market America's stock began trading on August 3, 1994, Zwetsch immediately began selling the stock through accounts he had established at Canadian broker-dealers. Partly as a result of the interest the defendants had generated, as well as an agreement between them pursuant to which Zwetsch would be the sole source of supply for the stock, Market America's stock increased sixfold by the close of the second day of Bulletin Board trading. Between August 1994 and December 1995, Zwetsch sold approximately 1.8 million shares of Market America stock through Canadian broker-dealers, sharing the proceeds as contemplated by his agreement with Ridinger. Between October 1994 and February 1996, Zwetsch sold 217,500 additional Market America shares for his own account.
Zwetsch and Ridinger both consented to the entry of final judgments enjoining them from future violations of Sections 5 and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(d), 13(g), and 16(a) of the Exchange Act, and Rules 10b-5, 13d-1, 13d-2 and 16a-3 thereunder. Additionally, Zwetsch consented to an injunction against future violations of Rule 10b-9 under the Exchange Act, and Ridinger consented to an injunction against future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder, and to an Order not to participate in any future penny stock offering. Zwetsch also consented to the entry of an Order pursuant to Section 15(b)(6) of the Exchange Act barring him from participating in an offering of penny stock. Zwetsch further agreed to disgorge $996,580, to pay prejudgment interest of $409,360, and to pay a penalty of $250,000, for a total payment of $1,655,940. Ridinger agreed to disgorge $235,498, to pay prejudgment interest of $69,196, and to pay a penalty of $100,000, for a total payment of $404,694.
Without admitting or denying the findings, Hall agreed to the entry of a Cease-And-Desist Order finding that he was a cause of violations of Securities Act Sections 5 and 17(a), Exchange Act Section 10(b) and Rule 10b-5 thereunder. Without admitting or denying the findings, Market America agreed to the entry of a Cease-And-Desist Order finding that it violated Exchange Act Section 13(a) and Rules 12b-20 and 13a-1 thereunder. The Commission ordered Hall and Market America to cease and desist from further violations of these provisions.