SEC SUES DAVID HOUGE FOR FRAUD INVOLVING FOUR MICROCAP SECURITIES
SECURITIES AND EXCHANGE COMMISSION V. DAVID E. HOUGE, 99-CIV-3378 (E.D.N.Y)
The Securities and Exchange Commission announced the filing of a complaint and a partial settlement on June 16, 1999, in the United States District Court for the Eastern District of New York, alleging that David Houge participated in the fraudulent manipulation and sale of stock in three micro-cap companies, Auxer Industries, Inc. ("Auxer"), Legend Sports, Inc. ("Legend"), Orlando Super Card, Inc. ("Orlando") and for participating in the fraudulent sale of one private placement for City Services, Inc. ("City Services").
The Complaint alleged as follows:
For each of Auxer, Legend, and Orlando, Houge's fraudulent scheme involved: (1) obtaining control of all or nearly all of the supply of publicly traded stock; (2) raising the stock price to desired levels through a series of orchestrated trades; and (3) paying undisclosed cash compensation to registered and unregistered salespeople. Houge knew that retail purchasers were not told that the salespeople were receiving this undisclosed compensation. The payments to the salespeople were approximately 50% of the proceeds from the stock sales. For City Services, Houge similarly paid undisclosed compensation to registered and unregistered salespeople of approximately 50% of the proceeds for selling City Services stock to their retail customers. In the scheme related to Auxer, Houge used nominees to purchase Auxer stock purportedly pursuant to Rule 504 of Regulation D, which he then resold without a registration statement in effect or an applicable exemption to registration. In the fraudulent schemes relating to Legend, Orlando, and City Services, Houge also acted as an undisclosed control person of First National Equity Corp., a now-defunct registered broker-dealer. Houge also acted as an officer of City Services. The total proceeds from the stock sales were as follows: $7 million for Auxer (from sales in 1995); $6 million for Legend (from sales in 1996 and 1997); $4 million for Orlando (from sales in 1997); and $1 million for City Services (from sales in 1997 and 1998). Of that amount, Houge paid approximately 50% of the proceeds to retail salespeople. Houge used the remaining proceeds to pay for the stock he resold to the public, to pay himself and other participants in the scheme, and to pay other expenses of the scheme.
Previously, the Commission halted the trading in the stock of Legend on September 15, 1997, and the stock of Orlando on November 3, 1997. In the Matter of Legend Sports, Inc., Sec. Exch. Act Rel. 39072 (September 15, 1997); In the Matter of Orlando Super Card, Inc., Sec. Exch. Act Rel. 39290 (November 3, 1997). The Commission also previously filed civil injunctive actions relating to the sale of Legend promissory notes and preferred stock and the sale of City Services stock in 1998. SEC v. James Staples, et al., 98-1061-CV-22-C (M.D. Fla.); SEC v. City Services, et al., 98 Civ. 1867 (RPP) (S.D.N.Y.)
As a result of the conduct described above Houge violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; and, as a controlling person under Section 20(a) of the Exchange Act is liable for First National's violations of Section 15(c) of the Exchange Act and Rules 10b-3 and 15c1-2 thereunder. The Complaint seeks permanent injunctive relief; disgorgement of Houge's ill-gotten gains plus prejudgment interest; and an officer and director bar.
Simultaneously with the filing of the Complaint, the Commission also filed a Partial Final Judgment on Consent, in which Houge, without admitting or denying the allegations of the Complaint consented to the entry of all the injunctive relief sought in the Complaint and an officer and director bar.