SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17118 / September 6, 2001
Accounting and Auditing Enforcement Release No. 1440 / September 6, 2001
SECURITIES AND EXCHANGE COMMISSION v. M & A WEST, INC.; SCOTT L. KELLY; SALVATORE CENSOPRANO; ZAHRA R. GILAK; FRANK THOMAS ECK, III; and STANLEY R. MEDLEY, United States District Court for the Northern District of California, Civil Action No. C-01-3376 (CRB)
S.E.C. CHARGES BAY AREA "INTERNET INCUBATOR" WITH FRAUD AND REGISTRATION VIOLATIONS
The United States Securities and Exchange Commission ("Commission") announced today that it has sued M & A West, Inc. ("MAWI" or the "Company"), a self-proclaimed "Internet incubator" engaged in developing Internet-related technology companies. According to the Commission, since 1999 MAWI and various persons affiliated with the Company have reaped more than $20 million in illegal profits by selling unregistered securities to investors, in violation of the registration provisions of the federal securities laws. These persons funneled millions of dollars through various secret accounts back to MAWI, which fraudulently reported the funds as revenue from operations which did not in fact exist. MAWI was based in San Bruno, California throughout the course of the scheme, and has recently relocated to Liberty, Texas.
Also named in the Commission's complaint, filed in the Northern District of California, are:
According to the complaint, during 1999 and 2000 Kelly, Gilak, Eck and Medley arranged a series of so-called reverse mergers between various MAWI operating divisions or related companies and publicly-traded shell companies with no operations. The mergers resulted in the formation of four publicly-traded companies - MAWI, VirtualLender.com (later renamed VLDC Technologies), Workfire.com, and Digital Bridge - in which these four defendants held significant interests. Under federal law, Kelly, Gilak, Eck and Medley were prohibited from selling their shares to the public unless the newly-formed companies complied with the registration provisions of the securities laws, which generally require that potential investors be provided with a prospectus that discloses certain material information about a company. No registration statement was ever filed for any of the defendants' shares and no exemptions from registration applied.
Despite this, following each merger MAWI hyped the newly-formed public companies with a barrage of press releases, paid coverage in Internet investment newsletters, and postings to Internet stock discussion boards. Kelly, Gilak, Eck and Medley then sold their unregistered stock into the market, reaping more than $20 million in illegal profits.
The complaint also alleges that Medley, who was responsible for locating the public shell companies and documenting the terms of the mergers, violated the securities laws by acting as an unregistered broker.
The complaint further alleges that Kelly and Censoprano fabricated contracts and other documents that MAWI used to falsely characterize millions of dollars in proceeds from the sale of unregistered securities as revenue from operations. For example, MAWI's financial statements for its fiscal year 2000, ended May 31, 2000, reported $1.7 million in revenue from the sale of various website-related subsidiaries. In actuality, the sales were complete shams. MAWI's fiscal 2000 financials described another $1 million in proceeds from unregistered stock sales as "consulting revenue" when, in fact, no consulting services were provided.
In addition, the complaint charges that Kelly and Censoprano fraudulently inflated the value of the securities holdings that constituted the Company's primary assets. For fiscal 2000, MAWI falsely reported a $12.1 million "unrealized gain on marketable securities available for sale." In fact, according to the complaint, on the last day of MAWI's fiscal year Kelly and Gilak illegally manipulated the stock of VLDC Technologies, MAWI's major holding, causing the price of that stock to triple. As a result, the value of MAWI's securities holdings was materially inflated.
The Commission's complaint charges that:
The complaint seeks permanent injunctive relief, civil penalties, and other remedies against all defendants, and an accounting and disgorgement of ill-gotten gains from MAWI, Kelly, Gilak, Eck and Medley.
In a separate matter, the Office of the United States Attorney for the Northern District of California has announced the filing of criminal charges against certain persons relating to much of the same conduct that is the subject of the Commission's complaint.