SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17407 / March 12, 2002
Accounting and Auditing Enforcement Release No. 1516
SEC v. Paul Skulsky, et al., No. CV-02-1524 (E.D.N.Y.) (DRH)
SEC CHARGES FORMER OFFICERS OF APPONLINE.COM, INC., ITS FORMER AUDITORS, AND OTHERS IN $60 MILLION FINANCIAL FRAUD AND MARKET MANIPULATION SCHEMES
The Commission today filed a civil injunctive action alleging that, from May 1997 through June 2000, AppOnline.com, Inc. ("AppOnline") engaged in two simultaneous schemes to defraud AppOnline's public investors.
First, AppOnline diverted at least $60 million AppOnline's lenders had advanced to fund specific mortgage loans and used those funds to pay AppOnline's operating expenses. To conceal the misappropriation, AppOnline prepared false and misleading financial reports that were filed with the Commission. Second, AppOnline manipulated the public market for its stock by paying bribes in exchange for three brokerage firms recommending the purchase of AppOnline stock to their retail customers. From July 1997 through March 1998, the three brokerage firms sold more than 1.4 million shares of AppOnline stock to investors, who paid more than $5.5 million for those shares.
In its complaint, the Commission named the following defendants:
Paul Skulsky, age 58, resides in Woodmere, New York. From 1997 to 2000, Paul Skulsky served as a de facto senior officer and director of AppOnline. In 1985, Paul Skulsky was convicted of criminal mail fraud, racketeering, and tax evasion charges in connection with the sale of securities in a multi-million dollar tax shelter scheme.
Jeffrey Skulsky, age 50, resides in New York, New York. Jeffrey Skulsky was AppOnline's President and a director from November 1998 to June 2000. He is the brother of Paul Skulsky.
Edward R. Capuano ("Capuano"), age 53, is a resident of Larchmont, New York. Capuano was AppOnline's Chief Executive Officer ("CEO") from May 1997 through June 2000.
Cindy L. Eisele ("Eisele"), age 37, a resident of East Northport, New York, was AppOnline's Chief Financial Officer ("CFO") from 1997 through June 2000.
Joseph Casuccio ("Casuccio"), age 49, is a resident of Hauppauge, New York. Casuccio audited AppOnline's financial statements for the fiscal years ended December 31, 1997 and December 31, 1998.
Jeffrey J. Schneider ("Schneider"), age 37, is a resident of Commack, New York. Schneider audited AppOnline's financial statements for the fiscal year ended December 31, 1998. Schneider also performed extensive test work for the audit of AppOnline's December 31, 1999 financial statements.
Aaron Chaitovsky ("Chaitovsky"), age 45, is a resident of Plainview, New York. Chaitovsky audited AppOnline's December 31, 1999 financial statements.
Robert Glass ("Glass"), age 59, is a resident of New York, New York. Glass reviewed and approved the audit of AppOnline's December 31, 1999 financial statements.
Ashley Nemiroff ("Nemiroff"), age 59, is a resident of Great Neck, New York. Nemiroff was a registered principal of Ash & Co., Inc. ("Ash"), a defunct broker-dealer formerly located in New York, New York.
Rocco Siclari ("Siclari"), age 45, a resident of Nyack, New York, was an undisclosed principal at Ash.
George A. Carhart ("Carhart"), age 53, a resident of Fort Lee, New Jersey, was an undisclosed principal at Ash.
Howard Zelin ("Zelin"), age 46, is a resident of Woodbury, New York. Zelin was a registered principal at Worthington Capital Group, Inc. ("Worthington"), a now defunct New York broker-dealer.
Carl D. D'Elia ("D'Elia"), age 31, is a resident of Hicksville, New York. During 1997 and early 1998, D'Elia was a registered representative ("RR") at Worthington.
Craig A. Brandwein ("Brandwein"), age 42, is a resident of Commack, New York. During 1998, Brandwein was a RR and, with Catapano, ran the Garden City, New York office of International Bond & Share ("IBS"), a now defunct broker-dealer. Brandwein later worked at the Syosset, New York office of IBS.
Donald Catapano ("Catapano"), age 45, is a resident of Oceanside, New York. During 1998, Catapano was a RR and, with Brandwein, ran the Garden City office of IBS.
Simultaneously with the Commission commencing the civil action, the United States Attorney for the Eastern District of New York unsealed criminal charges against Paul Skulsky, Jeffrey Skulsky, Capuano, Eisele, Casuccio, Schneider, Nemiroff, Siclari, Carhart, D'Elia, Brandwein, and Catapano based on the same conduct alleged in the Commission's complaint.
The Financial Fraud Scheme. The Commission's complaint alleges that beginning in 1997, AppOnline suffered operating losses and a cash shortage. To address this problem, Paul Skulsky directed AppOnline to divert funds borrowed by AppOnline from "warehouse banks" that were specifically designated to fund specific mortgage loans and, instead, use those diverted funds to pay normal operating expenses. From 1997 to 2000, Paul Skulsky, Jeffrey Skulsky, Capuano, and Eisele falsified AppOnline's accounting records and filed false and misleading quarterly and annual reports with the Commission. AppOnline's filings on Forms 10-KSB for December 31, 1997 and 1998, and on Form 10-K for December 31, 1999 misrepresented, among other things, that the funds AppOnline had misappropriated from its lenders was a debt owed to The Skulsky Trust (a related party controlled by Paul Skulsky and Jeffrey Skulsky). The complaint also alleges that AppOnline materially misstated results of operations in its annual filings with the Commission by recording other fraudulent entries on its books, including removing money-losing subsidiaries through sham sale transactions and manipulating its reported income by improperly recognizing certain revenues and failing to recognize certain expenses. The complaint further alleges that, at all times, AppOnline failed to disclose Paul Skulsky's management role. The complaint further alleges that Casuccio, Schneider, Chaitovsky, and Glass issued audit opinions that falsely stated that AppOnline's financial statements had been prepared in conformity with generally accepted accounting principles and that these auditors had conducted their audits in accordance with generally accepted auditing standards. Finally, the complaint alleges that Chaitovsky and Glass violated the federal securities laws by failing to notify the Commission when they learned, during the course of their audit, that AppOnline had previously filed false financial reports with the Commission.
The Stock Manipulation Scheme. The Commission's complaint alleges that Paul Skulsky conspired with Nemiroff, Siclari, Carhart, Zelin, D'Elia, Brandwein, and Catapano (the "Broker Defendants") to manipulate the public market for AppOnline stock. As part of the scheme, Paul Skulsky paid bribes to the Broker Defendants in exchange for Ash, Worthington, and IBS agreeing to recommend the purchase of AppOnline stock to retail customers. The complaint alleges that Paul Skulsky deposited AppOnline stock with Ash, Worthington, and IBS, and that those firms then sold more than 1.4 million AppOnline shares to investors, who paid more than $5.5 million for those shares.
The Commission's complaint charges that, as a result of the conduct described above: (i) Paul Skulsky, Jeffrey Skulsky, Capuano, Eisele, Casuccio, Schneider, and the Broker Defendants violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder; (ii) Paul Skulsky, Jeffrey Skulsky, Capuano, Eisele, Casuccio and Schneider violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1; (iii) Chaitovsky and Glass violated Sections 10(b) and 10A of the Exchange Act and Rule 10b-5; (iv) Paul Skulsky, Jeffrey Skulsky, and Capuano are liable as control persons for AppOnline's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13; and (v) Eisele, Casuccio, Schneider, Chaitovsky, and Glass are liable for aiding and abetting AppOnline's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1. The Commission's complaint seeks an order permanently enjoining each defendant and ordering them to pay civil penalties, and directing Paul Skulsky, Jeffrey Skulsky, Capuano, Eisele, Casuccio, Schneider, and the Broker Defendants to pay disgorgement plus prejudgment interest thereon. The Commission's complaint also seeks an order barring Paul Skulsky, Jeffrey Skulsky, and Capuano from acting as an officer or director of a public company.
The Commission acknowledges the assistance of the United States Attorney for the Eastern District of New York and the Federal Bureau of Investigation in connection with this matter.