Securities and Exchange Commission
Litigation Release No. 17510 / May 8, 2002
Securities and Exchange Commission v. Jerome E. Rosen, Diversified Corporate Consulting Group, Joseph D. Radcliffe, and William A. Calvo III, Civil Action No. 01-0369-CIV-Middlebrooks (S.D. Fla.)
SEC Wins Jury Verdict Against Penny Stock Trader Jerry Rosen and Accomplices for Role in Systems of Excellence Manipulation; Final Judgments Order Disgorgement, Prejudgment Interest, Civil Penalties and a Personal Trading Ban Against Rosen
The Securities and Exchange Commission announced that on April 24, 2002, the Honorable Donald M. Middlebrooks, United States District Judge for the Southern District of Florida, entered final judgments against penny stock trader Jerome E. Rosen, disbarred attorney William A. Calvo III, and Calvo's company, Diversified Corporate Consulting Group. Rosen, the trader exclusively responsible for his firm's market making activity in Systems of Excellence, Inc. ("SOE"), accepted a bribe, in the form of free SOE stock, in exchange for his efforts to manipulate the price of SOE. Diversified, a company controlled by Calvo, among others, supported Rosen's fraudulent and manipulative trading activity and sold unregistered shares of SOE while one of its principals was touting SOE in a popular penny stock newsletter. The final judgments, which follow a March 7, 2002 jury verdict in favor of the SEC, permanently enjoin (i) Rosen and Diversified from future violations of the antifraud provisions of the federal securities laws and (ii) Calvo, Rosen and Diversified from future violations of the registration provisions. In total, Rosen, Calvo and Diversified were ordered to pay more than $3.8 million in ill-gotten gains, prejudgment interest and civil penalties, all arising from their respective roles in the manipulation of SOE stock. Additionally, the Court enjoined Rosen from buying and selling individual stocks. With these final judgments, the Commission has now successfully concluded seven separate enforcement actions arising from its investigation of SOE, assisted in obtaining four criminal convictions, deregistered the securities of SOE, and recovered approximately $15 million for defrauded investors. Two related lawsuits against other defendants are still pending.
Final Judgment Against Rosen
The jury found that Rosen, a well-known penny stock trader working from the Aventura, Florida branch office of J. Alexander Securities, Inc. ("J. Alexander") manipulated the price of SOE stock. Rosen accepted a bribe in the form of SOE stock from Charles Huttoe, then the President of SOE, as an inducement to manipulate the price of SOE stock. Rosen then conspired with Huttoe, Sheldon Kraft (a stock promoter previously charged in this scheme), Diversified and Joseph D. Radcliffe (a co-defendant who settled upon the Commission's filing of its complaint) to obtain an exclusive supply of SOE stock, at favorable prices, in order to support his fraudulent and manipulative trading activity. The jury also found that Rosen had engaged in insider trading during the same period as a result of his access to material, nonpublic information supplied by Huttoe. The manipulative conduct and insider trading both 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. Finally, the jury found that Rosen resold unregistered SOE stock in violation of Section 5 of the Securities Act.
In addition to enjoining Rosen from violating the antifraud and registration provisions, the Court's order requires Rosen to disgorge $992,891.01, representing $615,966.50 in ill-gotten gains plus prejudgment interest of $376,925.01, and pay a separate $100,000 civil penalty. The disgorgement figure represents Rosen's share of trading profits that J. Alexander paid Rosen for his fraudulent SOE market-making activity and profits Rosen earned on the resale of SOE stock that he received from Huttoe. Further, the Court enjoined Rosen from directly or indirectly buying or selling securities registered with the SEC pursuant to Section 12 of the Exchange Act or securities meeting the definition of "penny stock" set forth in Exchange Act Rule 3a51. Finally, the Court required Rosen to maintain records relating to the activities described in the Complaint for three years and to provide the SEC with a sworn accounting of all his assets and liabilities.
Final Judgments Against Diversified and Calvo
The jury also found against Diversified for its involvement in Rosen's manipulation of SOE stock and for its participation in the "scalping" of SOE shares, in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. The scalping related to Diversified's resale of SOE shares while one of Diversified's principals, Theodore Melcher, Jr., was touting SOE in a popular penny stock newsletter. Previously, in a February 21, 2002 ruling on the Commission's motion for summary judgment, the Court found that Diversified and Calvo had violated Section 5 of the Securities Act by reselling, or by being a necessary or substantial participant in the resale of, unregistered SOE shares.
In addition to enjoining Diversified from violating the antifraud and registration provisions and enjoining Calvo from violating the registration provisions, the Court entered orders against Diversified and Calvo requiring them to jointly and severally disgorge $2,511,145.70, representing $1,636,556.51 in gains from their illegal resales of unregistered SOE stock plus prejudgment interest of $874,589.19, and to pay a civil penalty of $50,000 each. Further, the Court required Calvo and Diversified to maintain records relating to the activities described in the complaint for three years and to provide the SEC with a sworn accounting of all their assets and liabilities.
The Commission previously has made several announcements concerning these matters. See Lit Rel. 16881 (January 31, 2001); Lit. Rel. 16804 (November 20, 2000); Lit. Rel. 16695 (September 11, 2000); Lit. Rel. 16632a (July 21, 2000); Securities Exchange Act Rel. 42616 (April 4, 2000); Lit. Rel. 16343 (October 27, 1999); Lit. Rel. 15996 (December 9, 1998); Lit. Rel. 15906 (September 24, 1998); Lit. Rel. 15888 (September 18, 1998); Lit. Rel. 15617 (January 14, 1998); Lit. Rel. 15600 (December 22, 1997); Lit. Rel. 15571 (November 25, 1997); Lit. Rel. 15490 (September 12, 1997); Lit. Rel. 15286 (March 12, 1997); Lit. Rel. 15237 (January 31, 1997); Lit. Rel. 15185 (December 12, 1996); Lit. Rel. 15153 (November 7, 1996); Securities Exchange Act Rel. No. 37791 (October 7, 1996).
This enforcement action is part of the Commission's four-pronged approach to attacking Microcap abuses: enforcement, inspections, investor education and regulation. For information about the SEC's response to Microcap fraud, visit the SEC's Microcap Fraud Information Center at http://www.sec.gov/divisions/enforce/microcap.htm.