SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17756 / September 30, 2002
SEC CHARGES 17 DEFENDANTS WITH SCHEME TO MANIPULATE STOCK OF FREEDOM SURF, INC.
U.S. Securities and Exchange Commission v. Allen Z. Wolfson, Mervyn A. Phelan, David Wolfson, Kevin Kirkpatrick, Robert H. Pozner, John R. Chapman, Mervyn A. Phelan, Jr., Craig H. Brown, John W. Cruickshank, Jr., BonnieJean C. Tippetts, Feng Shui Consultants, Inc. (formerly World Alliance Consulting, Inc.), A-Z Professional Consultants Retirement Trust, Inc., AZW Irrevocable Trust, Salomon Grey Financial Corporation, Angelo Paul Koupas, Kyle Rowe, and Christopher Roundtree, U.S. District Court for the District of Utah, Civil Action No. 2:02CV-1086 TC (D. Utah 2002).
On September 30, 2002, the U.S. Securities and Exhange Commission filed a civil injunctive action in the United States District Court for the District of Utah charging 13 individuals and a Dallas broker-dealer with securities fraud in a scheme to manipulate the stock of Freedom Surf, Inc. from July 2000 through November 2000. Freedom Surf, a Nevada corporation then headquartered in Huntington Beach, California is now known as Freestar Technologies, Inc., and is under new management. At the time of the manipulation, Freedom Surf was a start-up company that purported to manufacture wetsuits and other surf-related apparel. Freedom Surf's stock was traded on the NASD's Over-The-Counter Bulletin Board ("OTC-BB").
Charged in the SEC's Complaint are:
The SEC's Complaint alleges that Phelan Sr. originated the scheme to manipulate Freedom Surf stock, and enlisted Allen Wolfson to carry it out. In July and August 2000, Phelan, his son, Phelan, Jr. and Brown, transferred 345,000 Freedom Surf shares at no cost to Wolfson. Wolfson then deposited the shares in accounts he controlled at Olsen Payne. Then, Allen Wolfson and his son, David Wolfson, directed Kirkpatrick, a stock trader at Olsen Payne, to bid up the price of Freedom Surf by posting artificially high quotations for the stock. Pozner, a trader at Glenn Michael Financial, bid up the stock price in concert with Kirkpatrick and on Allen Wolfson's instructions. Through these manipulative activities, Wolfson and the other defendants caused the Freedom Surf stock price to increase from $5 to $40 in approximately two months, before the stock was split 4 for 1 on October 11, 2000.
The Complaint also alleges that Salomon Grey, Koupas and Rowe had a pre-existing arrangement with Phelan Sr. and Allen Wolfson to obtain free and deeply discounted blocks of Freedom Surf stock for retail sales to the public at manipulated prices. On October 24, 2000, Tippetts directed Kirkpatrick to deliver 25,000 Freedom Surf shares from the Wolfson-controlled accounts at Olsen Payne to Salomon Grey for $153,125, or $6.125 per share. Salomon Grey sold over 27,000 shares of Freedom Surf to retail customer accounts, including over 17,000 shares at excessive markups of over 100 percent.
The Complaint further alleges that the defendants shut down the manipulation after the Commission staff began investigating in early November 2000. Thereafter, the price of Freedom Surf stock dropped to a low of approximately $.19 per share by the end of December 2000. In the spring of 2001, the defendants sold over 1.1 million shares of Freedom Surf stock in unregistered transactions from an escrow brokerage account controlled by Brown and Bo Phelan, and from the Chapman-controlled Canadian accounts.
The Commission's complaint seeks permanent injunctions against Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, three Wolfson-controlled entities holding brokerage accounts that were involved in the manipulation (Feng Shui Consultants, Inc., A-Z Professional Consultants Retirement Trust, Inc., and AZW Irrevocable Trust), Salomon Grey, Koupas and Rowe for violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Complaint also seeks a permanent injunction against Bo Phelan, Craig Brown, John Cruickshank, Tippetts and Roundtree, for aiding and abetting the foregoing violations of Section 10(b) and Rule 10b-5. The Commission asks the Court to impose a permanent injunction against Salomon Grey from violating, and against Koupas, Rowe and Roundtree for aiding and abetting the violation of, the antifraud provisions for broker-dealers, Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder. The Commission asks the Court to impose a permanent injunction against Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, Kirkpatrick, the three Wolfson-controlled entities, Salomon Grey, Koupas and Rowe from violating Sections 5(a) and 5(c) of the Securities Act of 1933.
The Commission also asks the Court to order an accounting, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and an order prohibiting Phelan, Brown and Cruickshank from serving as an officer or director of any public company. The Commission also seeks to prohibit Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, and the three Wolfson-controlled entities from participating in any offering of penny stock.
This is the Commission's second action relating to Freedom Surf. On March 6, 2002, the Commission brought securities fraud and related charges against Freedom Surf's former officers and others arising out of the recording of $5 million in fictitious assets on the company's books. The Commission has settled with all but one of the defendants. The Commission also barred John Cruickshank, one of the defendants in the current action, from appearing or practicing as an attorney before the Commission, based on his disbarment from the practicing of law and prior criminal conviction. The Commission also subsequently barred James E. Slayton, who audited Freedom Surf's financial statements, from practicing as an accountant before the Commission. For further information, see Litigation Release No. 17397 (March 6, 2002), Securities Exchange Act Release No. 45510 (March 6, 2002), Securities Exchange Act Release No. 45509 (March 6, 2002), Securities Exchange Act Release No. 46034 (June 5, 2002).