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U.S. Securities and Exchange Commission

Litigation Release No. 18344 / September 11, 2003

Securities and Exchange Commission v. Kenneth P. DíAngelo and RBF International, Inc., United States District Court for the Central District of California, Case No. LACV 03-6499 CAS (VBKx) (September 11, 2003)

SEC FILES FRAUD CHARGES ARISING OUT OF $130 MILLION STOCK LENDING AND MANIPULATION SCHEME

Defendant DíAngelo Pleads Guilty in Related Criminal Action Brought by U.S. Attorneyís Office for the Central District of California

The Securities and Exchange Commission today filed a complaint in the United States District Court for the Central District of California charging Kenneth P. DíAngelo and his company, RBF International, Inc., with participating in an unlawful scheme to manipulate the stock price of GenesisIntermedia, Inc. (GENI), a now defunct public company that was based in Van Nuys, California. The Commission alleges that the scheme, which occurred between September 1999 and September 2001, resulted in the misappropriation of more than $130 million, the collapse of three broker-dealers, and the largest bailout in the history of the Securities Investor Protection Corporation.

According to the complaint, the manipulation of GENIís stock price began shortly after the companyís June 1999 public offering. To benefit from the manipulation, GENIís Chief Executive Officer developed a stock lending scheme. The Commission alleges that the CEO and an accomplice loaned approximately 15 million shares of GENI stock to Native Nations Securities, Inc., a New Jersey broker-dealer, and more than a dozen other broker-dealers in exchange for approximately $130 million. To facilitate these stock loan transactions, DíAngelo defrauded those broker-dealers by leading them to believe that reputable brokerage firms were lending the GENI shares to them. The complaint alleges that the GENI shares actually were being loaned by Ultimate Holdings, Ltd., which was an offshore entity controlled by GENIís CEO and his accomplice. The stock loans generated cash proceeds for the full market value of the GENI shares and assured that Ultimate Holdings and the CEO would benefit from future price increases. According to the complaint, DíAngelo secretly paid others for their assistance in this scheme.

The complaint alleges that, in a typical stock loan transaction, Ultimate Holdings loaned stock to a broker-dealer and received the current market value of the stock in cash. As GENIís stock price fluctuated, the loaned stock was marked-to-market by the broker-dealer. In a hypothetical example, if Ultimate Holdings loaned a broker-dealer 1,000 shares of stock valued at $5.00 per share, Ultimate Holdings would get $5,000 from the broker-dealer and the broker-dealer would take possession of the stock. If the price of the stock subsequently rose to $6.00 per share, Ultimate Holdings would get another $1,000 from the broker-dealer. If the stock then dropped to $4.00 per share, Ultimate Holdings would be obligated to return $2,000 to the broker-dealer. Ultimate Holdings received additional cash when GENIís price increased, and was obligated to return cash when the stock price dropped. By lending the shares in this manner, rather than selling them, Ultimate Holdings and GENIís CEO: (i) raised substantial sums of money without giving up control of the stock or depressing the market; (ii) generated funds used in part to buy more GENI shares and drive up the market price; and (iii) prevented the shares from being used for short sales.

According to the complaint, GENIís CEO, his accomplice and DíAngelo inflated GENIís stock price by systematically engaging in fraudulent and deceptive practices that had the intended effect of generating additional cash proceeds from the broker-dealers participating in the stock loan transactions. Their illegal manipulative activities included (i) reducing the supply of GENI stock to control the public float; (ii) promoting a short squeeze; (iii) making trades through nominee accounts; and (iv) engaging in a free-riding scheme. In addition, the complaint alleges that, while these activities were ongoing, the CEO was secretly compensating a well-known financial commentator to tout GENI on CNBC, Bloomberg TV, CNN and CNNfn, thereby creating demand for the stock, and making false and misleading statements in periodic reports filed with the Commission and in press releases issued by the company (with assistance from GENIís former Chief Financial Officer).

The manipulation caused GENIís stock price to increase approximately 1,400%, from a low of $1.67 per share (split adjusted) on September 1, 1999 to a high of $25 per share on June 29, 2001. After the scheme collapsed in September 2001, GENIís stock price plunged to pennies per share. GENIís CEO and his accomplice then defaulted on the obligations of Ultimate Holdings to repay approximately $130 million they had obtained from loaning GENI shares to the various broker-dealers, which caused three of the firms to go bankrupt.

According to the complaint, DíAngelo and RBF International violated 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. As relief, the Commission is seeking permanent injunctions, an accounting of all the money that DíAngelo and RBF International obtained as a result of their illegal conduct, disgorgement (with prejudgment interest), and civil penalties.

Also today, the United States Attorneyís Office for the Central District of California filed related criminal charges against DíAngelo. He has entered a guilty plea and is waiting to be sentenced.

The Commission acknowledges the cooperation of the United States Attorneyís Office for the Central District of California and the Federal Bureau of Investigation in this matter.

SEC Complaint in this matter

 

http://www.sec.gov/litigation/litreleases/lr18344.htm


Modified: 09/12/2003