Securities and Exchange Commission v. Steven E. Muth and Door Chair, Ltd., Civil Action No. 03 CV 2178 WQH (JFS). (S.D.Cal., filed November 5, 2003)
On November 5, 2003, the Commission filed a complaint in the United States District Court for the Southern District of California against Steven E. Muth alleging that Muth perpetrated a fraudulent scheme to artificially inflate the stock price of San Diego-based airport concessionaire Creative Host Services, Inc. from $0.78 to $29.00, an increase of 3,618%. Muth, 43, of Houston, Texas, was employed as a registered representative of broker-dealer Kirkpatrick, Pettis, Smith, Polian Inc., headquartered in Omaha, Nebraska.
The complaint alleges that Muth fraudulently manipulated Creative Host's stock price during the period November 1999 to June 2000 by restricting supply and artificially creating demand for the stock through a variety of techniques and devices. These included: 1) causing Kirkpatrick's clients to buy and control 90% of Creative Host's shares; 2) engaging in high-pressure sales tactics; 3) using Kirkpatrick's affiliation with Mutual of Omaha Insurance Company to gain client trust; 4) refusing to execute clients' orders to sell Creative Host shares; 5) encouraging customers to obtain credit on their Creative Host shares in order to release funds with which to buy additional shares without explaining the risks of that credit; 6) hiring promoters to tout the shares on the Internet; 7) delaying submission of client orders toward the end of the trading day to increase demand at the end of the day; 8) helping Kirkpatrick to lead the bid prices placed for Creative Host shares, and 9) orchestrating prearranged trades. As a result of these actions, Muth allegedly received $950,562 in ill-gotten commissions and $546,781 in ill-gotten trading profits, $463,030 of which was received through Door Chair, Ltd., an entity Muth controls. The Commission charged Muth with securities fraud, specifically 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.
Separately, on November 5, 2003, the Commission entered an Order Instituting Administrative Proceedings, Making Findings, And Imposing Remedial Sanctions Pursuant To Section 15(b) Of The Securities Exchange Act Of 1934 ("Order") against Kirkpatrick; Peter N. Lahti, Kirkpatrick's former Chairman, President and CEO; and Gregory D. Adams, Kirkpatrick's former branch manager of two Colorado branch offices, for failure to supervise. While neither admitting or denying the Order's findings, Kirkpatrick, Lahti, 59, of Omaha, Nebraska, and Adams, 49, of Gulf Breeze, Florida, consented to the entry of the Order.
The Commission's Order found that Lahti failed to develop an adequate system to implement Kirkpatrick's procedures to prevent and detect securities law violations. Additionally, Lahti and Adams disregarded red flags indicating suspicious conduct related to the manipulation of Creative Host's share price. Adams also failed to follow Kirkpatrick's policies and procedures regarding heightened supervision and review of correspondence. As part of their offers to settle the Commission's administrative proceeding, Kirkpatrick agreed to a censure; Lahti agreed to be suspended from acting in a supervisory capacity at a broker-dealer for 12 months; and Adams agreed to be suspended from association with any broker-dealer for six months and barred from acting in a supervisory capacity at a broker-dealer. In addition the Order imposes a $100,000 penalty against Kirkpatrick, a $40,000 penalty against Lahti, and a $20,000 penalty against Adams.
SEC Complaint in this matter (in PDF format)