U.S. Securities and Exchange Commission
Litigation Release No. 18787 / July 20, 2004
Court Grants Summary Judgment Against Thomas Cavanagh, Frank Nicolois and Eight Other Defendants and Finds That They Engaged in Pump-and-Dump Scheme
Court Orders Over $18 Million in Disgorgement and $3.3 Million in Penalties
Securities and Exchange Commission v. Thomas Cavanagh, et al., 98 Civ. 1818 (SDNY) (DLC)
On July 15, 2004, U.S. District Judge Denise Cote granted summary judgment in favor of the Commission and against the ten remaining defendants in a civil action arising out of the fraudulent offering and sale of securities of Electro-Optical Systems Corporation. In its order, the court found that Thomas Cavanagh, Frank Nicolois, and their company U.S. Milestone had violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and that Thomas Brooksbank, James Franklin, and Thomas Hantges had violated Securities Act Sections 5(a) and 5(c). The Court also granted summary judgment against relief defendants Karen Cavanagh, Beverly Nicolois, their company Cromlix, LLC, and Edward Kaufer.
In granting the Commission's motion for summary judgment, the court permanently enjoined Cavanagh, Nicolois, and Milestone from violating, directly or indirectly, Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The court permanently enjoined Brooksbank, Franklin, and Hantges from violating, directly or indirectly, Securities Act Sections 5(a) and 5(c).
The court also ordered that Cavanagh, Nicolois, and Milestone pay, jointly and severally, disgorgement of $15,564,863.02 – the total amount of the market fraud – plus interest, less any disgorgement amounts actually paid by other defendants and relief defendants. Cavanagh, Nicolois, and Milestone were also each ordered to pay a civil penalty of $1,000,000. The court ordered Brooksbank, Franklin, and Hantges to pay, jointly and severally, disgorgement of $889,275.00 plus interest. In addition, Brooksbank, Franklin, and Hantges were ordered to individually pay disgorgement of $185,337.79, $50,926.50, and $304,654.29, respectively, plus interest. These three defendants were also each ordered to pay a civil penalty of $125,000. Relief defendants Karen Cavanagh, Beverly Nicolois, and their company Cromlix were ordered to pay, jointly and severally, disgorgement of $803,660.75 plus interest. Relief defendant Edward Kaufer and defendant Brooksbank were ordered to pay, jointly and severally, disgorgement of $213,150.97 plus interest.
The Commission filed this action in March 1998, alleging that certain defendants offered and sold securities of Electro-Optical in violation of the registration and anti-fraud provisions of the securities laws. Brooksbank, Franklin, and Hantges, in concert with now-settled defendant George Chachas, were the principal shareholders of Curbstone, a shell corporation that merged with a private company, WTS Transnational, Inc. ("WTS") in late 1997 to form Electro-Optical. They sold over 2.5 million Curbstone management shares to certain nominee shell companies in Spain and provided the nominees options to acquire additional management shares, which were restricted securities that could not be resold to public investors unless pursuant to registration or an exemption. These shares of Curbstone, which after the company's merger with WTS became shares of Electro-Optical, were soon resold to the public in a massive unregistered distribution in which Cavanagh and Nicolois (together with their now-deceased lawyer William Levy) pumped up the Electro-Optical stock price and pocketed millions of dollars.
Judge Cote issued a preliminary injunction in April 1998, having found that the Commission had shown a substantial likelihood of success in proving that the defendants had violated the registration and antifraud provisions of the securities laws. The injunction was affirmed on appeal. In October 1998, the action was stayed due to the criminal investigation and prosecution of Cavanagh, Nicolois, and Levy for false statements made in connection with this litigation. Since then, approximately forty-five persons or entities have either settled by paying full disgorgement or are in default. The order granting the Commission's motion for summary judgment resolves all outstanding claims.
Related Litigation Releases:
Related Administrative Proceedings:
Admin. Release No. 34-49484 / March 26, 2004