U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19064 / February 7, 2005
Securities and Exchange Commission v. Courtney D. Smith, United States District Court for the Central District of California, Case No. LACV-05-0941 R (SHx)
SEC FILES FRAUD CHARGES AGAINST COURTNEY D. SMITH, A TELEVISION FINANCIAL COMMENTATOR AND INVESTMENT ADVISER, FOR MANIPULATING THE STOCK PRICE OF GENESISINTERMEDIA, INC.
The Securities and Exchange Commission today filed a complaint in the United States District Court for the Central District of California charging Courtney D. Smith, a well-known financial commentator, for his role 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. After the scheme collapsed in September 2001, GENI's stock price plunged to pennies per share, leading to the bankruptcy of three brokerage firms and the largest bailout in the history of the Securities Investor Protection Corporation.
The Commission alleges that Smith assisted GENI's Chief Executive Officer and his accomplice (a Saudi Arabian national reputed to be an international arms dealer and financier) in a fraudulent stock manipulation and lending scheme that occurred between September 1999 and September 2001. According to the complaint, GENI's CEO secretly paid Smith approximately $1.1 million in cash and GENI stock to tout GENI shares on television. Smith's public statements, many of which were false or misleading, artificially inflated the price of GENI shares and facilitated the misappropriation of approximately $130 million by GENI's CEO and his accomplice.
According to the complaint, the manipulation of GENI's stock price began shortly after the company's June 1999 public offering. To benefit from the manipulation, GENI's CEO and his accomplice, with the assistance of Kenneth P. D'Angelo (a stock loan broker previously charged by the SEC and criminal authorities), developed a stock lending scheme in which they could profit from lending GENI shares (rather than selling them). The complaint alleges that the CEO and his accomplice, through an offshore entity called Ultimate Holdings, loaned approximately 15 million shares of GENI stock to more than a dozen broker-dealers in exchange for cash (based upon the market value of the shares). As the price of GENI shares increased from the efforts of Smith and others, Ultimate Holdings received additional funds when the GENI stock loans were marked-to-market by the broker-dealers involved. By lending the shares in this manner, Ultimate Holdings and GENI's CEO raised approximately $130 million without giving up control of the stock or depressing the market. GENI's CEO and his accomplice, however, defaulted on the stock loans and failed to repay the $130 million they had borrowed.
The manipulation caused GENI's 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. According to the complaint, key to the manipulation scheme were secret payments GENI's CEO made to Smith to compensate him for touting GENI on television, thereby creating demand for the stock. The complaint alleges that between December 1999 and April 2001, Smith was secretly paid $95,000 in cash and approximately $1 million worth of GENI stock in exchange for making public statements about GENI on CNBC, CNN, CNNfn and Bloomberg TV. The complaint alleges that Smith knew or was reckless in not knowing that many of his public statements about GENI shares were false or misleading and lacked any reasonable basis. The complaint also alleges that Smith disguised his receipt of the $1.1 million by funneling the payments and stock through his girlfriend and her small vitamin exporting company. Additionally, the complaint alleges that Smith worked as an investment adviser and recommended GENI stocks to certain of his clients without disclosing to them that he had been paid to tout GENI.
The Commission charged Smith with violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, as well as the anti-touting provision, Section 17(b) of the Securities Act. As relief, the Commission is seeking a permanent injunction, an accounting of all the money that Smith obtained as a result of his illegal conduct, disgorgement (with prejudgment interest), and civil penalties.
Also today, the United States Attorney's Office for the Central District of California announced related criminal charges against Smith.
The Commission acknowledges the cooperation of the United States Attorney's Office for the Central District of California and the Federal Bureau of Investigation in this matter.