JAMES LAWRENCE KING, District Judge.
This is a civil SEC case alleging stock and market manipulation. Plaintiff brings this action pursuant to the authority conferred on it by Securities Act Section 20(b) and (c) and Exchange Act Section 21(d) and (e). See 15 U.S.C. §§ 77t(b) & (c), 78u(d) & (e). Defendants include a business owner, stock traders, an attorney, and an accountant, all of whom are accused, both civilly and criminally, of perpetrating a fraudulent "pump-and-dump scheme"
On February 18, 2011, Plaintiff SEC filed the above-styled action, alleging violations of various securities laws. (See Compl., DE # 1). Default, consent, and summary judgments have been entered against all Defendants, except for Weinbaum and Zigdon.
This matter concerns the sale of the common stock of C02 Tech, a limited private company incorporated in the United Kingdom on January 24, 2007. (DE # 70-6, at 142). C02 Tech maintained a registered office at 95 Wilton Road, Suite 3, London, England. (DE # 70-6, at 144; Feb. 2, 2007 screenshot of http://www.co2-tech.contact_us.html, DE # 70-6, at 127). C02 Tech's manufacturing and research development facility was supposedly in Israel, on property owned by a subsidiary named Shamar Industries, Inc. (See Declaration of Israel Securities Authority ("ISA Decl."), DE # 70-3, ¶ 9). According to C02 Tech's website, Helga Schotten was the company's president, and Jacob Froynd was Chief Executive Officer. (Feb. 2, 2007 screenshot of http://www.co2-tech.contact_us.html, DE # 70-6, at 127).
In actuality, C02 Tech's address listed at 95 Wilton Road, Suite 3, was a mail drop rented from Steinberg & Partners Business Consulting Corporation. (See App. Ex. 19, DE # 70-6, at A131-35). In addition, according to Israeli officials, Shamar Industries was never listed with Israel's official Companies Registrar. (ISA Decl. ¶ 9). Further, and upon an extensive search, Israeli authorities could not locate C02 Tech's purported manufacturing facility. (Id.)
With regard to C02 Tech's corporate officers, Froynd, the company's CEO, had not traveled outside of Israel since November 1, 2003, and its President, Schotten, had not traveled outside of Israel since May 18, 2004. (ISA Decl. ¶ 6). According to Israeli authorities, Ms. Schotten was the 72-year-old mother of Froynd. (Id.).
In 2006, Defendants Weinbaum and Zigdon asked Defendant Michael Krome, an attorney licensed in New York, to find a public shell corporation for purchase, so that Defendants Weinbaum and Zigdon could facilitate an eventual merger of the shell corporation and C02 Tech. (Krome Decl. ¶ 3, DE # 70-4). In early October 2006, Defendant Weinbaum wire transferred approximately $82,000 to Defendant Krome's escrow account as part of the money needed to purchase a check in the amount of $120,000 to be deposited in Krome's escrow account. (Id. ¶ 4). This additional money made up the balance of the purchase price and incidental costs related to the purchase of a shell company. (Id.).
While Defendant Krome was looking for a shell company for purchase, Defendant Weinbaum met with Defendant Jonathan Curshen in late October or early November of 2006 to discuss the opening of a brokerage account at Red Sea Management Ltd., an asset protection company owned and operated by Defendant Curshen and located in San Jose, Costa Rica. (Jan. 23, 2012 Joseph Francis Direct, DE # 70-6; Nov. 7, 2006 Email from Jonathan Curshen, DE # 70-6, at 68). Around the same time, in late 2006, Defendant Weinbaum hired Defendant Robert Weidenbaum, a stock promoter in the United States, to distribute press about C02 Tech to increase its public exposure and to eventually organize match buy and sell orders of C02 Tech stock. (Jan. 18, 2012 Weidenbaum Direct 62:8-69:25, Case No. 11-CR-20131-RWG, DE # 70-7). Specifically, Defendant Weidenbaum arranged for
Soon thereafter, in December 2006, Defendant Krome located a shell company for sale: China Energy & Carbon Black Holdings, Inc. ("China Energy"), a public company in Nevada with no assets or revenues. (Declaration of Michael S. Krome ("Krome Decl."), DE # 70-4, ¶ 5). On December 21, 2006, Krome used Defendant Weinbaum's escrow funds to purchase China Energy for $175,000. (Id. ¶ 6). On January 2, 2007, Defendant Krome filed information with Nevada's Secretary of State to change China Energy's name to C02 Tech Ltd. (Id. ¶ 8).
The following day, on January 3, 2007, Defendant Krome, at the direction of Defendants Weinbaum and Zigdon, filed a certificate of incorporation with Delaware's Secretary of State for a company called JB Investment Enterprises Ltd. (Id.). Subsequent to the January 3, 2007 incorporation of JB Investment Enterprises Ltd., Defendants Weinbaum and Zigdon sent to Defendant Krome a debenture note that stated as of October 1, 2006 C02 Tech owed a debt of $200,000 to JB Investment Enterprises Ltd. (Id. ¶ 9). The note further provided that in the event C02 Tech was unable to repay the note with interest to JB Investment Enterprises by January 1, 2007, the full amount due could be converted into shares of C02 Tech stock and issued to JB Investment Enterprises. (Id.). Defendant Krome knew the debenture note to be false, because it referred to a debt owed by C02 Tech to JB Investment Enterprises Ltd. prior to the existence of JB Investment Enterprises Ltd. (Id. ¶ 10).
The discussions between Defendant Weinbaum and Defendant Curshen about opening an account at Red Sea continued in early January 2007, when Defendant Curshen and Defendant Weinbaum, along with their families, went on a ski trip in Whistler, Canada. (Jan. 19, 2012 Michael Bahar Direct 59:3, Case No. 11-CR-20131-RWG, DE # 70-6). Michael Bahar, Defendant Weinbaum's brother-in-law, was present at a "small business meeting" in Whistler when Defendants Weinbaum and Curshen agreed that Defendant Weinbaum would sell C02 Tech stock through Red Sea. (Id. 82:16-20). Shortly thereafter, on January 9 and 10, 2007, Defendant Zigdon received emails from Lucia Shum, the office manager at Red Sea, about the necessary forms to open a brokerage account at Red Sea. (January 9, 2007 Email from Lucia Shum to Zigdon, DE # 70-6, at A59). Around this time, Defendant Weinbaum also told Defendant Krome that a brokerage firm called Red Sea would be working on the C02 Tech transaction. (Krome Decl. ¶ 2).
Then, on January 16, 2007, at Defendant Weinbaum's request, Defendant Krome wrote a legal opinion letter to a stock transfer company, advocating for the release from the treasury of 22,500,000 shares of C02 Tech stock to MMTC & Co., without restrictive legend, as assignee of the October 2006 debenture note between JB Investment Enterprises Ltd. and C02 Tech. (Krome Dec. ¶¶ 9, 11; Jan. 16, 2007 Letter from Krome to OTC, DE # 70-6, at 11-16). The letter vouched for the authenticity of the October 2006 debenture note between JB Investment Enterprises Ltd. and C02 Tech, as well as the transaction's compliance with the Uniform Commercial
By the following week, at the urging of Defendant Weinbaum, a public media campaign was underway. (Jan. 18, 2012 Weidenbaum Direct 90:11-92:24). Defendant Zigdon's sister, Hila Zigdon Shtork, began to work on the graphics for the C02 Tech website. (Dec. 5.2011 Hochman Dep. 56:10-21, DE # 70-7). In addition, Defendant Zigdon asked Renee Hochman, the owner of a translation service in Tel Aviv, Israel, to edit the website, and Defendant Weinbaum also asked Bahar to review and make minor edits to the website. (Id. 55:24-56:2; Dec. 1, 2011 Bahar Dep. 39:1-8, DE # 70-6).
The website published statements about C02 Tech's purported services and its research and development program:
(Feb. 14, 2007 screenshot of http://www.co2-tech.com/index.html, DE # 70-6, at 96). In addition, the website referred to C02 Tech's purported contracts and clients:
(Feb. 2, 2007 screenshot of http://www.co2-tech.com/companyprofile.html, DE # 70-6, at 120).
On January 25, 2007, the C02 Tech website went live. That same day, Defendant Weinbaum's company, CLX & Associates, entered into a "consulting agreement" with C02 Tech, whereby CLX would provide investor relations for C02 Tech prior to the coordination of matched trades in exchange for $275,000.00. (Weidenbaum Direct 72:1-74:23). The next day, January 26, 2007, Red Sea began to sell C02 Tech stock into the public market. (Client Trade Report, DE # 70-6, at 17).
In addition to the website, Zigdon worked with Hochman to translate and disseminate C02 Tech press releases regarding C02 Tech's purported business relationships and activities. (Hochman Dep. 17:6-26:16; Jan. 31, 2007 Email from Hochman to Yakubuv, DE # 70-6, at 174). On January 30, 2007, C02 Tech issued a press release stating that "Boeing's interest has been captured by C02 Tech's new solution to reduce polluting gases emitted from airplanes at high altitudes," and, in
The next day, C02 Tech issued another press release claiming that C02 Tech "will exhibit its new solution to reducing gaseous emissions [from] airplanes at high altitudes for Boeing's review." (Jan. 31, 2001 "C02 to Exhibit New Anti-Global Warming System Solutions for Boeing's Review in Q2/2007" Press Release, DE # 70-6, at 152). The press release quoted Schotten as saying that C02 Tech "intend[s] to collaborate with Boeing in testing this product after completion of our prototype in Q2/2007 so that Boeing may be the first aircraft manufacturer to implement the new anti-global warming system and succesfully [sic] reduce air pollution." (Id.). The press release concludes with Schotten's statement that, "We are very pleased with Boeing's encouragement of our work on this innovative product...." (Id.).
Less than one week later, on February 5, 2007, Boeing sent a letter and email to Schotten "demand[ing] that C02 Tech immediately cease its use of the Boeing name and trademark in any press release issued by or on behalf of C02 Tech. Additionally, we demand that C02 Tech cease and desist any action that implies any association between Boeing and C02 Tech." (Feb. 5, 2007 Letter from Boeing to Schotten, DE # 70-6, at 155-56). The next day, Boeing received an email from Schotten apologizing for "any impression of an active association or affiliation between Boeing and C02 Tech." (Feb. 6, 2007 Email from Schotten to Boeing, DE # 70-6, at 156).
At the same time that C02 Tech was issuing false statements, its stock was being artificially inflated. In the pre- and early market hours of January 30, 2007, the sell-side (Weinbaum, Bahar, Ricci, and Salazar) and the buy-side (the Reynolds Group) engaged in matched orders of C02 Tech stock at increasing prices. For example, at 8:33 a.m., a Red Sea account entered a sell order for 100,000 shares at $0.91 per share and at 8:40 a.m. entered a sell order for an additional 27,000 shares at $0.93 per share. (Declaration of Craig Miller, executed on February 22, 2012 ("Miller Decl."), DE # 70-5, ¶¶ 3-4). Less than a minute later, the Reynolds Group bought the 127,000 shares at $0.94 per share. (Miller Decl. ¶ 3). At 8:52 a.m., a Red Sea account entered a sell order for 25,500 shares of C02 Tech stock at $0.94 per share. (Miller Decl. ¶ 6). A minute and a half later, in two separate transactions, the Reynolds Group bought the 25,500 shares at $0.95 per share. (Miller Decl. ¶¶ 6-7). At 9:29 a.m., a Red Sea account placed a sell order for 250,000 shares at $0,987 per share, which the Reynolds Group immediately bought for $0,987 per share. (Miller Decl. ¶ 8). At 9:38 a.m., a Red Sea account placed a sell order for 25,000 shares at $1.11 per share. (Miller Dec. ¶ 9). Less than a minute later, the Reynolds Group bought the 25,000 shares at the asked price. (Miller Decl. ¶ 9). On January 30, 2007, the Reynolds Group bought over 1.2 million shares of C02 Tech stock. (Oremland, at A322).
The next day, on January 31, 2007, Bahar arrived at Red Sea's office in Costa Rica and was given a desk on the trading floor. (Bahar, at A220-21, 241, A179). From his home in Boca Raton, Florida, Defendant Weinbaum telephoned Bahar with specific selling instructions, and Bahar relayed those instructions to David Ricci and Ronni Salazar, both traders at Sentry Global. (Bahar, at A233-34; see
These efforts to manipulate the stock of a fictitious company amounted to blatant securities fraud. The existence of Defendants' pump-and-dump scheme is undisputed. Default, consent, and summary judgments have been entered against all Defendants, except for Weinbaum and Zigdon. And the record leaves no question that Defendants Weinbaum and Zigdon violated Section 5 and Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. The uncontested findings of fact compel the conclusion that the SEC's Motion for Summary Judgment must be granted to the issue of liability. Trial will proceed on the issue of damages.
Summary judgment is appropriate where the pleadings and supporting materials establish that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses." Celotex, 477 U.S. at 323-24, 106 S.Ct. 2548.
The moving party bears the burden of pointing to the part of the record that shows the absence of a genuine issue of material fact. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir.1997). Once the moving party establishes the absence of a genuine issue of material fact, the burden shifts to the nonmoving party to go beyond the pleadings and designate "specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 324, 106 S.Ct. 2548; see also Chanel, Inc. v. Italian Activewear of Fla., Inc., 931 F.2d 1472, 1477 (11th Cir.1991) (holding that the nonmoving party must "come forward with significant, probative evidence demonstrating the existence of a triable issue of fact.").
"Summary judgment may be inappropriate even where the parties agree on the basic facts, but disagree about the factual inferences that should be drawn from these facts." Warrior Tombigbee Transp. Co., Inc. v. M/V Nan Fung, 695 F.2d 1294, 1296 (11th Cir.1983). On a motion for summary judgment, the court must view the evidence and resolve all inferences in the light most favorable to the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). However, a mere scintilla of evidence in support of the nonmoving party's position is insufficient to defeat a motion for summary judgment. See id. at 252, 106 S.Ct. 2505. If the evidence offered by the nonmoving party is merely colorable or is not significantly probative, summary judgment is proper. See id. at 249-50, 106 S.Ct. 2505.
As against Defendants Weinbaum and Zigdon, Plaintiff SEC alleges violations of Section 10(b) and Rule 10b-5 of the Exchange Act, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5, (Count I); Sections 17(a)(1), (2) and (3) of the Securities Act, 15 U.S.C. § 77q(a)(1), (2) & (3), (Count II); and Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) & (c), (Count IV). As the moving party, Plaintiff SEC bears the burden of demonstrating that there is no genuine issue about any material fact necessary to establish liability for Defendants Weinbaum and Zigdon. Plaintiff SEC has met this burden; the Defendants have failed to identify specific disputed facts.
Section 10(b) and Rule 10b-5 of the Exchange Act prohibit false statements and market manipulation.
17 C.F.R. § 240.10b-5.
Section 17(a) of the Securities Act imposes similar prohibitions. To establish a violation of Section 17(a)(2) and Rule 10b-5(b), the SEC must prove "(1) a misstatement or omission, (2) of a material fact, (3) made with scienter." SEC v. Dunlap, 2002 WL 1007626, at *5 (S.D.Fla. Mar. 27, 2002) (quoting Ziemba v. Cascade Int'l Inc., 256 F.3d 1194, 1202 (11th Cir. 2001)). To establish a violation of Section 17(a)(1) or (3) and Rule 10b-5(a) or (c), the SEC must prove that an individual "(1) committed a manipulative or deceptive act (2) in furtherance of the alleged scheme to defraud, (3) scienter...." In re Global Crossing, Ltd. Securities Litig., 322 F.Supp.2d 319, 336 (S.D.N.Y.2004). The SEC, unlike private litigants, "`does not need to prove investor reliance, loss causation or damages' in actions under 10(b) or 17(a)." SEC v. K.W. Brown & Co., 555 F.Supp.2d 1275, 1303 (S.D.Fla.2007) (quoting SEC v. Credit Bancorp, 195 F.Supp.2d 475, 490-91 (S.D.N.Y.2002)). The language of Section 17(a)(1) and (3) and Rule 10b-5(a) and (c) does not require misstatement or omission to have been made directly by the defendants; it is "aimed at broader fraudulent schemes" than Section 17(a)(2) and Rule 10b-5(b). SEC v. Lee, 720 F.Supp.2d 305, 325 (S.D.N.Y.2010).
A pump-and-dump stock scheme is a classic violation of these provisions. The actions of Defendants Weinbaum and Zigdon repeatedly violated the anti-fraud provisions of the Securities Act and Exchange
These undisputed facts leave no doubt that Defendants Weinbaum and Zigdon violated Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17 of the Securities Act. That Defendants Weinbaum and Zigdon manipulated the stock of a nonexistent corporation, with headquarters that were nothing more than a mail drop and a purported manufacturing facility that could not be located, makes their violations all the more clear.
Section 5 of the Securities Act prohibits any sale, whether direct or indirect, of an unregistered security. Liability for offerors and sellers is strict, "regardless of ... any degree of fault, negligent or intentional, on the seller's part." SEC v. Calvo, 378 F.3d 1211, 1212 (11th Cir. 2004) (quoting Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir.1980)). "Neither negligence nor scienter is an element of a prima facie case under Section 5 of the Securities Act." SEC v. Friendly Power Co., 49 F.Supp.2d 1363, 1367 (S.D.Fla. 1999). To establish a prima facie case, the SEC must show that: "(1) securities were offered or sold for which no registration statement was filed or in effect; (2) the offering or sale was made through the means or instruments of transportation or communication in interstate commerce or the mails; and (3) defendants, directly or indirectly, offered or sold the securities." Id. The defendant need not have directly sold the unregistered security "if it can be shown that he was a `necessary participant' or a `substantial factor' in the offering or selling...." Id. at 1372 (quoting SEC v. Holschuh, 694 F.2d 130, 139 (7th Cir.1982)).
It is undisputed that C02 Tech's stock was not registered and that, for the reasons discussed in Part III.A, Defendants Weinbaum and Zigdon were, at the very least, necessary participants and substantial factors in the interstate sale of the unregistered securities. In particular, both Defendants chose to open an account for C02 Tech with Red Sea Management to facilitate the pump-and-dump scheme; individually, Defendant Weinbaum provided specific buying and selling instructions for the matching orders, resulting in the Reynolds Group alone buying 1.2 million shares in a single day, and Defendant Zigdon orchestrated the false media campaign to inflate interest in the purchase of C02 Tech shares. As such, the uncontested facts establish that Defendants Weinbaum and Zigdon violated Section 5 of the Securities Act.
Accordingly, after careful review of the record and the Court being otherwise fully advised, it is
