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Wayne M. Carlin (WC-2114)
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Securities and Exchange Commission, Plaintiff, - against - eWealth Securities, Inc., Defendants. |
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02 Civ. ( ) |
Plaintiff Securities and Exchange Commission ("Commission"), for its complaint against defendants eWealth Securities, Inc. ("eWealth"), eWealth Holdings, Inc. ("Holdings"), Neil Formisano ("N. Formisano"), Donald Cunningham ("Cunningham"), Jonathan Aronica ("Aronica"), and Steven Mastrosimone ("Mastrosimone") (collectively the "Defendants"), alleges as follows:
1. The Commission brings this action to stop a brazen securities fraud perpetrated by the Defendants. Since at least January 2000, eWealth, a registered broker-dealer, and the other defendants have fraudulently obtained over $7 million from approximately 100 investors by making blatantly false and misleading statements in unregistered offerings of the securities of Holdings, a purported personal financial portal, providing comprehensive Internet based financial services (banking, mortgage, insurance) to consumers.
2. To induce investors to purchase Holdings' securities, the Defendants have continuously misrepresented that Holdings will conduct an initial public offering ("IPO") in the near future - usually within 3 to 9 months, that Holdings will trade at 4 to 5 times its offering price, and that investor funds would be used for legitimate business purposes. The Defendants further have misrepresented material facts concerning Holdings' business activities, including that Holdings had "entered into contract" to purchase a bank, the credentials of Holdings' president, and the safety of certain bond offerings by Holdings.
3. The Defendants knew or were reckless in not knowing that their representations to investors were blatantly false. The various IPO target dates the Defendants gave to earlier investors have come and gone without any IPO having been initiated. Despite Commission requests, the Defendants have provided no information demonstrating that Holdings is preparing for an IPO and Holdings has not filed a registration statement with the Commission. Holdings has no operating history to support the Defendants' projections concerning stock price, and Holdings never purchased a bank. N. Formisano and Cunningham appear to have diverted several million dollars of the offering proceeds to a separate entity they controlled.
4. eWealth, Holdings and the other defendants are an ongoing threat. In the last few months, the Defendants have continued to represent that the IPO is on target, even though, on March 1, 2002, Holdings became void and inoperative under Delaware law for failure to pay its taxes. As recently as July 2002, defendants raised approximately $278,000 from six investors. eWealth has told current investors that it is still soliciting investments in Holdings. In an effort to allay investors' concern about their Holdings investments, the Defendants have even misrepresented why the Commission staff has contacted investors during its investigation - stating that these contacts were routine and investors should not be concerned, and even suggesting that the calls from the Commission staff related to the IPO itself. Recently, as the investigation continued, the Defendants have engaged in witness tampering. Defendants have told investors that the Commission staff is harassing investors. Defendants also have pressured investors to make false statements to the Commission staff.
5. The Defendants, directly or indirectly, are engaging, have engaged, and are about to engage, in violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a), 77e(c), 77q(a), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78j(b), and Rule 10b-5, 17 C.F.R. §240.10b-5. eWealth, directly or indirectly, is engaging, has engaged, and is about to engage, in violations of Sections 17(a), 17(b), 15(g)(2) and 15(g)(5) of the Exchange Act, 15 U.S.C. §§ 78q(a), 78q(b), 78o(g)(2), 78o(g)(5) and Rules 15g-9 and 17a-4(j), 17 C.F.R. §§ 240.15g-9 and 240.17a-4(j). N. Formisano has aided and abetted eWealth's violations of Sections 17(a) and 17(b) of the Exchange Act, 15 U.S.C. §§ 78q(a) and 78q(b) and Rule 17a-4(j), 17 C.F.R. § 240.17a-4(j).
6. Unless the Defendants are temporarily restrained and preliminarily and permanently enjoined, they will continue to engage in the transactions, acts, practices and courses of business alleged herein, and in transactions, acts, practices, and courses of business of a similar type and object.
7. The Commission brings this action pursuant to authority conferred by Sections 20(b) and 20(g) of the Securities Act, 15 U.S.C. §§ 77t(b) and 77t(g), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), seeking to temporarily restrain, and preliminarily and permanently enjoin the Defendants from engaging in the wrongful conduct alleged in this complaint. The Commission also seeks a final judgment ordering the Defendants to disgorge their ill-gotten gains and to pay prejudgment interest thereon, permanently prohibiting each Defendant from participating in any future penny stock offering pursuant to Section 20(g) of the Securities Act, 15 U.S.C. § 77t(g), and Section 21(d)(6) of the Exchange Act, 15 U.S.C. § 78u(d)(6), and ordering the Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d). The Commission also seeks equitable relief while this action is pending, including an order (a) temporarily restraining and preliminarily enjoining defendants from future violations of registration, antifraud, and books and records provisions of the Securities Act and the Exchange Act , (b) freezing Defendants' assets, (c) allowing expedited discovery, preventing the destruction of documents and prohibiting the defendants from witness tampering, suborning perjury or otherwise impeding discovery or the prosecution of this case, (d) requiring accountings of ill-gotten gains, (e) temporarily restraining and preliminarily enjoining each Defendant from participating in any future penny stock offering; and (f) appointing a temporary receiver for eWealth and Holdings.
8. This Court has jurisdiction over this action, and venue lies in this District, pursuant to Sections 20(b), 20(g) and 22(a) of the Securities Act, 15 U.S.C. §§77t(b), 77t(g), 77v(a), and Sections 21(d), 21(e) and 27 of the Exchange Act, 15 U.S.C. §§77u(d), 77u(e) and 78aa.
9. The Defendants, directly and indirectly, singly or in concert, have made use of the means and instrumentalities of transportation or communication in, or the instrumentalities of, interstate commerce, or of the mails, in connection with the transactions, acts, practices, and courses of business alleged in this complaint. eWealth and Holdings maintain an office and transact business in the Southern District of New York.
10. eWealth is a broker-dealer that is registered with the Commission pursuant to Section 15(b) of the Exchange Act. eWealth is a New York corporation, previously incorporated in April 1998 under the name F.L.P. Gilmour & Associates ("Gilmour"). eWealth changed its name from Gilmour to eWealth Securities, Inc. on October 5, 2000. eWealth maintains offices in White Plains and Glen Falls, New York. eWealth is wholly owned by Holdings.
11. Holdings was incorporated under the laws of the State of Delaware in November 1999 under the name eWealth.com Holdings, Inc, and then changed its name to eWealth Holdings, Inc. on April 3, 2001. Holdings' business address is the same as eWealth's White Plains office. As of March 1, 2002, Holdings is no longer an existing corporation under Delaware law because it is inoperative and void for non-payment of taxes.
12. N. Formisano, 34, resides in Katonah, New York, is the Executive Vice President of eWealth, and holds a Series 24 license and a Series 7 license. According to the Holdings offering memoranda, N. Formisano is the Chairman and Chief Executive Officer ("CEO") of Holdings. He informed the Commission staff that he is an approximately 87% owner of Holdings. Approximately 5% of Holdings is owned by F.L.P. Gilmour, the previous owner of the broker-dealer of the same name.
13. Cunningham, 40, resides in Glen Ridge, New Jersey, is a registered representative of eWealth, and holds a Series 7 license. According to the Holdings Private Placement Memoranda, Cunningham is the President of Holdings.
14. Aronica, 29, resides in Great Neck, New York, is a general principal and registered representative of eWealth, and holds Series 7 and Series 24 licenses.
15. Mastrosimone, 23, resides in Yorktown, New York, is a general principal and registered representative of eWealth, and holds Series 7 and Series 24 licenses.
16. eWealth Solutions, L.L.C. ("Solutions") is a limited liability company organized in Delaware that purportedly provides Internet-based financial services software to banks and other financial institutions. Solutions shares the same address in White Plains, New York as eWealth and Holdings. According to N. Formisano, Solutions is owned by N. Formisano (48%), GP Strategies Corp. (35%), and Hunter-Brook Associates (17%). According to the Solutions website, N. Formisano is the Chairman and CEO of Solutions, and Cunningham is the Chief Strategic Investment officer of Solutions. Solutions ceased to be a limited liability company in good standing with the Delaware Secretary of State on June 1, 2002 by reason of neglect, refusal, or failure to pay an annual tax.
17. In March 1999, N. Formisano joined eWealth's predecessor firm, Gilmour, as a general securities representative. In July 1999, N. Formisano, through a limited partnership wholly owned by him, purchased fifteen percent of Gilmour with the right to purchase the remaining eighty-five percent. In or about October 2000, N. Formisano's limited partnership purchased the remaining eighty-five percent of Gilmour for approximately $200,000. He changed the entity's name to eWealth and sold it to Holdings for a $1.3 million promissory note. According to N. Formisano, he owns 87% of Holdings.
18. From January 2000 through the present, the Defendants have offered and sold, without ever filing a registration statement with the Commission, over $7 million of Holdings stock to approximately 100 investors, purportedly to develop the business and take Holdings "public." The Defendants conducted this unregistered stock offering using the telephone, email and mail delivery services.
19. In conjunction with the unregistered stock offerings described above in paragraph 18, the defendants also prepared and distributed two offering memoranda to promote the sale of Holdings stock to prospective investors, dated January 26, 2000 (the "January 26, 2000 Memorandum") and November 10, 2000 (the "November 10, 2000 Memorandum") (collectively the "Holdings Private Placement Memoranda"). The January 26, 2000 Memorandum describes a $5 million offering consisting of common stock at $2.50 per share, and the November 10, 2000 Memorandum describes a $5 million offering of common stock at $4.00 per share. Some investors also purchased Holdings stock at $3.00 per share, and other investors purchased "bonds" convertible to Holdings stock at $4.00 and $5.00 per share.
20. eWealth representatives, including N. Formisano, Cunningham, Aronica and Mastrosimone, solicited eWealth customers to invest in Holdings, and to refer their co-workers to eWealth so that they too could be solicited to invest in Holdings. At least some of these investors were unaccredited at the time they purchased Holdings securities. Holdings did not have audited financial statements at the time of the offerings and therefore Defendants did not provide investors with information of the type available in a registration statement. The Defendants also failed to give each Holdings investors the written disclosures required for "penny stock" transactions of the type that occurred here.
21. eWealth, through N. Formisano, failed to provide the Commission staff records that registered broker-dealers are required to maintain and to furnish promptly upon the staff's request, including records of each sale or purchase of Holdings securities and customer correspondence.
22. Each of the Defendants made material misrepresentations in the offer and sale and in connection with the purchase and sale of Holding's securities. In telephone calls, investor correspondence, email and the Holdings Private Placement Memoranda, the Defendants have made misrepresentations concerning: (i) the planned IPO of Holdings stock; (ii) price and profit projections for Holdings stock, (iii) Holdings' business activities; (iv) the use of the Holdings offering proceeds; (v) the credentials of Holdings' management; and (vi) the safety of certain Holdings investments.
23. The Defendants have materially misled prospective investors about the likelihood of Holdings becoming a public company by misrepresenting, among other things, that Holdings would be "going public" in the near future, and that "everything was on track" for an IPO.
24. N. Formisano made misrepresentations about a future IPO to prospective investors. For example, in January 2000, N. Formisano told one prospective investor over the telephone that Holdings "will go public within nine months" and its stock will trade in the aftermarket at a price "four to five times" what the investor paid.
25. Cunningham made misrepresentations about a future IPO to prospective investors. For example, in February 2002, Cunningham told an investor over the telephone that Holdings would have an IPO within the next few months.
26. Aronica made misrepresentations about a future IPO to prospective purchasers. For example, over the telephone he made the following misrepresentations:
(a) In January 2000, Aronica told an investor that Holdings would complete a public offering in "six to nine months."
(b) In February 2000, Aronica told another investor that Holdings was a "pre-IPO" stock, and to expect a Holdings IPO "within a year."
(c) In October 2001, Aronica told another investor (who had purchased stock at $2.50 per share) that Holdings would go public in six to nine months, and it would open at $8 to $12 per share. He quoted a price of $16 to another investor as the offering price.
(d) In October 2001, Aronica told an investor that Holdings was "about to go public."
(e) In August 2002, Aronica told an investor that Holdings had submitted its paperwork to the SEC to "go public."
27. Mastrosimone made misstatements about a future IPO over the telephone to prospective purchasers. For example:
(a) In October 2001, Mastrosimone told an investor that Holdings would "go public" in September of 2002.
(b) In October 2001, Mastrosimone told another investor that Holdings would "go public" in six to nine months. As recently as September 17, 2002, when the same investor asked when the Holdings IPO would occur, Mastrosimone stated that it would occur "in the middle of next year."
28. The representations described in paragraphs 23-27 were and are false and misleading because, among other reasons, Holdings has not: (a) prepared a draft prospectus; (b) hired underwriters, auditors or other professionals for an IPO; (c) obtained audited financial statements; or (d) filed a registration statement with the Commission. Since March 1, 2002, Holdings has been inoperative and void under Delaware law for non-payment of taxes, and therefore by definition, could not issue stock, let alone proceed with an IPO. eWealth and Holdings failed to provide any evidence in response to the Commission's investigative requests that an IPO or other transaction through which Holdings stock would become publicly traded is under way or even feasible; or that Holdings has taken any meaningful steps to prepare for an initial public offering, such as communications with prospective underwriters, professional advisors, or auditors. The representations described in paragraphs 23-27 were and are material.
29. The Defendants also made baseless, and often contradictory, price projections in conjunction with their misrepresentations about the likelihood of Holdings conducting an IPO.
30. The Defendants made the baseless price projections to prospective investors. For example, in February 2002, Cunningham told an investor over the telephone that once Holdings went public, the initial price of each share would reach between $10 and $20.
31. N. Formisano told an investor in January 2000 that based on the IPOs of similar companies, Holdings stock would trade in the aftermarket at "four to five times" what the investor paid.
32. Aronica also made misrepresentations about stock prices and profits to prospective purchasers:
(a) Aronica told an investor over the telephone that Holdings would eventually be "a $30 stock."
(b) Aronica told another investor over the telephone that after the IPO, he expected Holdings stock to open at $20 per share.
33. Mastrosimone made similar misrepresentations to prospective investors:
(a) Mastrosimone told one investor over the telephone that after the IPO, Holdings shares would appreciate "500 percent" from the $3.00 offering price.
(b) Mastrosimone told another investor over the telephone that Holdings shares would eventually reach $40 per share after the IPO.
34. The representations described in paragraphs 29-33 were and are false and misleading for the reasons set forth in paragraph 28, and because: (a) Holdings owns only a small brokerage firm and has no known cash flow or clients; (b) the Holdings Private Placement Memoranda contain no financial statements or verifiable facts that could support such a share price; (c) the price projections lacked a factual basis and were inherently arbitrary; and (d) the disparity among the price projections given to different investors indicates that the figures were fabricated. The representations described in paragraphs 29-33 were and are material.
35. In telephone calls, correspondence, email, web postings and in a Holdings "Business Summary," the Defendants misled investors about Holdings' business activities. The Defendants falsely represented that (a) Holdings had entered into partnerships with major U.S. technology and finance companies, (b) Holdings had "entered into contract" to acquire a bank, and (c) that Solutions is a division or subsidiary of Holdings.
36. In an email dated August 10, 2000, for example, N. Formisano told at least one investor that Holdings "developed partnerships with Cisco, Oracle and IBM and standardized on adding their technologies to our own to create the design for our flexible financial website," and also "partnered with UUNET, Cisco, Oracle and Red Hat, to create the best of breed technology platform."
37. In emails sent to investors in June and July 2001, N. Formisano misrepresented to investors that:
(a) Holdings "had entered into contract to purchase Public Savings Bank," a bank located in Willow Grove, an "upscale suburb" outside Philadelphia, Pennsylvania;
(b) Public Savings Bank "should become the centerpiece of our financial structure;"
(c) Holdings' plan was -- in three years -- to "grow the bank from its current asset base of $22 million to an institution with assets in excess of $250 million..." and that Holdings had a strategic plan and model supporting this projected growth;
(d) Holdings intends to convert Public Savings Bank from a state-chartered bank to a federally-chartered thrift institution; and
(e) Holdings was offering "convertible bonds" with a three year maturity date, to fund the acquisition of a federal charter for Public Savings Bank, which henceforth would be known as "eWealth Bank."
38. The Holdings Business Summary sent to at leaset one investor by fax on November 29, 2001 and which lists Cunningham as the contact person, stated that:
(a) Holdings "has entered into contract to purchase the Public Savings Bank of Philadelphia."
(b) Holdings had a "three-year plan" to grow the Public Savings Bank to "an institution with assets in excess of $250 million."
39. Aronica told more than one investor after the purported Public Savings Bank purchase, that eWealth was a "bank" and provided "banking services."
40. Aronica and Mastrosimone have told several investors that Solutions is either a division or subsidiary of Holdings, or they have described Holdings' business as the same as Solutions:
(a) Aronica, for example, told one investor that Solutions was a wholly-owned subsidiary of Holdings.
(b) Aronica told other investors to look at the Solutions website to see how "Holdings is growing."
(c) Aronica led investors to view web postings and "press releases" representing that eWealth was a "premier provider of online financial solutions to banks, financial institutions, affinity groups, member based organization [sic], corporate internets and extranets." He led the same investors to view web postings and "press releases" describing Solutions as "private-label, online, full service banking, bill paying and brokerage services, along with sophisticated research, investment and educational tools."
(e) Mastrosimone told an investor that Holdings supplies software solutions to businesses--the same business description as provided by Solutions on its website. In fact, web postings by Solutions also state that Solutions provides services that are identical to the services that eWealth claims to provide to the same type of clients.
41. The representations described in paragraphs 35-40 were and are false and misleading because, among other reasons, (a) each of the companies that are listed as having partnerships with Holdings have denied any such partnerships; (b) the President of the Public Savings Bank informed the staff that the Public Savings Bank never entered into a contract with Holdings for the sale of Public Savings Bank; and neither Holdings nor Solutions is a "bank," or provides services to any banking clients; (c) Public Savings Bank was never purchased by eWealth or Holdings, and no investor funds are invested in it; (d) N. Formisano informed the staff that Solutions is wholly-owned by himself and two other entities, and that Solutions is not a part of Holdings or eWealth; and (e) despite repeated requests to Holdings for information or evidence that would support of the above statements by the associated persons, Holdings has refused to produce anything. The representations described in paragraphs 35-40 were and are material.
42. Defendants made misrepresentations to investors about Holdings' use of the offering proceeds. For example, in the Holdings Private Placement Memoranda, Holdings, N. Formisano and Cunningham made misrepresentations concerning Holdings' use of funds for the acquisition of a broker-dealer and for general corporate purposes.
43. The January 26, 2000 Memorandum states that approximately $400,000 of Holdings investor funds would be used to acquire a registered broker-dealer.
44. The Holdings Private Placement Memoranda state that Holdings will use a combined $2.45 million for working capital and general corporate purposes.
45. The representations described in paragraphs 42-44 were and are false and misleading because, among other reasons, (a) according to the November 10, 2000 Memorandum, Holdings acquired the registered broker-dealer from a limited partnership owned by N. Formisano for a $1,300,000 promissory note and sought investor funding to pay off the note to purchase the broker-dealer from N. Formisano, who had previously purchased eWealth for $200,000; (b) Holdings has failed to pay for necessary corporate expenses - for example, Holdings failed to pay its Delaware corporate tax, resulting in Holdings becoming void and inoperative as a corporation under Delaware law; and (c) Defendants N. Formisano and Cunningham appear to have diverted several million dollars of the Holdings offering proceeds to Solutions. The representations described in paragraphs 42-44 were and are material.
46. In the Holdings Private Placement Memoranda, the Holdings Business Summary, and the eWealth web page (eWealthsecurities.com), Holdings, N. Formisano and Cunningham misrepresent Cunningham's qualifications and past achievements. The documents state that:
(a) Cunningham "completed graduate studies" in finance at the Massachusetts Institute of Technology ("MIT");
(b) Cunningham was "a member of the Office of Technology for the United States Senate from 1993 to 1997;"
(c) Cunningham was "a member of the National Security Advisory Council for Los Alamos Labs from 1992 to 1998;" and
(d) Cunningham received the "Prince of Wales Award for finance in 1997."
47. The representations described in paragraph 46 were and are false and misleading because, among other reasons, (a) Cunningham never attended MIT; (b) Cunningham was never an employee or "member" of the Office of Technology Assessment of the U.S. Congress, which closed its doors in September 1995 (the "Office of Technology for the U.S. Senate" never existed); (c) the Los Alamos Labs never had a National Security Advisory Council; and (d) Cunningham did not win the Prince of Wales Award in finance or any other category; the correct name for the award is the Prince of Wales Award for Innovation, and it is given only to U.K. residents and U.K. companies. The representations described in paragraph 46 were and are material.
48. Defendants made misrepresentations to prospective investors about the safety and security of an investment in certain Holdings "convertible bonds." For example:
49. In June 2002, Aronica told an investor, who was invested in blue-chip stocks, that the investor "had to pull [his] money out of the stock market" and put his money in a "stable investment." Aronica recommended that the investor purchase Holdings "convertible bonds," which were "more secure than stocks," would have to be held for one and one-half years, yielded 8% and could be converted to Holdings stock at a price of $4 per share.
50. In June 2002, Mastrosimone told an investor that the investor should liquidate the stocks in his portfolio and "put some cash aside" for when the market improves. When the investor informed Mastrosimone that he preferred to keep his money in stocks, Mastrosimone told him that "now is not the time to be aggressive" and recommended that the investor put his money in what the investor understood would be a cash account that would earn 7% to 8% per year and would have to be held for one and one-half years. Based on Mastrosimone's statements, the investor believed he was placing his funds into an investment vehicle similar to a certificate of deposit.
51. The representations described in paragraphs 48-50 were and are false and misleading because, among other reasons: (a) an investment in Holdings, a start-up company with no known cash flow or clients, is inherently more speculative than an investment in blue-chip stocks or a certificate of deposit; (b) Holdings became inoperative and void under Delaware law on March 1, 2002 for neglecting or refusing to pay their annual taxes; (c) the investors in "convertible bonds" in return for their investment received only Holdings promissory notes (with an unsigned signature line for Cunningham) that do not secure the investors' principal and are illiquid; and (e) the fact that the "convertible" bonds are purportedly convertible to shares would not lessen their risk because there was and would be no public market for Holdings shares. The representations described in paragraphs 48-50 were and are material.
52. The Defendants knew that the representations described above in paragraphs 23-50 were and are false and misleading because, in addition to the facts described in those paragraphs and in paragraphs 51 and 53-60:
(a) N. Formisano is the Chairman, Chief Executive Officer ("CEO") and 87% owner of Holdings. He is also a securities professional, holding Series 24 and Series 7 licenses. Cunningham is the President of Holdings and is a securities professional, holding a Series 7 license. Accordingly, as officers of Holdings, N. Formisano and Cunningham know that (i) Holdings did not file a registration statement; (ii) Holdings is not otherwise and never has been capable of and prepared to conduct an IPO; (iii) Holdings has not taken the requisite steps to become a publicly traded company; (iv) Holdings is inoperative, and has no cash flow or clients; (v) Holdings did not enter into a contract to purchase a bank, does not own a bank, and cannot provide full online banking services; (vi) Holdings did not have business partnerships and client relationships with any established companies; (vii) the offering proceeds were not going to purchase a broker-dealer for $400,000; (viii) the offering proceeds were not being used for general corporate purposes; and (ix) Cunningham did not have the credentials detailed in the Holdings Private Placement Memoranda.
(b) Aronica and Mastrosimone are both securities professionals, who have Series 7 and Series 24 licenses. Both Aronica and Mastrosimone told Holdings investors that Holdings would conduct an IPO in the near future, even though the IPO target dates they told investors passed without any public offering. Aronica and Mastrosimone also provided investors baseless market price and profit predictions, recommended that investors purchase risky Holdings "convertible bonds," and told investors that Solutions was part of, or the same as Holdings. Since Holdings never even filed a registration statement, did not have any operating revenue or cash flow, and has no formal corporate relationship to Solutions, neither Aronica nor Mastrosimone could have a reasonable basis for their statements.
53. In the last two months, Aronica and Mastrosimone, and through them eWealth and Holdings, have misled investors about why the Commission staff contacted Holdings investors in August and September 2002. They have done so as part of a concerted effort to obstruct the Commission staff's investigation.
54. On September 13, 2002, Aronica told an investor that the Commission was conducting an annual review of Holdings, that Aronica said was "standard procedure" for all "registered private placements."
55. In the week of September 16, 2002, Mastrosimone told an investor to expect a call from the SEC, because the SEC "calls investors on a regular basis."
56. On September 19, 2002, Aronica told an investor that the Commission staff was calling him because it was under "pressure" to be a "watchdog" for investors, and that there was nothing wrong with his Holdings investment. Aronica also told this investor that Holdings had made some sort of "filing" with the Commission.
57. In late September 2002, when the staff began sending to individual investors draft written declarations summarizing their statements to the Commission staff, eWealth representatives, including Aronica, told investors that the Commission staff was harassing investors and pressuring the investors to make false statements. Furthermore, Aronica told investors to refrain from talking further with Commission staff about eWealth. Aronica and others at eWealth sent or caused to be sent a draft form letter by email to investors, prepared by eWealth, for investors' signature and stating that certain draft declarations that memorialized the investors' statements to the Commission staff were so inaccurate as to be impossible to correct and requesting the staff not to call again. eWealth representatives solicited investors and endeavored to have them sign these misleading and false letters, in an effort to interfere with the Commission's investigation. Two investors, who had multiple conversations with Commission staff members and who had provided important information, signed and sent these form letters to the Commission staff. Another investor, after intervening calls from eWealth representatives, withdrew or modified statements previously made to the staff, even though statements of other investors corroborated the investor's prior statements.
58. The representations by Defendants described in paragraphs 53-57 are false because among other reasons, as of August 2002, the Commission staff was conducting an appropriate inquiry pursuant to its authority to investigate potential violations of the federal securities laws regarding eWealth and its offerings of Holdings' securities - not an annual or routine review, a review related to an impending Holdings IPO or a campaign to harass investors. Moreover, the Holdings offerings were not registered private placements and eWealth made no recent filing of any kind with the Commission. As securities professionals, eWealth representatives could have no reasonable basis for their statements, demonstrating that their intent was to prevent investors from asking questions about their investments and to impede the Commission staff's investigation.
59. In April 2002, eWealth, through N. Formisano, also impeded a Commission examination of eWealth. During that examination, the Commission's broker-dealer inspection staff requested access to and copies of certain books and records related to the Holdings offerings that a broker-dealer is required to keep and provide to the Commission on request. First, N. Formisano denied that eWealth participated in any Holdings offering and then refused to produce such documents about and relating to, inter alia, the Holdings offerings that occurred after January 2000, including records of the sales and purchases of Holdings stock and correspondence between eWealth and its customers who invested in Holdings.
60. eWealth and Holdings also declined to produce voluntarily Holdings' bank accounts for all the offerings, accounts and records concerning its use of funds, or any and evidence concerning steps Holdings took to commence an IPO at any time. On September 12, 13 and October 11, 16 and 17, 2002, the enforcement staff sent additional written requests for documentation and information to eWealth and Holdings. eWealth and Holdings provided few responsive documents, and no bank records have been received. N. Formisano and Holdings are aware of the existence of relevant documents and have refused to produce them in response to the Commission's requests.
61. The Commission repeats and realleges the allegations contained in paragraphs 1 through 60 by reference as if fully set forth herein.
62. Defendants, directly and indirectly, singly and in concert, knowingly or recklessly, by the use of the means or instruments of transportation or communication in, and the means or instrumentalities of, interstate commerce, or by the use of the mails, in the offer or sale, and in connection with the purchase or sale, of securities, have: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of, or otherwise made untrue statements of material fact, or omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, acts, practices and courses of business which operated or would operate as a fraud or deceit upon purchasers of securities or other persons.
63. As part of and in furtherance of this violative conduct, the Defendants, directly or indirectly, made the representations and omitted to state the facts alleged above.
64. The false statements and omissions made by Defendants, more fully described above, were material.
65. The Defendants knew, or were reckless in not knowing, that these material misrepresentations, more fully described above, were false or misleading.
66. By reason of the acts, omissions, practices, and courses of business set forth in this complaint, the Defendants have violated, are violating, are about to violate, and, unless restrained and enjoined, will continue violating, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.
67. The Commission realleges and incorporates paragraphs 1 through 60 by reference as if fully set forth herein.
68. Defendants, directly and indirectly, singly and in concert, have made use of the means or instruments of transportation or communication in interstate commerce, or of the mails, to offer and sell securities through the use or medium of a prospectus or otherwise when no registration statement has been filed or was in effect as to such securities and when no exemption from registration was available.
69. By reason of the foregoing, Defendants violated, are violating, are about to violate, and, unless restrained and enjoined, will continue violating, Sections 5(a) and 5(c) of the Securities Act.
70. The Commission realleges and incorporates paragraphs 1 through 60 by reference as if fully set forth herein.
71. eWealth has failed to produce a variety of documents within the scope of Section 17(a) and 17(b) of the Exchange Act, including investor checks and correspondence with customers. In addition, eWealth failed to provide all investors with the written information required by Rule 15g-9 for penny stock transactions. Under Rule 3a51-1 of the Exchange Act, Holdings is a penny stock, and the Rule 15g-9 disclosure requirements apply to the sales at issue here. Holdings was selling Holdings for between $2.50 and $4.00 per share and none of the exemptions are available.
72. By reason of the foregoing, defendant eWealth violated, is violating, is about to violate, and, unless restrained and enjoined, will continue violating, Sections 17(a), 17(b), 15(g)(2) and 15(g)(5) of the Exchange Act and Exchange Rules 15g-9 and 17(a)(4)(j).
73. The Commission realleges and incorporates paragraphs 1 through 60 by reference as if fully set forth herein.
74. eWealth has failed to produce a variety of documents within the scope of Section 17(a) and 17(b) of the Exchange Act, including investor checks and correspondence with customers. N. Formisano first lied to the Commission examination staff about eWealth's involvement in the Holdings offerings and then refused to produce documents pertaining to Holdings offerings after January 2000.
75. By reason of the foregoing, defendant N. Formisano aided and abetted, is aiding and abetting, is about to aid and abet, and, unless restrained and enjoined, will continue aiding and abetting violations, Sections 17(a) and 17(b) of the Exchange Act and Exchange Rule 17a-4(j).
WHEREFORE, Plaintiff Commission respectfully requests that this Court issue:
Orders temporarily and preliminarily, and Final Judgments permanently, restraining and enjoining each of the Defendants, their agents, servants, employees, attorneys in-fact, and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
Orders temporarily and preliminarily, and Final Judgments permanently, restraining and enjoining defendant eWealth, its agents, servants, employees, attorneys in-fact, and all persons in active concert or participation with it who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating Sections 17(a), 17(b), 15(g)(2) and 15(g)(5) of the Exchange Act and Exchange Rules 15g-9 and 17a4-(j).
Orders temporarily and preliminarily, and Final Judgments permanently, restraining and enjoining defendant N. Formisano, his agents, servants, employees, attorneys in-fact, and all persons in active concert or participation with it who receive actual notice of the injunction by personal service or otherwise, and each of them, from violating Sections 17(a) and 17(b) of the Exchange Act and Exchange Rule 17a4-(j).
An Order directing that each of the Defendants' assets be frozen.
Orders temporarily and preliminarily, and Final Judgments permanently, restraining and enjoining each of the Defendants from participating in any future penny stock offering, pursuant to Section 20(g) of the Securities Act, 15 U.S.C. § 77t(g), and Section 21(d)(6) of the Exchange Act, 15 U.S.C. § 78u(d)(6).
An Order directing each of the Defendants to each file with this Court and serve upon the Commission, within five business days, or within such extension of time as the Commission agrees in writing or as otherwise ordered by the Court, verified written accountings, signed by each of them under penalty of perjury.
An Order permitting expedited discovery.
An Order enjoining and restraining each of the Defendants, and any person or entity acting at their direction or on their behalf, from destroying, altering, concealing, or otherwise interfering with the access of the Commission to relevant documents, books and records.
An Order enjoining and restraining each of the Defendants, and any person or entity acting at their direction or on their behalf, from witness tampering, suborning perjury or otherwise impeding discovery or the prosecution of this case.
A Final Judgment requiring each of the Defendants to disgorge their ill-gotten gains from the violative conduct alleged in this complaint, and to pay prejudgment interest thereon.
A Final Judgment imposing civil monetary penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act against each of the Defendants.
Such other and further relief as the Court deems appropriate.
Dated: October 29, 2002, New York, New York
Respectfully Submitted,
___________________________Of Counsel:
Wayne M. Carlin
Barry W. Rashkover
G. William Currier
Elisabeth L. Goot
Bruce Karpati
Stephen B. Holden
David Min
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