Nathan A. Chapman, Jr., et al.
Litigation Release No. 18203 / June 26, 2003
Securities and Exchange Commission v. Nathan A. Chapman, Jr., et al., Civil Action No. WDQ-03-1877 (D. Md.)
Commission Sues Nathan A. Chapman, Jr., His Companies, and Others for Fraud in the Initial Public Offering of eChapman.com, Inc.
The Securities and Exchange Commission announced the filing, on June 26, 2003, of securities fraud charges against Nathan A. Chapman, Jr., three of his companies and three of his associates in connection with the June 2000 initial public offering of - and subsequent secondary market trading in - the common stock of eChapman.com, Inc (now eChapman, Inc., or ECMN). The Commission's complaint was filed in the United States District Court for the District of Maryland, and seeks permanent injunctions, civil money penalties, disgorgement of ill-gotten gains (including salaries, bonuses and commissions) and bars from acting as an officer or director of a public company.
The Commission alleges that the fraudulent scheme involved Chapman and officers of ECMN, a public company he controlled that is the parent company of a registered broker-dealer, The Chapman Company (TCC), and a registered investment adviser, Chapman Capital Management, Inc. (CCM). Both of those companies are also controlled by Chapman.
Named as defendants in the Commission's complaint are:
- Nathan A. Chapman, Jr., age 45, of Clarksville, Md. Chapman was ECMN's president, chairman of the board, and majority shareholder during the relevant period. He was also the president, chairman of the board and chief compliance officer of both registered entities, TCC and CCM, as well as CCM's chief investment officer.
- eChapman, Inc. (ECMN) headquartered in Baltimore, Md. ECMN provides brokerage, investment advisory and insurance services. During the relevant period, its shares traded on the NASDAQ National Market. They currently trade on the over-the-counter bulletin board. ECMN is the parent company of defendants TCC and CCM.
- The Chapman Company (TCC) is a broker-dealer registered with the Commission.
- Chapman Capital Management, Inc. (CCM) is an investment adviser registered with the Commission.
- Earl U. Bravo, Sr., age 55, of Baltimore, Md. Bravo was the senior vice president, secretary, assistant treasurer and member of the board of ECMN during the relevant period. He was also the chief operating officer, senior vice president, secretary and head of equity trading at TCC, as well as the secretary and assistant treasurer of CCM.
- Demetris B. Brown, age 47, of Woodstock, Md. Brown was the chief financial officer, treasurer and assistant secretary of ECMN, TCC and CCM during the relevant period. He is a Certified Public Accountant.
- Daniel Baldwin, Jr., age 46, of Randallstown, Md. Baldwin was senior vice president for institutional sales at TCC and a registered representative during the relevant period.
The Commission's complaint alleges that, in an effort to rescue a failing IPO, Chapman, Bravo, Baldwin and Brown engaged in fraudulent conduct, including: backdating trades and placing close to one-third of the IPO shares into the account of an advisory client; unauthorized sales of ECMN stock to TCC brokerage customers; manipulating the market for ECMN stock for months following the IPO; and filing false and misleading reports with the Commission. As a result of the fraudulent conduct investors, including the Maryland state retirement and pension system, lost millions of dollars.
The complaint alleges that in late 1999, Chapman decided to create a new public company that would take advantage of the growing influence of the Internet and provide a broad array of online financial services. The new company, ECMN, was to be formed by merging two existing public companies, and the IPO was structured so that Chapman would own approximately 63 percent of ECMN. However, in March 2000, the NASDAQ Composite reached its all-time high and began a steady decline. Chapman had difficulty attracting investors and marketing an unproven dot-com company in the face of the falling stock market.
The Commission's complaint further alleges that following the IPO on June 15, 2000, trading in ECMN opened significantly below its $13 per share offering price and never recovered. Chapman, together with Bravo, used his control over TCC and CCM to have CCM improperly place 395,000 shares - almost one-third of the IPO - with CCM's advisory client, a trust, using the trust's sub-advisers, one of which was an investment adviser owned by Alan B. Bond, currently a convicted felon. Of these shares, 175,000 were sold a week after ECMN began trading, when it was trading at $7. Chapman and Bravo illegally backdated the sale to the IPO date, at $13 per share - resulting in an instant loss of over $1 million to the trust and its investors.
The complaint further alleges that, in addition to the transactions at CCM, defendant Baldwin, with Bravo's knowledge, made unauthorized trades and placed ECMN IPO shares in at least 37 customer accounts at TCC. The customers on whom Baldwin preyed included the elderly, or individuals who had specifically requested low-risk investments. Many knew nothing about investing or the stock market and relied on Baldwin to make their investment decisions.
Finally, the complaint alleges that Chapman and Bravo, through TCC, manipulated the market for ECMN by using IPO proceeds to buy hundreds of thousands of ECMN shares in the months following the offering. As a result, ECMN was left without funds to implement the business strategies that ECMN had represented to investors were the reasons for the IPO. In further efforts to prop up the price of ECMN stock, Chapman, Bravo and others discouraged advisory clients and brokerage customers from selling their ECMN stock. The defendants thereafter concealed their fraud with false and misleading statements regarding the use of the IPO proceeds in quarterly and annual reports filed with the Commission, prepared and signed by Chapman and Brown.
The complaint charges all of the defendants with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; CCM, Chapman and Bravo with violations of Sections 206(1), 206(2) and 206(3) of the Investment Advisers Act of 1940; and ECMN, Chapman and Brown with violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder.
The Commission brought this action in coordination with the United States Attorney for the District of Maryland, who filed related criminal charges against Chapman, and the Maryland Division of Securities, which filed civil charges against all of the defendants in the Commission's action.
Contacts: Merri Jo Gillette, Associate District Administrator
David S. Horowitz, Assistant District Administrator
Philadelphia District Office
(215) 597-3100
