Securities and Exchange Commission v. Spongetech Delivery Systems, Inc., RM Enterprises International, Inc., Steven Y. Moskowitz, Michael E. Metter, George Speranza, Joel Pensley and Jack Halperin, Civil Action No. 10-2031 (E.D.N.Y.) (filed May 5, 2010)
SEC OBTAINS JUDGEMENTS AGAINST FORMER SPONGETECH EXECUTIVES MICHAEL E. METTER AND STEVEN Y. MOSKOWITZ
The Securities and Exchange Commission recently announced that on December 18, 2012 and June 12, 2012, the Honorable Judge Dora L. Irizarry, United States District Judge for the Eastern District of New York, entered Judgments against, respectively, Michael E. Metter (“Metter”), the former Chief Executive Office of Spongetech Delivery Systems, Inc. (“Spongetech”), and Steven Y. Moskowitz (“Moskowitz”), Spongetech’s former Chief Financial Officer. The judgments permanently enjoin Metter and Moskowitz from violating antifraud and securities registration provisions of the federal securities laws, as well as reporting, recordkeeping, and internal controls provisions. The Judgments also bar Metter and Moskowitz from serving as an officer or director of a public company, bar them from engaging in any offering of penny stock, and order them to pay penalties and disgorgement in amounts to be determined by the court, upon motion by the Commission. On September 20, 2012, the Commission instituted a settled administrative proceeding suspending Moskowitz from appearing or practicing before the Commission as an accountant.
The Commission’s complaint, filed on May 5, 2010, alleged that Metter, Moskowitz, Spongetech, and others engaged in a scheme to increase demand illegally for, and profit from, the unregistered sale of publicly-traded Spongetech stock by, among other things, “pumping” up demand for the stock through false public statements about non-existent customers, fictitious sales orders, and phony revenue. They also repeatedly and fraudulently understated the number of Spongetech’s outstanding shares in press releases and public filings. The purpose of flooding the market with false public information was to fraudulently inflate the price for Spongetech shares so the defendants and others could then “dump” the shares by illegally selling them to the public through affiliated entities in unregistered transactions. Among other things, the complaint further alleged that Spongetech, at the direction of Metter and Moskowitz, filed periodic reports with the Commission that contained materially false and misleading statements and materially overstated revenues, created materially false purchase orders, invoices, and other documents, and failed to ensure that Spongetech maintained accurate books and records or implemented effective internal controls. Metter and Moskowitz consented to the entry of the Judgments without admitting or denying the allegations of the Commission’s complaint.
The Commission previously obtained judgments against other defendants in this action. On November 10, 2011, the court entered a judgment by consent against Spongetech. The judgment imposed full injunctive relief and ordered Spongetech to pay penalties and disgorgement in amounts to be determined by the court, upon motion by the Commission.
On March 6, 2012, the court entered final judgments against RM Enterprises International, Inc. (“RM Enterprises”), a Spongetech affiliate, and George Speranza, a stock promoter. The final judgments imposed full injunctive relief against both, ordered Speranza to pay penalties, disgorgement, and prejudgment interest totaling $135,883.40, and barred Speranza from participating in any penny stock offering. The court deferred ruling on monetary remedies against RM Enterprises until the claims against other defendants are resolved.
Status of the Commission’s Spongetech Litigation
On March 14, 2011, the court issued an order granting the SEC’s motion for preliminary injunctions against six defendants, and granted the SEC’s requests for asset freezes against Metter, Moskowitz, and RM Enterprises. An asset freeze was not entered against Spongetech because the company filed for bankruptcy in July 2010, and has since been controlled by a court-appointed bankruptcy trustee. The asset freezes entered against Metter, Moskowitz, and RM, as subsequently modified by the court, remain in effect, as does the preliminary injunction entered against defendant Joel Pensley.
On March 27, 2012, the court granted the Commission’s motion to add BusinessTalkRadio.net, Inc. (“BTR”) and Blue Star Media Group, Inc. (“Blue Star”) as relief defendants. The amended complaint alleges that in 2009, RM Enterprises transferred illicit proceeds from the Spongetech fraud to satisfy a judgment that had been entered against Metter, these entities, and others.
The Commission’s action remains pending against BTR, Blue Star, and two of Spongetech’s former attorneys, Pensley and Jack Halperin, who are charged with violating the antifraud provisions by authoring false and misleading opinion letters to improperly remove the restrictions on trading shares of Spongetech stock.
On December 19, 2011, in a separate action, the court entered a Final Judgment permanently enjoining Myron Weiner from violating the securities registration provisions in connection with his purchase and sale of Spongetech’s stock, imposing a one-year penny stock bar, and ordered him to pay disgorgement and penalties totaling over $1.3 million. SEC v. Myron Weiner, Civil Action No. 11-CV-5731 (E.D.N.Y.). [See Litigation Release No. 22168 (Nov. 23, 2011), Litigation Release No. 22206 (Dec. 21, 2011)].
The Parallel Criminal Action
On May 5, 2010, the United States Attorney’s Office for the Eastern District of New York (USAO-EDNY) arrested Metter and Moskowitz, who were indicted for conspiracy to commit securities fraud and obstruction of justice, securities fraud, obstruction of justice, conspiracy to commit money laundering, and perjury. On October 14, 2010, the USAO-EDNY filed a superseding indictment against Speranza and four former Spongetech employees – Andrew Tepfer, Seymour Eisenberg, Thomas Cavanagh, and Frank Nicolois – on charges including securities fraud, obstruction of justice, money laundering, structuring, and contempt.
All of the criminal defendants have entered guilty pleas, with the exception of Metter. Moskowitz pleaded guilty to securities fraud and is awaiting sentencing. Speranza pleaded guilty to perjury for giving false testimony during the SEC’s investigation, and was sentenced to five years of probation. Cavanagh and Nicolois pleaded guilty to structuring transactions to avoid federal currency transaction reporting requirements, and were sentenced to 24 months and 16 months in prison, respectively, followed by three years of supervised release. Eisenberg and Tepfer also have pleaded guilty to securities fraud and await sentencing.
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