SEC complaint against Freedom Surf Penny Stock Scammers
John L. Hunter
Bonnie S. Kartzman
Rami Sibay
Attorneys for Plaintiff
Securities & Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
202-942-4825
Thomas M. Melton (4999)
Attorney for Plaintiff
Securities and Exchange Commission
50 South Main Street, Suite 500
Salt Lake City, Utah 84144-0402
801-524-5796
Local Counsel
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ALLEN Z. WOLFSON, MERVYN A. PHELAN, SR. DAVID WOLFSON, KEVIN KIRKPATRICK,
ROBERT H. POZNER, JOHN R. CHAPMAN, MERVYN A. PHELAN, JR., CRAIG H. BROWN,
JOHN W. CRUICKSHANK, JR., BONNIEJEAN C. TIPPETTS, FENG SHUI CONSULTANTS, INC.
(formerly WORLD ALLIANCE CONSULTING , INC.), A-Z PROFESSIONAL CONSULTANTS RETIREMENT
TRUST, INC.,
AZW IRREVOCABLE TRUST, SALOMON GREY FINANCIAL CORPORATION, ANGELO PAUL KOUPAS,
KYLE ROWE, and CHRISTOPHER ROUNDTREE. Defendants.
PRELIMINARY STATEMENT
Plaintiff Securities and Exchange Commission ("Commission" or "SEC"), for its Complaint against defendants Allen Z. Wolfson ("Wolfson"), Mervyn A. Phelan, Sr. ("Phelan"), David Wolfson, Kevin Kirkpatrick ("Kirkpatrick"), Robert H. Pozner ("Pozner"), John R. Chapman ("Chapman"), Mervyn A. Phelan, Jr. ("Bo Phelan"), Craig H. Brown ("Brown"), John W. Cruickshank, Jr. ("Cruickshank"), BonnieJean C. Tippetts ("Tippetts"), Feng Shui Consultants, Inc. (formerly World Alliance Consulting, Inc.) ("World Alliance"), A-Z Professional Consultants Retirement Trust, Inc. ("A-Z Retirement Trust"), AZW Irrevocable Trust, Salomon Grey Financial Corporation ("Salomon Grey"), Angelo Paul Koupas ("Koupas"), Kyle Rowe ("Rowe"), and Christopher Roundtree ("Roundtree") (collectively, the "Defendants"), alleges as follows:
1. From July 2000 through November 2000, the Defendants engaged in a scheme to manipulate the public trading market for stock issued by Freedom Surf, Inc. ("Freedom Surf"). Led by Phelan, certain Defendants issued stock in an offering that they claimed was exempt from registration, and transferred 345,000 shares, at no cost, to Allen Wolfson, an indicted stock manipulator based in Salt Lake City. Wolfson, in turn, executed manipulative trades and directed the posting of artificially high price quotations for Freedom Surf's common stock through his Salt Lake City broker on the NASD's Over-The-Counter Bulletin Board ("OTC-BB"). This caused the price of Freedom Surf stock to rise from $5 to $40 in approximately two months.
2. In late October 2000, certain Defendants sold a 25,000 share block of Freedom Surf stock at a "50% discount" from the manipulated market price to Salomon Grey, a Dallas broker-dealer registered with the Commission, which, in turn, marked up the stock price, and sold it to retail customers. Beginning in March 2001, certain Defendants sold manipulated stock to the public out of various retail outlets, including a California brokerage account they established and brokerage accounts in Canada over which they had control.
3. Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance, A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe, directly or indirectly, have engaged in transactions, acts, practices and courses of business which constitute violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. In addition, Defendants Bo Phelan, Brown, Cruickshank, Tippetts, and Roundtree aided and abetted these Defendants' violations of Section 10(b) and Rule 10b-5. [15 U.S.C. § 77t(e)]
4. Defendant Salomon Grey violated, and Defendants Koupas, Rowe and Roundtree aided and abetted violations of, Sections 15(c)(1) [15 U.S.C. §78o(c)(1)] and Rule 15c1-2 of the Exchange Act [17 C.F.R. §240.15c1-2].
5. Defendants Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, Kirkpatrick, World Alliance, A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas, and Rowe directly or indirectly, have engaged in violations of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a), 77e(c)].
6. Unless restrained and enjoined by this Court, the Defendants will continue to engage in the transactions, acts, practices, and courses of business described herein, and in transactions, acts, practices, and courses of business of a similar type and object. By this action, the Commission seeks permanent injunctive relief, disgorgement, an accounting, penny stock bars, officer and director bars and an award of civil penalties.
JURISDICTION AND VENUE
7. The Commission brings this action pursuant to Sections 20(b), 20(d) and 20(e) of the Securities Act [15 U.S.C. §§ 77t(b), 77t(d), and 77t(e)] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)].
8. This Court has jurisdiction of this action pursuant to Sections 20(d)(1) and 22(a) of the Securities Act [15 U.S.C.§§ 77t(d)(1) and 77v(a)] and Sections 21(d)(3)(A), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d)(3)(A), 78u(e), and 78aa].
9. In connection with the transactions, acts, practices, and courses of business described in this Complaint, each of the Defendants, directly or indirectly, has made use of the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange. Certain of the transactions, acts, practices, and courses of business alleged herein occurred within this District, and venue is proper pursuant to Section 22(a) of the Securities Act and Section 27 of the Exchange Act.
DEFENDANTS
10. Wolfson, age 54, resides in Salt Lake City Utah. Wolfson coordinated the manipulation of Freedom Surf by controlling the U.S. brokerage accounts involved in the manipulation. He is 100% owner of World Alliance, and one of two trustees of A-Z Professional Trust. Wolfson asserted his Fifth Amendment privilege against self-incrimination and refused to testify in the Commission's investigation in this matter.
11. Phelan, age 62, resides in Laguna Beach, California. Phelan was the architect of the manipulation of Freedom Surf stock. In July and August 2000, Phelan gave Wolfson 345,000 shares of stock at no cost to begin manipulating the trading market in Freedom Surf. Phelan also arranged for Salomon Grey to be a retail outlet to sell the artificially inflated shares to the public.
12. Kirkpatrick, age 41, is a resident of Salt Lake City, Utah. Kirkpatrick is a trader and market maker associated with Salt Lake City broker-dealer Olsen Payne & Company ("OLIE"), from 1996 to the present. At all times relevant to this action, Kirkpatrick made a market in Freedom Surf, and was the registered representative for the two U.S. Wolfson accounts at OLIE. Kirkpatrick advanced the bid and engaged in manipulative trading on instructions from Allen Wolfson, and Wolfson's son, David.
13. Pozner, age 57, is a resident of Ridgewood, New Jersey. At all times relevant to this action, Pozner was employed at broker-dealer Glenn Michael Financial Corporation ("GMFI"), which made a market in Freedom Surf. Pozner took instructions from Wolfson and Kirkpatrick to advance the bid price in Freedom Surf stock. Pozner asserted his Fifth Amendment privilege against self-incrimination and refused to testify in the Commission's investigation in this matter.
14. Chapman, age 60, resides in Salt Lake City, Utah. At all times relevant to this action, Chapman, who works with Wolfson, had trading authority over five of six entities holding Canadian brokerage accounts that engaged in manipulative trading. Chapman asserted his Fifth Amendment privilege against self-incrimination and refused to testify in the Commission's investigation in this matter.
15. David Wolfson, age 23, is Allen Wolfson's son, and a resident of Salt Lake City, Utah. At all times relevant to this action, David Wolfson, like his father, called in trading and quoting directives to Kevin Kirkpatrick. David Wolfson asserted his Fifth Amendment privilege against self-incrimination and refused to testify in the Commission's investigation in this matter.
16. Bo Phelan, age 34, resides in Dana Point, California. At all times relevant to this action, Bo Phelan worked in the same offices as his father, Merv Phelan, and in July and August 2000, Bo Phelan sent free stock to Wolfson to begin trading in Freedom Surf. Bo Phelan also sold Freedom Surf stock out of an escrow brokerage account from at least March 2001 though July 2001.
17. Brown, age 45, resides in Laguna Beach, California. At all times relevant to this action, Brown shared offices with the Phelans and worked with them on Freedom Surf matters. Brown controlled certain Freedom Surf shares that were put into escrow in or about November 2000, and beginning in or about December 2000, Brown arranged for the transfer of many of these shares out of escrow, and into the escrow's brokerage account for sales to the public by Bo Phelan.
18. Cruickshank, age 63, is a disbarred lawyer and a convicted felon. Cruickshank resides in Downey, California. In or about March 2000, Cruickshank assembled Freedom Surf's application to begin trading on NASDAQ's OTC Bulletin Board. At all times relevant to this action, Cruickshank worked in the Phelan offices. Cruickshank also prepared and filed Freedom Surf's periodic reports with the Commission during most if not all of the time period of the market manipulation. At Phelan's instruction, Cruickshank also served on Freedom Surf's board of directors from August 2000 to December 2000.
19. Tippetts, age 60, resides in Farmington, Utah. At all times relevant to this action, Tippetts, who was Wolfson's executive assistant and office manager, acted as Wolfson's nominee for opening and controlling three accounts involved in the manipulation. Tippetts asserted her Fifth Amendment privilege against self-incrimination and refused to testify in the Commission's investigation in this matter.
20. World Alliance (now known as Feng Shui Consultants, Inc.) is an entity controlled by Allen Wolfson, which holds a brokerage account at OLIE. Although Tippetts was listed as President of World Alliance, Wolfson and his son David directed manipulative trades out of this account.
21. A-Z Retirement Trust is an entity controlled by Allen Wolfson that holds a brokerage account at OLIE. Although both Wolfson and Tippetts are listed as trustees of the account, Wolfson and his son David directed manipulative trades out of the account.
22. AZW Irrevocable Trust is an entity controlled by Wolfson through his nominee Tippetts. Tippetts is listed as Trustee of this entity, which, at all times relevant to this action, maintained a brokerage account at a Canadian broker-dealer. Wolfson, through Tippetts, directed manipulative trades out of this account.
23. Salomon Grey is a Texas broker-dealer registered with the Commission, with six active branch offices in Florida, Georgia, New York and Texas.
24. Koupas, age 33, resides in Frisco, Texas. At all times relevant to this action, Koupas has been Chief Executive Officer of Salomon Grey. Koupas arranged for Salomon Grey to purchase, in October 2000, a block of Freedom Surf stock from Allen Wolfson at a fifty percent discount to the market price.
25. Rowe, age 35, resides in Dallas, Texas. At all times relevant to this action, Rowe has been President and Chairman of the board of directors of Salomon Grey. After the October 2000 purchase of Freedom Surf stock from Wolfson, Rowe determined the execution prices of all Freedom Surf sales to Salomon Grey customers, and set the amounts of Salomon Grey's bid and ask quotations for Freedom Surf.
26. Roundtree, age 24, resides in Little Elm, Texas. At all times relevant to this action, Roundtree has been employed as the head trader of Salomon Grey. Roundtree was responsible for mechanically executing the October 2000 purchase of Freedom Surf stock from Wolfson, and for executing Freedom Surf retail sales to Grey's customer accounts.
RELEVANT ENTITIES AND PERSONS
27. Interstate Capital Corporation ("Interstate Capital"), a shell corporation which would eventually become Freedom Surf, was incorporated by Bo Phelan in 1997. According to SEC filings, on April 5, 1999, Interstate Capital sold 5 million shares of common stock to twenty-six investors, raising $5,000 in capital. Interstate did not file a registration statement with the Commission for this transaction, because, purportedly, the sale fell within an exemption to the registration provisions, Rule 504 of Regulation D of the Securities Act (the "504 offering").
28. Freedom Surf, Inc., now known as Freestar Technologies, Inc. (herein, "Freedom Surf"), is a public Nevada corporation with its current place of business in New York City, NY. At all times relevant to this action, Freedom Surf was a start-up company, with offices in Huntington Beach, California. Freedom Surf had originally been a private, Delaware corporation until November 1999, when it merged with Interstate Capital to become the public Nevada corporation Freedom Surf, Inc. Freedom Surf purported to be in the business of manufacturing wetsuits and other related surf apparel.
29. Olsen Payne and Company ("OLIE") is a Salt Lake City broker-dealer. At all times relevant to this action, OLIE was a marketmaker in Freedom Surf stock, and held the Wolfson-controlled World Alliance and A-Z Retirement Trust accounts.
30. Raece Richardson, age 38, is an Australian citizen living in Huntington Beach, CA. Richardson founded the surf apparel business that ultimately became Freedom Surf. Richardson served as Freedom Surf's president, CEO, and a director from the formation of the company until he resigned in August 2000.
31. Dan Rubin, age 30, does business as Rubin Investment Group, and resides in Woodland, California. Wolfson sold Rubin a large block of discounted Freedom Surf stock in late November 2000, which Rubin, in turn, sold into the market in December 2000.
FACTS
A. The Phelans and Brown Conduct a Sham Rule 504 Offering
32. The Interstate Capital Rule 504 offering was a sham put together by the Phelans and Brown. Phelan controlled Interstate Capital. Moreover, Phelan and Brown assembled and knew, either directly or indirectly, all of the investors who purportedly purchased stock in the 504 offering (the "504 shareholders"). Finally, the Regulation D filing made by Interstate Capital in connection with the 504 offering contained the names of at least two officers who had no association whatsoever with Interstate Capital.
B. The Plan to Manipulate Freedom Surf Stock
33. Phelan met Raece Richardson in the summer of 1999. Richardson wanted to market an idea for "stitch-free" wetsuits under the brand name of Freedom Surf or Freedom Wetsuits. Phelan offered Interstate Capital, a shell corporation with 504 stock, to put the wetsuits business into operation. Phelan told Richardson the stock could be traded once a merger took place between Interstate Capital and Freedom Surf. Phelan promised to provide $5 million to the company within 30 days of trading.
34. On November 17, 1999, Interstate Capital merged with Freedom Surf to become Freedom Surf, Inc., which filed with the SEC in January 2000 on Form 10-SB.
35. In or about March 2000, Phelan colleague Cruickshank prepared for filing a Form 211, which was an application to get Freedom Surf trading on the OTC-BB, a securities market maintained by the NASD, that uses computers, telephones and other instruments of communication in interstate commerce and the mails to effectuate purchases and sales of stock. Cruickshank also had a consulting contract with Freedom Surf, pursuant to which he assembled the company's SEC filings. At Phelan's request, Cruickshank also served on Freedom Surf's board of directors from August to December 2000.
36. In a series of discussions beginning sometime between April and June 2000, Phelan told Richardson that Phelan would work with an individual named Allen Wolfson to make a market in Freedom Surf stock. Phelan said he would give approximately 300,000 Freedom Surf shares to Wolfson at no cost, and Wolfson would in turn buy and sell the stock in the market to give the appearance of volume, and raise the price of the stock.
37. Phelan told Richardson that Wolfson would then sell blocks of stock at a 50% discount to a Dallas broker-dealer called Salomon Grey. Phelan said that he planned to take part of the proceeds for himself, and use the remainder to build the company.
38. Phelan's plan also was to assign one half of the Rule 504 stock to twenty-six additional shareholders designated by Richardson. Thereafter, these shareholders would deposit their stock in escrow, which would be a "mechanism" ultimately to sell off the stock at a discount in large blocks without needing to go back to each individual shareholder. Richardson gave Phelan a list of twenty-six "investors," and approximately half of the Rule 504 shares were then redistributed to the individuals and entities named by Richardson. Although the stock was redistributed, the actual assignment never was completed and none of the Richardson "investors" were ever told of this plan.
C. Phelans and Brown Transfer 345,000 Freedom Surf Shares to Wolfson
39. In July and August 2000, Phelan, Bo Phelan and Brown caused three sets of documents (the "stock power documents") to be executed by three Freedom Surf "shareholders" to give up their ownership of, collectively, 345,000 Freedom Surf shares. One such shareholder, SS Capital (purportedly the owner of 100,000 shares), was a company controlled by the Phelans, and Bo Phelan had his clerical secretary execute the stock power documents. The second shareholder was Robert Brown (purportedly the owner of 95,000 shares), Craig Brown's cousin, and Craig Brown procured the stock power documents from him. The third shareholder was Tod Ashment (purportedly the owner of 150,000 shares), Raece Richardson's brother-in-law, and Richardson, at Phelan's instruction, had Ashment execute the stock power documents.
40. At or about this time, Bo Phelan sent the stock power documents and three stock certificates corresponding with each of the three "shareholders" to Allen Wolfson so that Wolfson could deposit the 345,000 shares at OLIE. Wolfson deposited these shares in his two OLIE accounts in early August 2000.
D. Phelan Controls the Float of Freedom Surf Stock
41. The Phelans and Brown controlled the floating supply of Freedom Surf stock at all times relevant to this action.
42. Before October 11, 2000, when Freedom Surf effected a 4:1 stock split, the company had approximately 10 million shares outstanding, only about 5.1 million of which were not restricted. By controlling the 5 million "free-trading" 504 shares, Phelan controlled almost the entire floating supply.
43. Phelan also had physical possession of the stock. The Rule 504 stock certificates were never issued to the shareholders, and from March through late September 2000, Phelan held the Freedom Surf shares in certificate form at his offices. From late September to early November 2000, Freedom Surf's transfer agent held the shares in certificate form at its offices in Phoenix, Arizona.
44. Beginning in November 2000, the 504 shares were transferred to an escrow account controlled by Craig Brown. At or about the time of the Rule 504 offering, Brown set up an escrow account for Freedom Surf and, in or about late October 2000, procured what purported to be signed agreements from each of the original 504 shareholders agreeing to "lock up" their shares for three years in escrow, and ceding the disposition of their shares to Brown's control. Thus, from November 2000 forward, the 504 shares were under Brown's control.
45. To ensure his control of the float, Phelan limited any selling into the market during the period of the manipulation. On or before September 2000, Phelan colleague John Cruickshank received 100,000 "free-trading" shares of Freedom Surf as compensation for his consulting work. At or about that time, Phelan made Cruickshank promise not to sell any shares into the market without Phelan's permission. Cruickshank knew that Phelan did not want anyone to sell Freedom Surf shares into the market.
E. Defendants Manipulate the Stock Price
46. Between July 21, 2000 and October 23, 2000, Wolfson, in concert with Kirkpatrick, Pozner, Chapman, David Wolfson, Tippetts, World Alliance, A-Z Retirement Trust and AZW Irrevocable Trust, manipulated the stock price of Freedom Surf by (i) advancing the bid quotation without relation to genuine market demand or worth of the company; and (ii) engaging in a series of public market purchases and sales among controlled accounts. The foregoing was done to artificially increase the stock price of Freedom Surf prior to Wolfson's block sale of 25,000 shares to Salomon Grey on October 24th, and Grey's subsequent retail selling of the stock.
47. There was no market demand during this period other than that generated by Wolfson and those acting in concert with him. The only trading done during this period was from orders placed by Wolfson and those acting in concert with him, and inter-dealer sales and purchases in response to these orders.
(i) The Wolfsons, Kirkpatrick and Pozner Run Up the Bid Price
48. On July 21, 2000, Kirkpatrick, on behalf of OLIE, posted its first price quotation of $5 "bid" and $10 "ask" for Freedom Surf common stock on the OTC-BB. This was the initial priced quotation for Freedom Surf.
49. Between July 21 and October 11, 2000 (the day of Freedom Surf's stock split), Kirkpatrick increased the bid price fifty-three (53) times, to $40. During that time period, Olsen Payne posted or maintained the exclusive high bid on fifty-one of fifty-eight trading days.
50. There was very little trading done during this time period. During the approximately two months when Freedom Surf stock went from $5 to $40 (July 21 through September 28, 2000), Kirkpatrick reported to NASDAQ only two transactions for a total of 200 shares, and, market-wide, there were only six transactions involving 850 shares, all of which were arranged trades.
51. After the four-for-one stock split on October 11, 2000, Kirkpatrick posted a revised bid of $10 to reflect the split. Thereafter, between October 17th and October 23rd, Kirkpatrick raised the inside bid five times from $10.50 to $11.375.
52. During the entire period from July 21st to October 23rd, Kirkpatrick never reduced OLIE's bid quotation for Freedom Surf.
53. Kirkpatrick had no client orders for his bid increases. He instead was steadily increasing the bid at the direction of Allen and David Wolfson.
54. On July 21, 2000, Pozner, on behalf of Glenn Michael, matched Kirkpatrick's initial bid quotation of $5 just 2.5 minutes after Kirkpatrick's posting. Between July 21st and September 13, 2000, Pozner advanced Glenn Michael's bid sixteen times, from $5 to $35. During this time, Pozner posted the exclusive inside bid nine times, and shared the inside bid with Kirkpatrick four more times. Even when he was not ahead of Kirkpatrick in bidding, Pozner was close behind, and in front of other market makers. Pozner posted the highest daily bid of any firm on seven days during this time period.
55. Pozner had no client orders for his bid increases. He was instead increasing the bid at the direction of Wolfson.
56. In moving the bid at Wolfson's direction, Kirkpatrick and Pozner knowingly and recklessly participated in and furthered the manipulation of Freedom Surf stock.
(ii) The Wolfsons, Kirkpatrick, Chapman, Tippetts, World
Alliance, A-Z Retirement Trust, and AZW Irrevocable
Trust Effect Manipulative Trades to Increase the Stock Price
57. The Wolfsons, Kirkpatrick, Chapman, Tippetts, World Alliance, A-Z Retirement Trust, and AZW Irrevocable Trust effected manipulative, arranged public market trades among Wolfson-controlled accounts between July 28, 2000 and October 23, 2000, to inflate the stock price of Freedom Surf prior to the block sale of 25,000 shares to retailer Salomon Grey.
58. Six accounts at Canadian broker-dealers generated all of the retail demand for Freedom Surf during the foregoing period: (1) East-West Trading Corporation at Union Securities, Ltd.; (2) East-West Trading at Canaccord Capital Corporation; (3) Karston Electronics at Canaccord; (4) Leeward Consulting Group LLC at Rampart Securities Inc.; (5) Consolidated Euro-Holdings at Credifinance; and (6) AZW Irrevocable Trust at Canaccord.
59. John Chapman,d/b/a International Consulting, had trading authority over five of the six Canadian accounts. Chapman operates out of the same business address as Wolfson, and shares profits from trading in the Canadian accounts with Wolfson.
60. Tippetts is listed as Trustee of the sixth account, AZW Irrevocable Trust.
61. The Canadian accounts collectively purchased 12,950 shares of Freedom Surf from U.S. market makers in ten transactions at increasing prices between July 28 and October 20, 2000. Sell orders from the Wolfson-controlled accounts at OLIE, near in time to the buy orders and in identical or nearly identical amounts, provided to the marketplace the stock that was used to fill the demand from the Canadian accounts.
62. The U.S. market makers that sold stock in response to the demand generated by the Canadian accounts maintained flat inventory positions by immediately purchasing stock from OLIE, which in turn purchased from the Wolfson-controlled accounts. Wolfson's World Alliance and A-Z Retirement Trust accounts accounted for 100 % of the retail sales volume in Freedom Surf between July 28 and October 23.
63. Allen and David Wolfson called in trades for the OLIE accounts to Kirkpatrick during this time period.
64. The foregoing manipulative trades created actual and apparent activity in Freedom Surf stock, and caused the stock price to rise.
65. In effecting arranged trades, Kirkpatrick knowingly or recklessly participated in the manipulation of Freedom Surf stock.
F. Koupas and Rowe Arrange for Salomon Grey to
Buy 25,000 Shares of Freedom Surf Stock from Wolfson.
66. Between June and August 2000, Phelan introduced Salomon Grey CEO Paul Koupas to Freedom Surf. Based on Phelan's recommendation, Koupas visited Freedom Surf's offices and met with company president Raece Richardson. Koupas subsequently prepared the documents used by Salomon Grey to authorize the firm to make a market in Freedom Surf and to retail the stock to Salomon Grey's customers.
67. Koupas and Salomon Grey President Kyle Rowe had a pre-existing arrangement with Phelan and Wolfson to obtain free and deeply discounted blocks of Freedom Surf stock for retail sales to the public at manipulated market prices. In this regard, Koupas, on behalf of Salomon Grey, entered into a "consulting agreement" with Craig Brown which was dated October 25, 2000. Pursuant to this agreement, Brown agreed to pay Salomon Grey a non-refundable fee of 25,000 Freedom Surf shares for "securities related advice."
68. In an effort to further the manipulation of Freedom Surf's stock price, Salomon Grey began selling Freedom Surf stock to its customer accounts on the morning of October 24, 2000.
69. In consultation with Rowe, Koupas arranged for Salomon Grey to acquire 25,000 shares of Freedom Surf at a 50 percent discount to the manipulated market price from Wolfson's accounts at Olsen Payne. This pre-arranged transaction was concealed from the market. Salomon Grey head trader Christopher Roundtree prepared an order ticket reflecting Salomon Grey's acquisition of 25,000 shares of Freedom Surf for $6.125 per share from Olsen Payne on October 24, 2000.
70. Koupas knew, or was reckless in not knowing, that Salomon Grey would sell its Freedom Surf shares at manipulated "market" prices.
71. On October 24, Tippetts instructed Kirkpatrick to deliver 25,000 Freedom Surf shares to Salomon Grey, 12,500 from each of the World Alliance and A-Z Retirement Trust accounts for a total payment of $153,125, or $6.125 per share.
72. This sale was not registered with the Commission, and no exemption from registration was available.
G. Salomon Grey Excessively Marks Up the Stock Sold to its Customers
73. Rowe set the prices for Salomon Grey's Freedom Surf retail trades at the time of each customer order, and Roundtree executed the trades.
74. Salomon Grey charged its customers excessive markups. The markups, based on Salomon Grey's contemporaneous cost, were in excess of 100 percent. Salomon Grey brokers sold over 17,000 Freedom Surf shares to 14 customers through October 31, 2000. Salomon Grey never disclosed its excessive mark-ups to the firm's customers.
75. Between October 24 and November 21, 2000, Salomon Grey sold a total of 27,310 Freedom Surf shares to retail customers.
76. Roundtree knew, or was reckless in not knowing, that Salomon Grey charged excessive markups in its sales of Freedom Surf stock to its customers. As the firm's head trader, Roundtree prepared the order ticket showing Salomon Grey's acquisition of the Freedom Surf discount block. Roundtree also executed trades to Salomon Grey customer accounts at the marked-up prices.
77. Salomon Grey's retail sales were not registered with the Commission, and no exemption from registration was available.
78. From October 24, 2000 to November 14, 2000, while Salomon Grey sold Freedom Surf stock to its retail customers, Wolfson continued to support the market by using the accounts he controlled to buy up 99% of the retail selling volume.
H. The Market for Freedom Surf Collapses
When Commission Begins Investigation
79. In early November 2000, the Commission began to investigate possible accounting fraud and manipulation issues concerning Freedom Surf. On November 30, 2000, Commission staff performed surprise inspections at OLIE and Salomon Grey. On information and belief, Defendants shut down the manipulation as a result of the Commission's early inquiries.
80. With the manipulation shut down, and the stock no longer supported, Freedom Surf stock price declined precipitously. On November 29, 2000, the day before the Commission staff's surprise inspections, Freedom Surf closed at $3.30 a share. By the end of December 2000, the stock hit a low of approximately $.19 a share.
I. The Defendants Profited Illegally Through Unregistered
Sales of Manipulated Freedom Surf Stock
(i) The Escrow Brokerage Account
81. In early November 2000, all of the Freedom Surf Rule 504 shares originally put in the name of the Phelan group of shareholders were put in an escrow account controlled by Craig Brown. Between January and September 2001, Brown transferred over 6.6 million Freedom Surf shares to the escrow brokerage account. Brown gave Bo Phelan trading authority over the escrow brokerage account.
82. In the period of March 2001 through July 2001, Bo Phelan sold over 981,000 shares from the escrow brokerage account.
83. The proceeds of the stock sales went to a company Brown controlled, and Brown withdrew most of the proceeds to cash.
84. The foregoing sales from the escrow brokerage account were not registered with the Commission, and no exemption from registration was available.
(ii) The Canadian Accounts
85. Between August 2000 and April 2001, the Canadian accounts received over 877,000 shares of Freedom Surf from Phelan and Wolfson sources.
86. Between March and June 2001, the Canadian accounts sold over 196,000 of these shares into the market.
87. These sales were not registered with the Commission, and no exemption from registration was available.
(iii) Dan Rubin
88. In late November 2000, Tippetts contracted to sell 500,000 Freedom Surf shares to Rubin Investment Group, an entity owned by an individual named Dan Rubin.
89. Tippetts delivered at least 100,000 of these shares, and Rubin sold substantially all of them in the open market during December 2000.
90. These sales were not registered with the Commission, and no exemption from registration was available.
FIRST CLAIM
Fraud in the Offer and Sale of Securities in Violation
of Section 17(a) of the
Securities Act By Wolfson, Phelan, David Wolfson, Kirkpatrick,
Pozner,
Chapman, World Alliance (now Feng Shui Consultants), A-Z
Retirement
Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe
91. Paragraphs 1 through 90 are hereby realleged and incorporated by reference.
92. Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe and each of them, directly and indirectly, singly or in concert, in the offer or sale of Freedom Surf securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, knowingly or recklessly, have: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact and omissions to state material facts necessary in order to make the statements made, in the 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 Freedom Surf securities.
93. As part and in furtherance of this violative conduct, Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe and each of them, knowingly or recklessly engaged in some or all of the series of manipulative transactions, acts, practices, and courses of business described above. This resulted in a rise in the price of Freedom Surf stock, which included price leadership and undisclosed domination and control of the market for Freedom Surf stock; and actual and apparent trading activity, which included pre-arranged matched orders. These transactions, acts, practices, and courses of business operated as a fraud or deceit upon on the nature of the market for Freedom Surf.
94. Also as part and in furtherance of this violative conduct, Salomon Grey charged its customers excessive and undisclosed markups exceeding 100% based on Salomon Grey's contemporaneous cost. Koupas and Rowe negotiated the purchase of 25,000 discounted shares of Freedom Surf stock from Wolfson that preceded these sales, and Rowe set the prices for the sales of the stock to Grey's retail customers.
95. By reason of the foregoing, Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe and each of them, have violated, and, unless enjoined, will again violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
SECOND CLAIM
Fraud in Connection With the Purchase and Sale
of Securities in Violation of
Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder
By Wolfson, Phelan,
David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance
(now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable
Trust, Salomon Grey,
Koupas, Rowe, Bo Phelan, Brown, Cruickshank, Tippetts and
Roundtree
96. Paragraphs 1 through 95 are hereby realleged and incorporated by reference.
97. Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas, and Rowe, and each of them, directly and indirectly, singly and in concert, by use of the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange, in connection with the purchase and sale of Freedom Surf securities, knowingly or recklessly, have: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, in the 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 Freedom Surf securities.
98. As part and in furtherance of this violative conduct, Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, and AZW Irrevocable Trust, and each of them, knowingly or recklessly engaged in some or all of the series of manipulative transactions, acts, practices, and courses of business described above. This resulted in a rise in the price of Freedom Surf stock, which included price leadership and undisclosed domination and control of the market for Freedom Surf stock; and actual and apparent trading activity, which included pre-arranged matched orders. These transactions, acts, practices, and courses of business operated as a fraud or deceit upon on the nature of the market for Freedom Surf.
99. Also as part and in furtherance of this violative conduct, Salomon Grey charged its customers excessive and undisclosed markups in excess of 100% based on Salomon Grey's contemporaneous cost. Koupas and Rowe negotiated the purchase of 25,000 discounted shares of Freedom Surf stock from Wolfson that preceded these sales, and Rowe set the prices for the sales of the stock to Grey's retail customers.
100. Defendants Bo Phelan, Brown, Cruickshank and Tippetts knowingly provided substantial assistance to the conduct alleged in paragraphs 97 and 98. Bo Phelan and Brown procured and transferred Freedom Surf stock and stock power documents to Defendant Wolfson. Defendant Brown also controlled the escrow where the Freedom Surf stock was held beginning in November 2000. Defendant Cruickshank, who knew that the market for Freedom Surf was manipulated, prepared the company's Form 211 application, and did SEC filings for the company during the manipulation time period. Defendant Tippetts acted as a Wolfson nominee for three accounts involved in the manipulation.
101. Defendant Roundtree knowingly provided substantial assistance to the conduct alleged in paragraphs 97 and 99. Roundtree executed the purchase of 25,000 shares of Freedom Surf from Wolfson, and sold excessively marked-up stock to Salomon Grey's customers.
102. By reason of the foregoing, Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe, and each of them, have violated, and Defendants Bo Phelan, Brown, Cruickshank, Tippetts and Roundtree, and each of them, have aided and abetted violations of, Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder. Unless enjoined, these defendants will again violate the foregoing provisions.
THIRD CLAIM
Violations of Section 15(c)(1) of the Exchange
Act and Rule 15c1-2
Thereunder By Defendants Salomon Grey, Koupas, Rowe and Roundtree
103. Paragraphs 1 through 102 are hereby realleged and incorporated by reference.
104. Defendant Salomon Grey, by use of the mails or any means or instrumentality of interstate commerce, effected transactions in, or induced or attempted to induce the purchase or sale of, Freedom Surf stock any security by means of a manipulative, deceptive or other fraudulent device or contrivance.
105. As part and in furtherance of this violative conduct, Salomon Grey charged its customers excessive and undisclosed markups in excess of 100% based on Salomon Grey's contemporaneous cost.
106. Defendants Koupas, Rowe and Roundtree knowingly provided substantial assistance to Defendants Salomon Grey in its violation of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder.
107. As part and in furtherance of this violative conduct, Koupas and Rowe negotiated the purchase of 25,000 shares of Freedom Surf stock from Wolfson that preceded the retail sales by Salomon Grey, and Rowe set the prices for the sales of the stock to Grey's retail customers. Defendant Roundtree executed the October 2000 block purchase of Freedom Surf stock from Wolfson, and sold excessively marked-up stock to Salomon Grey's customers.
108. By reason of the foregoing, Defendant Salomon Grey has violated, and Defendants Koupas, Rowe and Roundtree have aided and abetted violations of, Section 15(c)(1) of the Exchange Act [15 U.S.C. § 78o(c)(1)] and Rule 15c1-2 thereunder [17 C.F.R. §240.15c1-2]. Unless enjoined, these defendants will again violate the foregoing provisions.
FOURTH CLAIM
Unregistered Offer and Sale of Securities in Violation of Sections 5(a) and 5(c) of the Securities Act By Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, Kirkpatrick, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe
109. Paragraphs 1 through 108 are hereby realleged and incorporated by reference.
110. There are at least five incidences of unregistered sales of Freedom Surf stock for which no exemption is available: (i) Wolfson's October 24, 2000 sale of 25,000 shares to Salomon Grey; (ii) Salomon Grey's October through November 2000 sale of 27,310 shares to its retail customers; (iii) the sale of over 981,000 shares out of the escrow brokerage account between March and July 2001; (iv) the sale of over 196,000 shares out of the Canadian accounts; and (v) the sale of almost 100,000 shares into the market by Dan Rubin in December 2000.
111. Defendants, directly or indirectly, singly or 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 had been filed or was in effect as to such securities and when no exemption from registration was available.
112. As part of and in furtherance of this violative conduct, Defendants Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, Kirkpatrick, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe, and each of them, as more fully described above, participated in the unregistered sales of Freedom Surf shares.
113. By reason of the foregoing, Defendants Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, Kirkpatrick, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe, and each of them, have violated and, unless enjoined, will again violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§77e(a) and 77e(c)].
RELIEF REQUESTED
WHEREFORE, the Commission respectfully requests that this Court:
I.
Enter a Final Judgment of Permanent Injunction permanently restricting and enjoining Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe, and each of them, and their agents, servants, employees, attorneys, attorneys in fact, and those persons in active concert or participation with them who receive actual notice of the Final Judgment by personal service or otherwise from violating, directly or indirectly, Section 17(a) of the Securities Act [15 U.S.C. §77q(a)].
II.
Enter a Final Judgment of Permanent Injunction permanently restricting and enjoining Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas, and Rowe from violating, directly or indirectly, and Defendants Bo Phelan, Brown, Cruickshank, Tippetts and Roundtree from violating, directly or indirectly, or aiding and abetting violations of, Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder. This Final Judgment would apply to each of the foregoing Defendants, and their agents, servants, employees, attorneys, attorneys in fact, and those persons in active concert or participation with them who receive actual notice of the Final Judgment by personal service or otherwise.
III.
Enter a Final Judgment of Permanent Injunction permanently restricting and enjoining Defendant Salomon Grey from violating, directly or indirectly, and Defendants Koupas, Rowe and Roundtree from violating, directly or indirectly, or aiding and abetting violations of, Section 15(c)(1) of the Exchange Act [15 U.S.C. §78o(c)(1) and Rule 15c1-2 thereunder [17 C.F.R. §240.15c1-2]. This Final Judgment would apply to each of the foregoing Defendants, and their agents, servants, employees, attorneys, attorneys in fact, and those persons in active concert or participation with it who receive actual notice of the Final Judgment by personal service or otherwise.
IV.
Enter a Final Judgment of Permanent Injunction permanently restricting and enjoining Defendants Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, Kirkpatrick, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas and Rowe, and each of them, and their agents, servants, employees, attorneys, attorneys in fact, and those persons in active concert or participation with them who receive actual notice of the Final Judgment by personal service or otherwise from violating, directly or indirectly, Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
V.
Enter a Final Judgment ordering Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, Bo Phelan, Brown, Cruickshank, Tippetts, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas, Rowe, and Roundtree to disgorge an amount equal to the funds and benefits they obtained illegally as a result of the violations alleged herein, plus prejudgment interest on that amount.
VI.
Enter a Final Judgment ordering Defendants Wolfson, Phelan, David Wolfson, Kirkpatrick, Pozner, Chapman, Bo Phelan, Brown, Cruickshank, Tippetts, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, AZW Irrevocable Trust, Salomon Grey, Koupas, Rowe, and Roundtree to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3)(A) of the Exchange Act [15 U.S.C. § 78u(d)(3)(A)].
VII.
Enter a Final Judgment pursuant to Section 20(e) of the Securities Act [15 U.S.C. §77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. §78u(d)(2)] permanently prohibiting Phelan, Brown and Cruickshank from serving as an officer or director of any issuer that has a class of securities registered with the Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. §78l] or that is required to file reports with the Commission pursuant to Section 15(d) of the Exchange Act [15 U.S.C. §78o(d)].
VIII.
Enter a Final Judgment pursuant to Section 21(d) of the Exchange Act [15 U.S.C. §78(u)(d)], permanently prohibiting Wolfson, Phelan, Bo Phelan, Brown, Tippetts, Chapman, World Alliance (now Feng Shui Consultants), A-Z Retirement Trust, and AZW Irrevocable Trust from participating in any offering of penny stock.
IX.
Grant such other and further relief as the Court may deem just and appropriate.
Dated:
September 27, 2002
Washington, DC
John L. Hunter
Bonnie S. Kartzman
Rami Sibay
Attorney for Plaintiff
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
(202) 942-4825
Dated:
September 30, 2002
Salt Lake City, UT
_________________________________
Thomas M. Melton (4999)
Attorney for Plaintiff
Securities and Exchange Commission
50 South Main Street, Suite 500
Salt Lake City, Utah 84144-0402
801-524-5796
Local Counsel
http://www.sec.gov/litigation/complaints/comp17756.htm
Les Henderson
Box 159, |
