=DJ Penny-Stock Co. Says SEC Harassing It For Speaking Out
03/19/2004
Dow Jones News Services
(Copyright © 2004 Dow Jones & Company, Inc.)
By Judith Burns
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Universal Express, Inc. (USXP), a tiny Florida firm, is suing the Securities and Exchange Commission, claiming it has been subject to "retaliatory harassment" for criticizing SEC inaction on abusive short selling.
Universal Express, Boca Raton, said the SEC has issued subpoenas "each and every time the company issues a press release." It claims the SEC is violating its right to free speech and due process and is engaged in a conspiracy to intentionally interfere with its business.
The lawsuit, recently filed in U.S. District Court for the Southern District of Florida, seeks compensatory and punitive damages, recovery of legal fees, and a permanent injunction to stop the SEC from issuing subpoenas to Universal Express and its business partners.
"We will be moving to dismiss the complaint," said SEC associate general counsel Richard Humes. "It lacks merit."
Free-speech claims against the SEC generally fail. Earlier this year, a federal judge in Maryland refused to dismiss SEC charges against Agora, Inc., a Baltimore publisher that claimed the SEC was violating its First Amendment right to free speech.
Courts are reluctant to stop SEC investigations as well. Robert Brennan, the former high-flying head of First Jersey Securities, and the penny-stock promotion firm Blinder Robinson & Co. are among those who have lost lawsuits seeking to stop SEC probes.
"Nobody, but nobody, sues the SEC and wins," said Stephen Crimmins, a partner at the Washington, D.C., law firm of Pepper Hamilton LLP and former SEC deputy chief litigation counsel.
Crimmins doesn't think a federal judge will believe claims of SEC retaliation. "The idea of a vendetta is absurd," he said. "It really doesn't happen."
Arthur Tifford, a Boca Raton, Florida, attorney representing Universal Express, disputes that, saying the SEC has issued 15 subpoenas against the firm in recent months, distracting its executives and killing deals with other companies.
"All of it is being done vindictively," Tifford said.
Universal Express, which provides services to private postal companies, has been a vocal critic of the SEC, complaining it has failed to stop stock manipulations through "naked" short sales.
Short selling, which produces profits when stock prices fall, is legal. Unlike legitimate short sellers, who sell borrowed shares in hopes of replacing them at a lower price, "naked" short sellers conduct sales without borrowing stock.
The SEC floated a proposal last fall to combat abusive short selling but it has yet to act on it. Universal Express said inaction has hurt small companies whose shares are most vulnerable to manipulation while protecting "influential" brokerage firms that could lose billions covering naked short positions.
Universal Express, whose shares trade in the over-the-counter Bulletin Board, said it has been burned by short sellers and was rebuffed when it complained to the SEC in 1998. It had more success suing short sellers, with two Florida jury trials awarding it $526 million in judgments. It also has campaigned to limit short sales to those holding stock certificates and enlisted microcap companies to abandon trading through the Depository Trust Co. At the DTC's request, the SEC halted that exodus last June.
In its lawsuit, Universal Express said SEC subpoenas began in June. A second subpoena came in August and a third in September after Universal Express declared war on naked short selling in a release that asked if jurors can see the damage it causes, "why can't the SEC?"
Tifford said the SEC demanded that Universal Express prove it was the victim of naked short selling. The company turned over documents and issued a new press release complaining of SEC intimidation. Another subpoena followed seeking documents on the company's ability to collect on its legal judgment. The flurry of press releases and subpoenas continued through the fall, with the SEC demanding years of canceled checks, deposit slips, and wire transfers, the complaint states.
After Universal Express announced plans in October to purchase North American Airlines, the SEC quickly subpoenaed the New York charter company's financial records. Universal Express sued for breach of contract when the deal was scrapped in November. In a countersuit, North American Airlines claimed Universal Express couldn't finance the deal and only announced it to lift its stock price.
"They said the money was on its way," said Kenneth Kelly, a New York attorney who represents North American Airlines. "It never came."
Kelly confirmed that North American Airlines received an SEC subpoena but said it was "very easy" to produce the information sought by SEC lawyers. Universal Express said the soured deal shows SEC subpoenas may cause "irreparable damage."
Along with filing the lawsuit, Universal Express says it has complained to SEC Chairman William Donaldson, New York Attorney General Eliot Spitzer and members of Congress, and asked the Justice Department to open a formal probe of the SEC. Tifford said the requests have gone unanswered.
By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com
(END) Dow Jones Newswires
03-19-04 1320ET |
