Complaint continued...
13. On February 17, 1998, Smith announced that Great White's 1997 sales totaled $14 million, a purported 176% increase from the prior year. Throughout 1998, Smith falsely announced “audited” sales results for year-end 1997, and quarterly periods ending March 31, and June 30, 1998. On January 26, 1999, Great White reported sales totaling $25.6 million for 1998. In fact, Great White has no records detailing its 1997 sales, and these claims are wholly unverified. As to its 1998 sales, the largest portion of Great White's purported sales revenues were supposedly generated from sales of yachts and marine equipment in Mexico; however, the company cannot fully substantiate that it purchased or sold any of the “invoiced” items. In addition, with regard to both 1997 and 1998 sales of boat motors, accessories and all-terrain vehicles, the next largest component of purported sales revenues, the company's suppliers shipped goods worth far less, even with exorbitant retail mark-ups, than the reported sales amounts paid to the company during the reporting periods.
14. With respect to the excerpts of “audited” 1997 and 1998 financial statements contained in Great White's press releases and promotional brochures, and set out in the company's website, the company purportedly relied upon the auditing services of John C. Reyes (“Reyes”), a “Certified Independent Accountant” from Monterrey, Mexico, who claims to maintain an office in Waco, Texas. With regard to the year-end 1998 financial statement appended to Great White's Form 10-SB, the company purportedly relied upon Jose Berlanga, a “Certified Independent Accountant” from Mexico City, Mexico. Neither Reyes nor Berlanga is licensed to practice as a certified public accountant in Texas, or otherwise qualified in the United States to provide public accountancy services. More importantly, neither Reyes' nor Berlanga's work complies with Generally Accepted Auditing Standards (“GAAS”). The financial statements purportedly audited by Reyes and Berlanga do not contain mandatory footnotes detailing Great White's accounting practices or significant transactions, including related party transactions between the company and its principals. Nor do the financial statements Reyes and Berlanga purportedly audited provide necessary statements of cash flow or changes in stockholders' equity. According to Smith, Reyes is “incommunicado,” and has possession of the original Great White records that would support his audit conclusions regarding the 1997 financial statements; the company refused to produce Berlanga for investigative testimony, or authorize him to provide his workpapers to the Commission.
15. Furthermore, Smith has tampered with Reyes' June 30, 1998, audit report in materials provided to investors and in Great White's Form 10-SB. To create the appearance that Reyes' audit report complied with GAAS, Smith retained another accountant to prepare footnotes and supplemental statements of cash flow and changes in stockholders' equity, on a compilation – not audit – basis; that means the compilation accountant prepared these materials based on Smith's representations, rather than from an independent review of Great White's accounting records. Smith then removed the compilation accountant's qualifying comments, which stated that no audit had been performed and no audit opinion rendered, and appended the compilation materials to Reyes' audit report. By this ruse, Great White and Smith have falsely represented that the company's 1998 financial statements were audited.
16. Indeed, commencing in October 1998, Great White and Smith publicly represented that the company had retained a U.S. auditor, in anticipation to the imminent filing of a registration statement with the Commission. In March 1999, approximately one month prior to filing its Form 10-SB registration statement, Great White announced its U.S. and Mexican accountants had completed their work, and that an audit report was forthcoming. At that time, according to the U.S. accountant and Great White's chief financial officer, there were no financial statements to audit, since Great White's financial records were either incomplete or in disarray.
17. Great White and Smith have also made false or misleading claims regarding the nature of its distribution agreements with certain of the company's suppliers. For example, until May 1998, Great White claimed to hold a distribution agreement with Arctic Cat, Inc., permitting it to sell personal water craft in Mexico; in fact, the agreement was terminated by Arctic Cat, Inc. in May 1997, due to Great White's failure to account for financed inventory. Smith has also failed to disclose litigation with a financial institution that had financed certain of its inventory during 1997, which alleged that he had converted certain financed inventory. The lawsuit against Smith was settled only after the financial institution obtained a personal judgment against Smith and he commenced personal bankruptcy proceedings, which also were not disclosed to investors. Smith then arranged for Great White to pay past-due amounts to his creditor.
18. During 1998, Great White and Smith consistently understated the total number of the company's shares issued and outstanding, apparently to conceal the unlawful distribution discussed below, and to create the false appearance of greater shareholder equity. From May through December 1998, Great White and Smith reported only 8.3 million shares issued and outstanding, when the actual number was at least 19 million, and may have been as much as 32 million. And in an April 6, 1998, press release, Smith falsely claimed that neither he nor any of the company's insiders had sold Great White stock – a misrepresentation that Smith has never corrected. At the time of the press release, the company and Smith had issued and sold at least 1 million shares, including shares issued to investor services providers, and Smith had, at least three months prior, begun his systematic sale of Great White shares through nominee accounts maintained in the names of K.Ursrey and others.
GREAT WHITE'S AND SMITH'S FRAUDULENT DISTRIBUTION
19. Great White and Smith commenced a fraudulent distribution of the company's unregistered shares in January 1998, through a carefully crafted series of sales in market transactions, through accounts in his name and in the name of K.Ursrey and others; through putative private placements to persons he knew or should have known did not have investment intent; and through sales of warrants and debentures that were immediately converted into shares sold in market transactions. From January 1998 to the present day, Great White and Smith have sold, directly and indirectly, at least 10 million Great White shares into the OTC market, in addition to warrants and convertible debentures representing rights to at least an additional 2 million shares, raising at least $10.8 million, without registering any of these shares or other securities with the Commission under the Securities Act.
20. In 1998 and 1999, Smith opened a series of brokerage accounts in his own name, some jointly with his wife and ex-wife, and in the names of K.Ursrey and others, including, Parker Ursrey, Smith's three-year-old grandson, and deposited at least 2.5 million shares of Great White stock into these accounts. Smith has admitted that he completed and signed the new account forms, using K.Ursrey's or Parker Ursrey's name, directed sales of Great White stock from these accounts into the OTC market, and signed checks, using K.Ursrey's name, disbursing the trading proceeds. At least 1.1 million Great White shares were sold from K.Ursrey's accounts alone, generating at least $2.5 million in trading proceeds. The remaining 1.4 million shares were transferred from these accounts by Smith, and used to compensate various entities for services provided to the company; many of these transferred shares were then immediately sold into the OTC market, with Smith's actual or tacit approval. A number of these accounts, including accounts in the name of K.Ursrey and Smith's grandson, remain open and active, and certain of these accounts hold Great White shares and proceeds from sales thereof. More recently, the Commission has learned that in May 1999, Smith directed the sale of 83,000 shares of Great White stock from a K.Ursrey denominated account he controls, realizing trading proceeds of $172,500; these profits were deposited into Smith's personal bank account, and to purchase two vehicles for use by him and his wife.
21. Separately, Smith orchestrated a series of putative private placements, selling Great White shares at a discount from the prevailing market price, when he knew, or reasonable should have known, that the purchasers would immediately sell such shares into the OTC market. Smith sold at least 5.7 million shares of Great White stock through these private placements, much of which he directed be transferred directly into brokerage accounts maintained by the purchasers or their associates, and he and the company received at least $5.6 million from these sales. In each instance, Great White's transfer agent issued these shares without any restrictive legend, at Smith's instruction. In nearly every instance, the purchasers immediately sold these Great White shares directly into the OTC market.
22. Great White and Smith also sold warrants and convertible debentures, in certain instances in conjunction with the previously described private placements, providing purchasers with the opportunity to convert these securities into Great White stock, when they knew, or reasonably should have known, that the purchasers would immediately exercise their conversion rights and sell the newly obtained shares into the OTC market. Smith has sold warrants and convertible debentures that grant holders the right to purchase at least 2 million shares of Great White stock, and possibly a controlling interest in Great White, raising at least $1.4 million; purchasers have already exercised rights under these agreements to obtain at least 1.8 million shares of Great White stock, generating an additional $1.1 million in stock sales revenues. In at least two instances, the converting purchasers told Smith that they would be use the proceeds from their sales of stock to pay for their conversion obligations, and delayed payment to Great White on that basis. Upon information and belief, all of these shares have been offered or sold into the OTC market by the purchasers, often with Smith's admonition to sell so as to avoid impacting market prices.
GREAT WHITE'S AND SMITH'S USES OF PROCEEDS AND RECORDKEEPING
23. Smith misappropriated over $3.5 million raised by Great White or obtained from trading proceeds, for his own uses. In March 1998, Smith used investors' funds to purchase a $328,000 residence for L.Smith, and, from January 1998 to the present, he or Great White have paid her at least $100,000, and also paid certain of her credit card bills. In June 1998, Smith directed Great White to cause a $1 million cashier's check, purchased with investors' funds, to be issued to himself, depositing the proceeds into his personal bank account. In October 1998, Smith liquidated a $1 million certificate of deposit purchased with investors' funds, again depositing the proceeds into his personal bank account. During the period from January 1998 to the present, Smith also deposited at least $800,000 obtained from sales of Great White stock from his personal and nominee brokerage accounts, into his personal bank accounts. During this same period, Smith purchased undeveloped lots valued at $99,000; paid at least $230,000 of his personal expenses, which includes payment of a $70,000 mortgage on his residence; paid a personal judgment of $110,000; made payments on various credit card accounts; and gave at least $80,000 to family members. All of the funds used to make these purchases or payments were diverted from Great White, and were derived from his or the company's sales of its stock and other securities.
24. In July 1998, Smith directed payment of a $.10 per share “dividend” to the company's shareholders, and Great White paid a total of over $1 million to approximately 150 shareholders. At the time the purported dividend was paid, all of the funds in the Great White account from which the checks were issued were derived from Smith's or the company's sales of stock.
25. After the Commission commenced its investigation into the activities of Great White's investor services providers, and soon after Smith provided testimony in that investigation in October 1998, he “returned” nearly $1 million of misappropriated funds to Great White. Following his conversion of the certificate of deposit referenced in paragraph 23, Smith “loaned” Great White $500,000, and paid it $400,000 for undisclosed reasons. In December 1998, Smith also paid $110,000 to Great White, which, upon information and belief, served to repay the company's settlement of a judgment against Smith. These payments, “loans,” and repayments, however, all demonstrate Smith's cavalier treatment of Great White's funds as his own, and reveal that Great White operates as his “alter ego.” Unless Smith is enjoined and a receiver pendente lite is appointed for Great White, Smith will continue to breach his fiduciary obligations to the company and he and the company will continue to breach their fiduciary obligations to its shareholders.
26. In part, the Commission's investigation of Great White's and Smith's fraudulent scheme has been hindered by the company's near-complete failure to maintain books and records of its financial dealings. Great White does not maintain most records of original entry necessary to maintain its financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”). Upon information and belief, these recordkeeping failures are willful, and designed to prevent any persons, especially shareholders, regulators or law enforcement agencies, from effectively determining the company's, and Smith's, uses of funds obtained from sales of securities. These same failures also demonstrate that Great White's “audited” financial statements must be considered unreliable, and that the company's and Smith's reliance on these financial statements in publicly disseminated releases and Commission filings must be considered unfounded and reckless, at best.
COUNT I
FRAUD IN CONNECTION WITH THE PURCHASE AND SALE OF SECURITIES
Sections 10(b) of the [15 U.S.C. § 78j(b)] and Exchange Act and
Rule 10b-5 [17 C.F.R. § 240.10b-5] Thereunder
27. The allegations of paragraphs 1 through 26 of this Complaint are realleged and incorporated herein by reference as if set forth here verbatim.
28. Great White and Smith, singly and with others, directly and indirectly, have been using and, unless enjoined, will continue to use the means and instrumentalities of interstate commerce and the mails:
a. to employ devices, schemes and artifices to fraud;
b. to make untrue statements of material facts and to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and
c. to engage in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons,
in connection with the purchase and sale of securities.
29. As part of and in furtherance of the scheme, these defendants made false or misleading statements of material facts, and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, as described in the paragraphs 1 through 26 of this Complaint.
30. Great White and Smith have intentionally, knowingly, or recklessly engaged in the devices, schemes, and artifices to defraud, making of untrue statements and omissions, and acts, practices and courses of business described in this count. By reason of the foregoing, these defendants have violated and, unless enjoined, will continue to violate the provisions of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
COUNT 2
FRAUD IN THE OFFER AND SALE OF SECURITIES
Violations of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]
31. The allegations of paragraphs 1 through 26 this Complaint are realleged and incorporated herein by reference as if set forth here verbatim.
32. Great White and Smith, singly and with others, have, in the offer and sale of securities, used, and unless enjoined, will continue to use, the means and instruments of transportation and communication in interstate commerce and by use of the mails, directly and indirectly:
a. to employ devices, schemes or artifices to defraud;
b. to obtain money or property by means of untrue statements of material fact 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; or
c. to engage in transactions, practices or courses of business which operate or would operate as a fraud or deceit.
33. As part of and in furtherance of this scheme, Great White and Smith obtained money or property by use of false and misleading statements of material fact, and by omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, as described in the paragraphs 1 through 26 of this Complaint.
34. By reason of the foregoing, Great White and Smith have violated, and unless enjoined, will continue to violate Sections 17(a)(2) and (3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and (3)]. Furthermore, these defendants have intentionally, knowingly and/or recklessly engaged in the acts and practices described in this count, so they have violated and, unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)].
COUNT 3
FAILURE TO REGISTER SECURITIES
Violations of Section 5(a) and 5(c) of the Securities Act
35. The allegations of Paragraphs 1 through 26 of this Complaint are realleged and incorporated herein by reference, as if set forth here verbatim.
36. Great White and Smith, singly and with others, have been offering to sell, selling and delivering after sale, certain securities, and have been, directly and indirectly: (a) making use of the means and instruments of transportation and communication in interstate commerce and of the mails to sell securities, through the use of written contracts, offering documents and otherwise; (b) carrying and causing to be carried through the mails and in inter-state commerce by the means and instruments of transpor-tation, such securities for the purpose of sale and for delivery after sale; and (c) making use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell such securities.
37. As described in paragraphs 1 through 26, defendants offered and sold Great White's securities to the public by use of the means and instrumentalities of interstate commerce. No registration statements under the Securities Act have been filed with the Commission or are otherwise in effect with respect to these securities.
38. By reason of the foregoing, Great White and Smith have violated and, unless all are enjoined, will continue to violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. 77e(a) and 77e(c)].
COUNT 4
ANCILLARY EQUITABLE RELIEF
Relief Defendant K.Ursrey has Either Been Unjustly Enriched, or, in the
Alternative, Holds Great White's or Smith's Funds in Constructive Trust
39. The allegations of paragraphs 1 through 26 of this Complaint, are realleged and incorporated herein by reference, as if set forth here verbatim.
40. K.Ursrey holds Great White shares, funds and other securities that were received from Great White or Smith, or that were purchased or obtained with the proceeds of unlawful transactions in the securities of Great White. K.Ursrey has any no legal or equitable claim to these funds or securities, and to permit him to retain such funds would unjustly enrich him. As well, K.Ursrey funds he knows or should have reasonably known, and now certainly knows, were obtained by means of fraudulent acts and practices; he, thus, holds these funds in constructive trust for Great White and/or its shareholders.
RELIEF REQUESTED
WHEREFORE, the Commission respectfully requests that the Court:
Temporary Restraining Order, Preliminary Injunction Order, and Asset Freeze
Issue, instanter, a Temporary Restraining Order enjoining Great White and Smith from violating Sections 5 (a) and (c), and 17(a) of the Securities Act [15 U.S.C. §§ 77q(a) and (b)]; and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], and prohibiting them and K.Ursrey and L.Smith from selling, spending, disbursing or otherwise disposing of funds or assets in their possession. Upon a proper showing, issue an Order of Preliminary Injunction enjoining and prohibiting the defendants and relief-defendants from engaging in acts or practices enjoined or prohibited by the Temporary Restraining Order.
Declaratory Relief
Declare, determine and find that Great White and Smith have committed the violations of the federal securities laws alleged herein.
Permanent Injunctive Relief
Issue an Order of Permanent Injunction, enjoining Great White and Smith, their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them, and each of them, from violating Sections 5 (a) and (c), and 17(a) of the Securities Act [15 U.S.C. §§ 77q(a) and (b)]; and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5.
Accounting
Issue an Order requiring Great White, Smith, and K.Ursrey to make an accounting, under oath, of all funds or other remuneration they received as a result of the activities alleged in this Complaint.
Disgorgement
Issue an Order requiring Great White, Smith, and K.Ursrey to disgorge all ill-gotten profits or proceeds that they have received as a result of the acts and/or courses of conduct complained of herein, with prejudgment interest.
Penalties
Issue an Order directing Great White and Smith 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. § 78(d)(3)].
Appointment of a Receiver Pendente Lite
Issue an Order appointing a Receiver Pendente Lite for Great White.
Repatriation Order
Issue an Order directing Great White, at the instruction of the Receiver Pendente Lite, and Smith, to immediately repatriate all funds or assets held outside the jurisdiction of this Court.
Expedited Discovery; Procedural Orders
Issue an Order expediting discovery, and prohibiting the defendants or others from spoliation of evidence by destroying, altering or removing from the jurisdiction of this Court their personal or business records.
Retention of Jurisdiction
Further, the Commission respectfully requests that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be entered, or to entertain any suitable application or motion by the Commission for additional relief, equitable and/or legal, to which the Commission may show it is entitled and this Court finds to be just and proper.
Dated: July 28, 1999. Respectfully Submitted,
PHILLIP W. OFFILL, ESQ.
(OKLA. BAR NO. 10426)
SENIOR TRIAL COUNSEL
VICTORIA FAY PRESCOTT, ESQ.
(TEXAS BAR NO. 16255300)
RONDA JOY BLAIR, ESQ.
(NEBRASKA BAR NO. 19010)
Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
801 Cherry St., 19th Floor
Fort Worth, Texas 76102
Telephone: (817) 978-6450
Facsimile: (817) 978-2700
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