eConnect, president hit with speedy SEC action
ECNC
Shares issued 0 close $0
Friday Mar 24 2000
by Brent Mudry
The United States Securities and Exchange Commission has moved quickly to shut down the alleged fraudulent market manipulation of eConnect, filing an emergency complaint and injunction application against the company and president Thomas S. Hughes, just 10 days after abruptly suspending trading in shares of eConnect.
In an 11-page complaint filed Thursday in the U.S. District Court for the Central District of California in Los Angeles, the SEC claims Mr. Hughes, 52, of Rancho Palos Verdes, Calif., caused eConnect to issue a series of false press releases about non-existent PalmPilot technology and on-line brokerage deals. The SEC won a temporary restraining order on Friday from Judge Margaret Murrow, enjoining eConnect and Mr. Hughes from further allegedly fraudulent activity, including the issuance of false or misleading press releases.
"The fraudulent press releases misrepresented eConnect's potential business opportunities, thereby causing a dramatic rise in the price of eConnect's stock from $1.39 on Feb. 28 to a high of $21.88 on March 9, on heavy trading volume," states the SEC complaint, filed by staff attorney Roberto Tercero. The shares soared from the 20-cent level in mid-December. (All figures shown are in U.S. dollars.)
The SEC notes that eConnect's average daily trading volume increased from 4.4 million shares between Jan. 3 and Feb. 25, to more than 13.1 million shares from Feb. 28 through March 10. eConnect shares fell $4.50 to $10 on Friday, March 10, on heavy volume of 18.9 million shares on the OTC Bulletin Board.
The SEC imposed a 10-day temporary trading suspension effective at the open on Monday. The suspension was set to expire at midnight on Friday, March 24.
The regulator claims that despite the trading suspension and its investigation, eConnect and Mr. Hughes persisted in continuing to issue false and misleading statements regarding eConnect's business opportunities, and posting them on the company's own Web site, in violation of antifraud provisions of the Exchange Act.
The main alleged misrepresentations noted by the SEC are eConnect's false claims that a subsidiary has a "strategic alliance" to offer to on-line brokerages and their clients a system to permit cash transactions over the Internet, and that eConnect and its joint venture partner have a unique licensing arrangement with PalmPilot.
eConnect, a Nevada company based in San Pedro, Calif., has operated under various names, including Handy-Top Inc., Leggoons Inc. and Betting Inc., since it was originally incorporated in Missouri in 1981.
The current SEC action is the latest setback for the controversial company in the past year. On March 12, 1999, the SEC filed an action against Betting in federal court alleging non-filing of financials. Mr. Hughes has been president of the company since March of 1997, and presided during this earlier period of securities violations.
The company was quite a cheap paper-printer after Mr. Hughes came on board. From March 1 to Aug. 31, 1997, the company issued 4.71 million shares for services rendered, at deemed prices up to 20 cents, of which 3 million shares were issued in the first two months.
Mr. Hughes himself received one million restricted shares in the year ended Aug. 31, 1997, valued at $375,000, although the company notes it received no cash consideration.
The company also issued 6.44 million shares during the year ended Aug. 31, 1998, accidentally exceeding its 10 million shares authorized by 4.28 million shares. In a recent filing, the company claims it meant to issue most of these shares as preferred shares, but due to some sort of an error that nobody noticed until after the close of the year, all of these shares had been mistakenly issued as common shares.
More recently, eConnect agreed on Sept. 28, 1999, to sell shares to Alpha Venture Capital, a company operating out of a post box in the offshore enclave of the Cook Islands. Enhancing its offshore flavour, the company disclosed plans last year to issue 5.2 million restricted shares to two existing shareholders, both based in Costa Rica: Ranco Plasticos and Menhur Azul S.A.
After its regulatory troubles last year, although the company admitted it had not filed the required reports and consented in a settlement to a permanent injunction on future securities violations, it noted in a recent EDGAR filing that it made five late filings last year after signing the settlement. "The company to date has not received any communication from the SEC with regard to these late reports," stated eConnect on March 9, two weeks before the regularly abruptly halted the stock.
Besides its regulatory troubles, eConnect also faces a $1.23-million suit from Canadian brokerage Thomson Kernaghan, which has been involved in a number of OTC Bulletin Board deals. The Toronto-based brokerage issued a legal warning on Aug. 19, 1999, in connection with providing $500,000 to eConnect last year related to a debenture financing.
eConnect claims it received $417,500, net of an $82,500 fee. Thomson Kernaghan served its suit on Nov. 15, claiming $1.23-million and seeking various orders. In its March 9 EDGAR filing, eConnect claims that it has told its lawyer it owes nothing to Thomson Kernaghan "since TK has caused damage to the company and its shareholders well in excess of any amount allegedly owed by the company to TK."
The current SEC complaint focuses on allegedly false press releases issued since at least Feb. 28. The regulator notes that Mr. Hughes was responsible for eConnect's press releases being issued and either sent them himself to Business Wire or revised them before they were issued. eConnect also hired an investor relations firm, unidentified in court filings, to handle investor inquiries.
The first allegedly false disclosure is a Feb. 28 press release, in which eConnect claimed it had entered a "strategic alliance," through one of its subsidiaries, with Empire Financial Group, a broker-dealer based on Longwood, Fla., and registered in 1991, to provide on-line brokerages with eConnect's "Instant Cash Trading Account" system, to transfer clients' funds from their bank account to a brokerage account through the Internet using ATM cards.
The SEC claims there was no "strategic alliance" between Empire and eConnect or any of its subsidiaries. In reality, Empire had signed a nonbinding letter of intent with a joint venture partner of eConnect, with hopes of negotiating an agreement in March. The regulator notes that Empire's president reviewed a draft press release four days before the Feb. 28, but it did not contain the false representation.
"Even though Empire's president asked to see a final version of the press release before it was issued, no one ever provided him with one," states Mr. Tercero in the complaint. The SEC claims that in addition to distributing the revised and allegedly false press release through Business Wire, eConnect also posted the bullish release on a Raging Bull message board devoted to the company's stock and on its own Web site.
Bullish chat-group posters, unidentified in court documents, projected large increases in the share price of eConnect. The stock rose $1.11 to $2.50 on heavy volume of 16.76 million shares on Feb. 29, the day after the release. The volume that day was four times the volume of 4.32 million shares posted on Feb. 28.
In the second allegedly false release, dated March 3, eConnect claimed it and joint venture partner Pilot Publishing Inc. had "structured a licensing agreement with PalmPilot" to enable the first-ever wireless transactions over the Internet using Palm Inc.'s Palm Pilot device. The March 3 release was issued the day after Palm Inc.'s highly publicized initial public offering.
The SEC claims there was actually no such licensing agreement between either Palm and eConnect, Pilot Publishing or a joint venture comprised of eConnect and Pilot Island. Pilot Island, based in Winter Garden, Fla., is 100-per-cent owned by International Digital Holding Inc., and claims it is an industry leader in developing software products and accessories for the "Palmtop" portable computing market.
The regulator notes that Pilot Island merely a "Registered Solution Provider" of Palm, amongst countless others, which allows it to participate in Palm's technical and marketing programs and receive discounts on development hardware.
The SEC alleges that Mr. Hughes knew there was no unique licensing arrangement with Palm. In a Dec. 27, 1999, letter to International Digital's chairman proposing a "PocketPay Palm Pilot" development venture, and a Jan. 10 eConnect press release, Mr. Hughes made no mention of any Palm licensing agreement. On March 1, just two days before the press release was issued, Mr. Hughes signed a joint venture agreement on behalf of eConnect with Pilot Island, which made no mention of any licence or agreement with Palm, let alone a unique one.
Using its similar modus operandi, in addition issuing its March 3 press release to Business Wire, eConnect posted it to the Raging Bull message board, where it was warmly received by bullish posters.
The stock rose 56 cents to $4.50 on the open and hit an intraday high of $5.25 on volume of 9.67 million shares on March 3. The next day, eConnect shares rose $3.59 to $8.25 on 11.68 million shares. The stock peaked at $21.88 on Thursday, March 9, on volume of 14.16 million shares, before falling back to $10 on the Friday, its last day of trading.
The SEC moved in to suspend eConnect trading on Monday March 13. The abrupt trading halt came after the company released two bullish announcements on the Saturday: its plans to apply for a Nasdaq National Market System listing, and the April launch of its eCashPads product for Internet merchants.
The SEC claims that on March 20, a week after its suspension of eConnect trading, the company issued yet another false and misleading press release purporting to clarify its previous statements.
eConnect claimed its Palm licensing arrangement was a standard licence agreement downloaded from Palm's Internet site. In reality, this agreement is available to anyone visiting Palm's Web site and it has nothing to do with the development of products or services with Palm.
The clarification release also mentioned the Empire deal, stating that a copy of the nonbinding exclusive letter of intent with Empire had been posted on at a designated Web address. The SEC notes that eConnect did not distribute this clarification release in the same broad manner as the original releases, and any corrective effect was minimized, as the company continued to post the allegedly false earlier releases on its Web site.
In its complaint, the SEC claims that through the questionable releases, eConnect and Mr. Hughes employed schemes and devices to defraud, and engaged in acts, practices or courses of business which operated as a fraud or deceit upon investors. The regulator also claims eConnect and Mr. Hughes made untrue statements of material fact or omitted to state relevant material facts to make the statements true.
The SEC seeks to permanently enjoin eConnect and Mr. Hughes from future violations of Section 10(b) and Rule 10b-5 of the Exchange Act. In addition, the regulator seeks a court order for both to pay unspecified civil penalties.
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