..........................THE FRAUDULENT SCHEME
The Start of the Scheme
33. When Tsai formed MAS in October 1996, he was its chairman, president, and treasurer, and he caused MAS to issue him 8.5 million shares of common stock. MAS was a shell with minimal assets, and its express purpose was to merge with a private entity looking to establish a public trading market for its shares.
34. In several Commission filings made in 1999, Tsai falsely represented that he and MAS had transferred thousands of MAS shares to dozens of individuals during 1997 and 1998 in order to conceal his true ownership and control of the shares and to make it appear that the shares could be later sold without a registration statement in effect. More specifically, Tsai falsely reported in these filings that in January 1997 he gifted 50,000 of his own shares to each of five former directors, for a total of 250,000 shares, and that MAS issued a total of 500 shares in January 1997 and a total of 750 shares in September 1998 to former directors as compensation for services in 1997 and 1998. Tsai subsequently fabricated documents which showed that the former directors transferred most of their 250,000 shares supposedly gifted by Tsai in January 1997 to roughly thirty other individuals in August 1999.
35. The two January 1997 transfers and the September 1998 transfer were shams since the purported directors rendered no services for MAS and never knew they supposedly were directors. Tsai never told the purported directors they received shares in MAS from him or the company, or that the 250,000 shares they supposedly collectively received from Tsai in January 1997 were later transferred to others.
36. In fact, at all relevant times, the "directors" and other "shareholders" were nominees, and Tsai controlled the stock they supposedly owned. Tsai duped the nominees into signing one or more blank stock powers, which Tsai kept and later used to further the scheme.
The Promoter Defendants' Initial Involvement in the Scheme
37. On February 17, 2000, after MAS acquired the Chinese Linux company and changed its name to BluePoint, the total outstanding shares of BluePoint stood at 20 million shares. Of the 20 million shares, approximately 16 million shares were restricted. The Chinese Linux company's founders held 15.5 million restricted shares, and Tsai held 450,000 restricted shares. This left roughly 4 million shares in the float. On the same day, the Promoter Defendants obtained 3.75 million shares, or over 90% of the supposed unrestricted shares, from Tsai. Tsai sold the nominees' shares to the Promoter Defendants through the stock powers he obtained earlier in 1997 and 1998, and he never told the nominees about the stock sale.
38. Markow facilitated the transfer of the 3.75 million BluePoint shares from Tsai to the other Promoter Defendants. Through Markow, the Promoter Defendants paid Tsai $250,000 for the shares while Markow paid the nominees each $100 to make it look like he and the other Promoter Defendants were buying from shareholders rather than Tsai. The Promoter Defendants never reported their acquisition of 90% of the free-trading shares of BluePoint, and Tsai never reported the sale of the nominees' shares which he effectively controlled to the Promoter Defendants.
Distribution of BluePoint Shares to the Promoter Defendants and
Preparation to Trade
39. Markow and Goelo knew that they were required to report their control of BluePoint stock in a Commission filing and actively took steps in an unsuccessful attempt to evade the reporting requirement. Markow was careful to cause the 3.75 million shares to be assigned to fourteen separate holders, with no single holder assigned more than 2.5% of BluePoint's outstanding stock.
40. Out of the 20 million total shares of BluePoint outstanding, the promoters had collectively acquired 18.75% (3.75 million shares). They held or directly controlled 15.45% (3,090,000 shares), and Yang at least partially controlled an additional 3.3% (660,000 shares) held by him, K&J, his spouse and in-laws.
41. Of the 3.75 million shares controlled by the Promoter Defendants, Markow caused a total of 2.6 million BluePoint shares to be issued in the names of the Promoter Defendants and entities they controlled. Markow also caused another 590,000 shares to be placed in the names of the spouses of Yang (220,000 shares) and Luo (220,000 shares), and Luo's minor child (150,000 shares). The remaining shares (560,000) were placed in the names of Yang's mother, father-in-law, and mother-in-law. The shares initially assigned to Yang's mother (120,000) were soon transferred to Yang, and he had at least partial control of the shares held by his in-laws and spouse. The shares assigned to Luo's child were soon transferred to Luo, and he controlled the shares held by his spouse.
42. The Promoter Defendants concealed from the investing public that they controlled the float of BluePoint, that they planned to manipulate the BluePoint market, and that they had paid only pennies for their shares. In addition, Markow never reported the "desist-and-refrain" orders issued against him by the state of California in 1998 in any BluePoint filing with the Commission.
43. Around the time of the acquisition, Markow, Goelo, Yang, and Luo worked together as a group to arrange for BluePoint to trade publicly by lining up market makers for BluePoint shares, communicating frequently amongst each other, and transferring a majority of the BluePoint shares held by the Promoter Defendants to Sierra.
44. During this same time, Markow also recruited Sierra and other brokerage firms to act as market makers for BluePoint.
45. Three days before trading began in early March, Markow wrote to Yang and Goelo as follows: "WE CAN TRADE ON MONDAY. EVERYTHING IS FINE. LET'S HAVE A CONFERENCE CALL SHORTLY."
The Manipulative Trading Activity on March 6, 2000
Domination and Control of the BluePoint Market
46. By March 6, 2000, the Promoter Defendants had placed 2.43 million BluePoint shares in Sierra accounts they controlled. That day, BluePoint began trading on the OTC Bulletin Board.
47. On March 6, 2000, the Promoter Defendants and Broker-Dealer Defendants maintained control of BluePoint's float and exercised domination and control of the market in BluePoint shares. The initial BluePoint trades all involved Sierra, Goelo, Yang, and Luo. Specifically, in the first eleven minutes of trading, the following transactions occurred:
Acting for Sierra's account, Geiger bought 100,000 shares from Yang at $6 per share. Sierra reported the purchase to the Nasdaq system as four separate blocks of 25,000 shares each.
Geiger (on behalf of Sierra) sold 40,000 of the Yang shares for $6.02 per share to Goelo, who already owned nearly a million shares.
Geiger (on behalf of Sierra) bought one block of 50,000 shares each from Yang and Luo at $6.50 per share.
48. These transactions were artificially structured by the Promoter Defendants acting in concert and were executed at literally hundreds of times the price that the Promoter Defendants had paid just weeks earlier.
49. Geiger resold another 40,000 of the first 100,000 Yang shares to Geiger's wife, his mother, Richardson, and John McCamey ("McCamey") of Sierra. Each buyer got 10,000 shares at $6.1275 per share.
50. At 9:58 a.m., sixteen minutes after the first trade, Sierra sold 5,000 shares of BluePoint at $7.1875 per share to a Sierra customer, who was advised by Markow to buy BluePoint. Markow arranged this trade in advance with Geiger.
51. At 10:22 a.m., forty minutes after the first trade, Geiger bought another 20,000 shares for Sierra from Luo at $15 per share. Sierra's bid was then 200 shares at $11 per share.
52. By 10:28 a.m., BluePoint had traded at its high for the day, $21 per share.
53. After the first eleven minutes, Sierra began reselling the shares it bought from Yang and Luo to other broker-dealers. In just over half an hour between 9:54 a.m. and 10:31 a.m., Sierra sold 59,700 shares at prices starting at $7.125 per share and ending at $20 per share. By 1:00 p.m., Sierra had sold 103,700 shares at prices as high as $21 per share.
54. BluePoint's total trading volume on March 6 was 1.15 million shares. Sierra's trading accounted for 44% of the volume, and the market maker with the next highest volume had just 8%.
Price Leadership by Sierra
55. Throughout the day, the Broker-dealer Defendants demonstrated price leadership
of the BluePoint shares. During this sell-off, Sierra dominated other market makers. For much of the morning, only Sierra consistently offered BluePoint for sale. From the first trade at 9:42 a.m. until 10:06 a.m., Sierra was the only market maker quoting an ask. During that time, Geiger raised Sierra's ask from $7 to $10.
56. From 10:06 a.m. until 10:17 a.m., only one other market maker quoted an ask.
57. From 10:17 a.m. through 11:18 a.m., other market makers frequently quoted a bid but no ask, while Sierra always quoted both prices.
58. Geiger also ensured the Sierra led the bid, although it bought little from other broker-dealers. Between the market open and 10:47 a.m., Sierra's bid (entered by Geiger) went from $3 to $19. Yet Sierra did not buy BluePoint from another broker-dealer until 10:51 a.m.
59. Sierra's bid leadership occurred when over half the float was in Sierra accounts and over 90% of it was held by the promoters or their relatives. For the day, Sierra had the exclusive high bid 59% of the time, and shared the high bid with one or more other broker-dealers 16% of the time. Sierra also raised its bid ten times to match or exceed the high bid. Yet for the day, Sierra bought only 5,400 shares from other broker-dealers.
60. Sierra bid and bought aggressively (from Yang and Luo) in the absence of arms-length retail demand for BluePoint from Sierra customers. Every retail customer to whom Sierra sold BluePoint on March 6, with the exception of one person, was either one of the promoters, a Sierra employee, a relative of Geiger, someone whose account Geiger set up specifically to trade in BluePoint, or someone with ties to Markow. Because Sierra had purchased enough shares of BluePoint from Yang and Luo in the first eleven minutes to satisfy the total retail customer demand on March 6, Sierra had no legitimate reason to raise the bid throughout the day.
61. Likewise, Sierra had purchased enough shares to satisfy demand from other broker-dealers and had no legitimate reason to raise the bid throughout the day on March 6.
62. Geiger and Richardson knew they could immediately resell 80,000 shares to Sierra customers when Sierra bought the initial 100,000 shares from Yang. The customers, however, were Goelo, Geiger's wife, Geiger's mother, Richardson, and McCamey. There was no preexisting retail interest in the remaining 20,000 Yang shares, or for the other 100,000 shares Sierra bought from Yang and Luo in the first eleven minutes of trading on March 6, 2000.
63. As the day wore on, Sierra bought back over half of the 40,000 BluePoint shares Sierra had sold earlier to Geiger's wife, Geiger's mother, Richardson, and McCamey. Sierra paid as much as $19.875 per share for the stock, which it had sold to these customers for $6.1275 per share.
64. At all relevant times and to date, the Promoter Defendants never made any filings with the Commission as required to report their sales of BluePoint securities and the change in their ownership.
65. At all relevant times, Tsai, the Promoter Defendants, Sierra and Richardson sold or offered to sell shares of BluePoint without a registration statement in effect.
The Slide Down
66. BluePoint never regained the $21 per share high and million-plus volume seen on its first day of trading. On the first day, it closed at $17.75 per share. On the second day, BluePoint closed at $18.50 per share, and trading volume fell to slightly over 100,000 shares. By March 13, 2000, BluePoint closed at $17.875 per share on volume of 80,000 shares. By March 20, 2000, the closing price was $14.50 per share on a volume of 34,000, and by March 27, 2000, BluePoint closed at $13.75 per share with volume of 25,000. On April 6, 2000, one month after it began trading, BluePoint closed at $6.875 per share with volume of 6,700.
67. On the last trading day in April, BluePoint closed at $6.375 per share with 3,700 in volume. By the end of May, it was down to slightly over $4.00 per share, and by the end of June, it fell to under $3.00 per share, with volume at 3,800.
68. After July 2000, BluePoint never closed above $5 again.
Touting Scheme
69. Markow and Goelo orchestrated a scheme to arrange for individuals, including Armstrong, to tout the BluePoint stock. Armstrong posted over eighty times on the BluePoint message board located on the Raging Bull website in the first three weeks. He praised BluePoint's investment value and encouraged traders who were having trouble getting their orders filled to keep trying. Armstrong never stated in his posts on the Internet that he was being compensated for making the postings. However, Goelo and Markow compensated Armstrong by transferring stock in three separate companies to Armstrong at below market prices during the relevant time period.
Profits to the Defendants
70. All the defendants profited from selling BluePoint. After the first day of trading and continuing through July, the Promoter Defendants sold off many of their remaining shares. Although the price of BluePoint fell sharply during this period, the Promoter Defendants continued to profit because they had paid Tsai only pennies per share for their stock.
71. Tsai received $250,000 from the Promoter Defendants when they bought the nominee shares from him.
72. To date, the Promoter Defendants' approximate profits from selling BluePoint are as follows: Yang $1.27 million; Luo $1.24 million; Markow $1.23 million; and Goelo $300,000.
73. Sierra's profits from BluePoint were about $570,000 on March 6, 2000 and about $40,000 thereafter. Sierra paid 60% of its March 6 BluePoint profits to Geiger, per his usual compensation program. Richardson has made about $90,000 in profits from trading BluePoint in his personal account, most of which he made on March 6.
74. Armstrong made at least $20,000 from selling the shares of the three securities he received from Markow and Goelo.
75. In making their profits, the Promoter Defendants did not give up their control of the float. By the end of the third week of trading (March 27, 2000), they still directly held about 2.97 million shares. On succeeding dates, they still held shares as follows: April 17, 2.96 million shares; April 30, 2.94 million shares; May 31, 2.63 million shares; June 30, 2.82 million shares; July 31, 2.78 million shares.
76. During this time, the Promoter Defendants never reported made any filings with the Commission as required to report their sales of BluePoint stock and the change in their ownership of the securities. |
