SEC's settlement with Coutris brothers rejected
2010-06-03 14:34 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (U-HSTH) HS3 Technologies Inc
Also Street Wire (U-XPNG) Xpention Genetics Inc
by Mike Caswell
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A Colorado judge has rejected the U.S. Securities and Exchange Commission's proposed settlement with John Coutris and Michael Coutris, two brothers facing civil charges for the pump-and-dumps of Xpention Genetics Inc. and HS3 Technologies Inc. In a decision filed on June 2, 2010, Judge Robert Blackburn says proposed orders against the men are inadequate because the orders fail to state the size of their financial penalties.
The SEC claims that the Coutris brothers were part of a 2005 scheme to promote Xpention and HS3 Technologies with misleading tout sheets and spam. The other defendants in the case include West Vancouver's Joseph Fernando. Mr. Fernando paid $805,000 for three tout sheets on the company, and the men sold $3.5-million worth of stock, the regulator says. (All figures are in U.S. dollars.)
On May 26, 2010, the SEC filed proposed judgments against the Coutris brothers, in which they agreed to permanent penny stock bans and to pay civil penalties and disgorgement in amounts to determined by the judge. The men did not admit to any wrongdoing. In rejecting the deal, Judge Blackburn said that the proposed judgments fail to specify the amount of disgorgement and civil penalties. "I cannot direct the entry of a final judgment that fails to quantify such matters," his decision reads. Presumably the SEC must now negotiate financial penalties with the brothers or face the prospect of a trial.
Should there be a trial, there will not be any participation from Mr. Fernando. He last appeared in the case in October, 2009, when the judge ordered him to attend a deposition at the SEC's office in Denver. He did not show up, and the SEC won a default judgment against him on May 12, 2010. The judge has yet to determine his penalties.
SEC's complaint
The case began on March 9, 2009, when the SEC filed a complaint in the District of Colorado against Mr. Fernando, the Coutris brothers and four other men. The other defendants were Scott Gelbard, 33, of Colorado; Aaron Lamkin, 31, of Colorado; Dimitrious Gountis, 34, of Ohio; Jeffrey Koslosky, 43, of Colorado; and James Coutris (father of John Coutris and Michael Coutris), 64, of Ohio.
The complaint described how the men pumped Xpention to $1.29 touting a purported cancer vaccine for dogs and a cancer detection tool for humans. The SEC said Mr. Fernando paid $805,000 for favourable coverage in three tout sheets: the SuperStock Investor, the Michael Williams Market Mover and the OTC Special Situations Report. All three predicted the stock would rise significantly as its products moved closer to marketability. "When the FDA approves their cancer vaccine, the stock could go from $1 to $100 a share...as crazy as that sounds. But even if that doesn't happen, early investors could see a 900% return when the technology is applied successfully in an entirely different field -- veterinary medicine!" the SuperStock mailer read.
The tout sheets were misleading, according to the SEC. Although they contained cautionary words, they failed to state that Mr. Fernando had paid for the advertising. They also did not state that the company had not done any research on detecting cancer in humans, and laboratory testing on its cancer vaccine for dogs was not successful.
In the wake of the newsletters, Xpention rose from $1 to $1.29. Mr. Fernando and the others then sold their stock, with Mr. Fernando grossing $2-million and the others grossing $1.5-million, the SEC said. The men had received the shares prior to the promotion, when Mr. Gelbard, Mr. Lamkin and Mr. Koslosky acquired 72 per cent of a shell that was to become Xpention.
The other pump-and-dump, HS3 Technologies, also occurred in 2005 and followed a similar script, according to the complaint. HS3 purported to be developing a real-time video surveillance system that used Ka-band satellites to relay the data. As with Xpention, the men paid for favourable coverage in tout sheets, which predicted that the stock could reach $4. The company subsequently rose from 83 cents to $1.07 and the men sold their shares, realizing $464,000, the complaint stated.
The SEC sought disgorgement of profits, appropriate civil penalties and orders barring the men from participating in penny stock offerings.
Other defendants
The only settlement in the case so far has been against James Coutris, who agreed to an order preventing future violations of the U.S. Securities Act. His role in the scheme, according to the complaint, was to hold Xpention shares for his sons, helping them hide their ownership of the stock. The SEC did not seek a civil penalty against James Coutris, based on his financial condition. He did not admit to any wrongdoing in settling the case.
The other defendants have all denied any wrongdoing in answers to the suit, and await trial.
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