Reprinted without permission for the benifit of all in this group.
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Dow Jones Business News -- November 8, 1996
SEC Brings First Internet Stock Manipulation Suit
By MATTHEW K. BENJAMIN
Dow Jones News Services
WASHINGTON -- The Securities and Exchange Commission brought suit yesterday against several firms and individuals in its first ever case of market manipulation of a publicly traded stock using the Internet.
Citing the speed and efficiency the new medium can lend the dissemination of information, and more importantly misinformation, an attorney at the SEC said the case, involving Systems of Excellence Inc. (SEXI), represents the commission's newly intensified vigilance for stock promotion schemes involving the Internet.
Filed in the District of Columbia, the suit alleges a massive and ongoing market manipulation in the common stock of Systems of Excellence, a Coral Gables, Fla., maker of video teleconferencing equipment.
Between March 1995 and July 1996, according to the SEC, Systems Of Excellence's chairman and chief executive, Charles Huttoe, distributed unregistered shares of the company to accounts controlled by him and to principals at SGA Goldstar Research Inc., a market research company which publishes an electronic tout sheet distributed over the Internet.
In return for the shares the SGA employees, Theodore Melcher and Shannon Terry, agreed to include Systems of Excellence in their electronic newsletter, SGA Whisper Stock Report. The newsletter is disseminated electronically via a World Wide Web site, as well as by fax and quote machines, to over 700 paid subscribers. Over the next several months, according to the complaint, the newsletter continually urged its readers to buy and hold Systems of Excellence stock, backed up by what the SEC says was false and misleading information. Huttoe also hyped the company through misleading press releases about the company's success in the video teleconferencing business, the SEC said.
The promotional information distributed by Huttoe and SGA caused the company's share price to skyrocket from 28 cents in December 1995 to over $4.50 in June 1996, the SEC said. Huttoe and the SGA individuals illegally profited on the rise by reselling their shares to the public at huge profits. Huttoe alone amassed at least $9.7 million from the sales, according to the SEC. The stock later retreated to around $1.20 a share.
Huttoe later added to his transgressions, according to the SEC, and attempted to cover his tracks by filing bogus documents with the SEC for stock issued to consultants and employees. As part of the cover-up he forged consultant agreements in an attempt to legitimize the unregistered shares.
An attorney for the SEC said the securities industry regulatory agency is seeking a return of all illegal profits, said to exceed $10 million, as well as an enjoinment on the individuals involved from future securities laws violations. The commission has not yet decided to seek civil penalties.
An attorney for Huttoe said only, ''The stakes have been made and Mr. Huttoe is attempting to resolve the difficulties.'' An attorney for the SGA Goldstar employees could not be reached. |
