Re: 4/11/03 - [BLPT/Goelo] US District Court: SEC vs. Sierra Brokerage et. al (1 of 2)
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION,
Plaintiff,
v.
SIERRA BROKERAGE SERVICES, INC.,
RICHARD GEIGER, JEFFREY A. RICHARDSON,
AARON TSAI, MICHAEL M. MARKOW,
GLOBAL GUARANTEE CORPORATION,
FRANCOIS GOELO, YONGZHI YANG,
K&J CONSULTING, LIMITED, KE LUO,
M&M MANAGEMENT, LIMITED,
JEROME B. ARMSTRONG,
Defendants.
CIVIL ACTION
CASE NO.
COMPLAINT FOR PERMANENT INJUNCTION
AND OTHER EQUITABLE RELIEF
Plaintiff United States Securities & Exchange Commission ("Commission") alleges as follows:
SUMMARY
1. The Commission brings this civil action against eight individuals and four entities for their conduct between April 1999 and July 2000 relating to the price manipulation, unregistered sales, unreported stock ownership and touting of securities issued by BluePoint Linux Software Corporation ("BluePoint"), a U.S. corporation formerly named MAS Acquisition XI Corporation ("MAS").
2. Aaron Tsai ("Tsai") formed MAS as a shell corporation in 1996. From then through August 1999, Tsai purported to transfer ownership of many of MAS's outstanding shares of common stock to approximately thirty shareholders. These transfers were shams; the shareholders were nominees, and Tsai retained control of the stock during all relevant times. Tsai's intent was to create the appearance that the nominee shares could later be sold without limitation and without a registration statement in effect with the Commission.
3. From late 1999 through early 2000, Tsai, Michael Markow and his company, Global Guarantee Corporation (collectively, "Markow"), Francois Goelo ("Goelo"), and Yongzhi Yang and his company, K&J Consulting, Ltd. (collectively, "Yang"), arranged for MAS to acquire a Chinese company that purportedly had developed a Chinese version of the Linux computer operating system. Upon the acquisition in February 2000, the Chinese Linux company became a subsidiary of MAS, which changed its name to BluePoint.
4. Markow, Goelo, Yang, and Ke Luo, and his company, M&M Management, Ltd. (collectively, "Luo"), placed 3.75 million shares they bought from Tsai in their names, the names of entities they controlled, and the names of their relatives.
5. Sierra Brokerage Services, Inc. ("Sierra"), its president, Jeffrey Richardson ("Richardson") and its trader, Richard Geiger ("Geiger") (collectively, the "Broker-dealer
Defendants") participated in the scheme to manipulate the price of BluePoint shares.
6. At all relevant times, Markow, Goelo, Yang and Luo (collectively, the "Promoter Defendants") acted as a group and controlled a vast majority of the free-trading shares, or float, of BluePoint in order to manipulate the price of BluePoint shares. When BluePoint stock began trading publicly on March 6, 2000, the Broker-dealer Defendants facilitated the scheme by creating artificial trading activity in BluePoint stock that enabled the Promoter Defendants to complete the scheme. The Promoter Defendants and Broker-dealer Defendants engaged in trading of BluePoint shares at artificially high prices that were hundreds of times more than what the Promoter Defendants had paid for less than three weeks earlier.
7. Tsai made false filings with the Commission when he failed to disclose his true ownership of the shares and the subsequent sale of those shares to the Promoter Defendants. Although the Promoter Defendants had collectively acquired nearly 20% of BluePoint's 20 million outstanding shares and over 90% of the publicly traded shares, they never reported their ownership to the Commission in any filing as required under the federal securities laws.
8. On March 6, 2000 and after, Jerome Armstrong ("Armstrong") promoted BluePoint on the Raging Bull internet site, which carried hundreds of posts about BluePoint. Armstrong received undisclosed compensation from Markow and Goelo in return for his posts.
9. In the weeks and months after BluePoint started trading, BluePoint's price and volume steadily declined from its all-time high of $21. Nonetheless, the Promoter Defendants continued to sell at a profit, having paid Tsai only pennies for their shares. The Promoter Defendants never reported any changes in ownership when they sold their BluePoint shares in any filings with the Commission.
10. Tsai, directly and indirectly, has engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the registration provisions of the federal securities laws, specifically, Section 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§77e(a) and 77e(c)] and Sections 13(d)(1) and 16(a) of the Exchange Act [15 U.S.C. §§78m(d)(1) and 78p(a)] and Rules 13d-1(a) and 16a-3 [17 C.F.R. §240.16a-3] thereunder.
11. Markow, directly and indirectly, has engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the anti-fraud provisions of the federal securities laws, specifically, Section 17(a) of the Securities Act [15 U.S.C. §77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)], and Rule 10b-5 [17 C.F.R. §240.10b-5] thereunder; or in the alternative, Markow has engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute aiding and abetting the other promoter's violations of the anti-fraud provisions of the federal securities laws, specifically, Section 17(a) of the Securities Act [15 U.S.C. §77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)], and Rule 10b-5 [17 C.F.R. §240.10b-5] thereunder.
12. Goelo, Yang, Luo, and the Broker-dealer Defendants, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the anti-fraud provisions of the federal securities laws, specifically, Section 17(a) of the Securities Act [15 U.S.C. §77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)], and Rule 10b-5 [17 C.F.R. §240.10b-5] thereunder.
13. The Promoter Defendants, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the anti-fraud provisions of the federal securities laws, specifically, Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §77q(a)], and Sections 13(d)(1), 13(d)(2), and 16(a) of the Exchange Act [15 U.S.C. §§78j(b), 78m(d)(1), 78m(d)(2) and 78p(a)] and Rules 13d-1(a), 13d-2(a), and 16a-3 [17 C.F.R. §§240.10b-5, 240.13d-1(a), 240.13d-2(a), and 240.16a-3] thereunder.
14. Sierra, directly and indirectly, has engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the broker-dealer anti-fraud provisions of the federal securities laws, specifically Section 15(c)(1) of the Exchange Act [15 U.S.C. §78o(c)(1)]. Geiger and Richardson, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute aiding and abetting violations of the broker-dealer anti-fraud provisions of the federal securities laws, specifically, Section 15(c)(1) of the Exchange Act [15 U.S.C. §78o(c)(1)].
15. Armstrong, directly and indirectly, has engaged and, unless enjoined, will continue to engage in acts, practices and courses of business which constitute violations of the touting provisions of the federal securities laws, specifically, Section 17(b) of the Securities Act [15 U.S.C. §77q(b)].
JURISDICTION AND VENUE
16. The Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77v(a)], Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§78u(e) and 78aa] and 28 U.S.C. §1331. Venue is proper in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77v(a)] and Section 27 of the Exchange Act [15 U.S.C. §78aa].
17. The transactions, acts, practices, and courses of business constituting the violations alleged herein occurred within the jurisdiction of the United States District Court for the Southern District of Ohio and elsewhere.
18. Defendants, directly and indirectly, made use of the means and instrumentalities of interstate commerce and of the mails in connection with the transactions, acts, practices, and courses of business alleged in this Complaint.
DEFENDANTS
19. Aaron Tsai, age 33, resides in Evansville, Indiana. Tsai formed MAS in October 1996. From October 1996 through at least February 2000, he was the chairman, president, and treasurer of MAS. During this same time period, Tsai formed nearly fifty "blank check" public shell corporations, including MAS. From 1998 through 2000, Tsai was also a registered representative for three securities firms.
Promoter Defendants
20. Michael Markow, age 56, resides in Westlake Village, California. At all relevant times, he controlled Global Guarantee Corporation as the president and chief executive officer of the company. He was employed as a registered representative for four different securities firms before 1993. In 1998, California issued "desist-and-refrain" orders against him for operating an unlicensed broker-dealer and for selling securities that had not been "qualified." Alabama issued a cease-and-desist order against him in 2000 for operating an unregistered broker-dealer.
21. Global Guarantee Corporation ("Global Guarantee") is a California corporation that Michael Markow formed in 1992 and controlled throughout the relevant times. Michael Markow used Global Guarantee to acquire and sell BluePoint stock. At all relevant times, acts of this entity were caused solely by Michael Markow.
22. Francois Goelo, age unknown, resides in the Cayman Islands. Goelo's citizenship is unknown.
23. Yongzhi Yang, age 44, resides in Irvine, California. At all relevant times, he controlled K&J Consulting, Ltd. as the president of the company. He was born in China but is a U.S. citizen. From 1994 through 1999, he was a college professor in the U.S. Since then, he has been a self-employed business consultant. At all relevant times, he was a consultant for the Chinese Linux company, and then continued to be a consultant for MAS after it acquired the Chinese Linux company and changed its name to BluePoint.
24. K&J Consulting Ltd. ("K&J") is a British Virgin Islands entity organized and controlled by Yongzhi Yang. Yongzhi Yang formed K&J in January 2000. Yongzhi Yang used K&J to acquire and sell BluePoint stock. At all relevant times, acts of this entity were caused solely by Yongzhi Yang.
25. Ke Luo, age 44, resides in Jamaica Plain, Massachusetts. At all relevant times, he controlled M&M Management, Ltd. as the president of the company. He is a citizen of the People's Republic of China. From 1992 through 1998, he was a student in the United States, and during 1998-99, he was employed as a research scientist at a university in Alabama.
26. M&M Management Ltd. ("M&M") is a British Virgin Islands entity organized and controlled by Ke Luo. Ke Luo formed M&M in February 1999. Ke Luo used M&M to acquire and sell BluePoint stock. At all relevant times, acts of this entity were caused solely by Ke Luo.
Broker-Dealer Defendants
27. Sierra is a broker-dealer located in Columbus, Ohio that has been registered with the Commission since 1994. Sierra is a small, one-office operation that conducted a general securities business in listed and over-the-counter securities and made a market in many bulletin board stocks. During all relevant times in the Complaint, Sierra was a market maker in BluePoint. On March 7, 2003, the NASD gave Sierra notice of its intention to expel the firm from membership for failure to pay a fine. Since November 2002, Sierra has not been operating for failure to meet net capital requirements under the federal securities laws. On October 8, 2002, the Commission instituted an unrelated administrative and cease-and-desist proceedings against Sierra's Chairman, who was also CEO and part-owner, in a matter involving a fraudulent, unregistered offering of securities in an unregistered hedge fund. In 1998, 2000 and 2002, Sierra was censured and fined by the National Association of Securities Dealers ("NASD") three times for various violations of NASD regulations, including, failure to timely report transactions, failure to correctly memorialize the time of execution of transactions, failure to memorialize the time of entry and time of execution of transactions, and failure to establish, maintain and enforce written supervisory procedures regarding trading and market making activities.
28. Geiger, age 48, resides in Morton, Illinois. During the relevant time period, Geiger was employed as a registered representative and trader at Sierra. In July 2002, the NASD fined Geiger $10,000 and suspended him from association with any NASD member for twenty days for conducting transactions at Sierra as an equity trader without being registered. In January 1997, the NASD censured Geiger, fined him $10,000, suspended him for ten days, and barred him from acting as a securities firm principal for one year. Geiger had acted as an unregistered principal of a member firm, allowed another individual to work at the firm without the required registration, and failed to properly report transactions and prepare trade confirmations. Based on the NASD action, the state of Ohio refused to grant Geiger a securities sales license, and Geiger worked for Sierra out of his home in Illinois during the times alleged in the Complaint.
29. Richardson, age 44, resides in Columbus Ohio. Richardson is the president of Sierra, its head trader, and a part-owner of the firm. He supervised Geiger and authorized all of Geiger's trades in BluePoint during all relevant times. In July 2002, the NASD censured Richardson and fined him $10,000 (jointly and severally with Sierra) for allowing Geiger and another Sierra employee to function as equity traders without being registered to do so. In June 2000, Richardson was fined $5,000 by the NASD for various violations at Sierra, including, its failure to timely report transactions, failure to correctly memorialize the time of execution of transactions, failure to memorialize the time of entry and time of execution of transactions, and failure to establish, maintain and enforce written supervisory procedures regarding trading and market making activities.
Touting Defendant
30. Armstrong, age 39, resides in Seaside, Oregon. Since early 2000, his only source of income has been from stock market investing.
OTHER RELEVANT NON-DEEFENDANT ENTITIES
31. MAS was formed by Tsai in 1996 as a blank check Indiana shell corporation. In April 1999, Tsai caused MAS to become a voluntary reporting company by registering its class of common stock under Section 12(g) of the Exchange Act by filing a Form 10-SB with the Commission. In February 2000, MAS acquired BluePoint Linux Software Company, and changed its name to BluePoint upon the acquisition.
32. BluePoint Linux Software Company was a Chinese entity that marketed a Chinese version of the Linux computer operating system, an alternative to Microsoft's Windows program. As a result of being acquired by MAS, it became BluePoint Linux Software Corporation or BluePoint. Aside from a December 2000 Form S-8 involving common stock to be awarded to certain employees as part of an employee benefit plan, BluePoint has never filed a registration statement under the Securities Act. BluePoint stock currently trades on the OTC Bulletin Board around $0.10.
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.
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