Digital Gas mastermind sued for fraud
Authorities allege shell firm was used to swindle investors The Times, Trenton
nj.com
Digital Gas mastermind sued for fraud
Authorities allege shell firm was used to swindle investors
Friday, October 13, 2006
BY GREG SAITZ
Newhouse News Service
Digital Gas, a small company traded on the over-the-counter markets, was always on the verge of doing great things or signing new deals.
At least that's the impression left by press release after press re lease the publicly traded company regularly issued.
Unfortunately for investors, the releases were almost all lies: Digital Gas had no business operations or employees, authorities allege, just a prolific Spring Lake man commit ting securities fraud from his house.
The man behind the shell company, Brian Smith, used Digital Gas as his personal piggy bank, state regulators charged in a lawsuit filed earlier this week in Freehold. He fraudulently took money from investors, gave himself and others millions of shares of stock, and used the news releases to artificially inflate the stock price, according to the complaint.
State and federal authorities, including the FBI, searched Smith's house for 5 1/2 hours Wednesday, carting off documents. Local officials temporarily barred Smith, his wife and two children from returning to the home after discovering unsafe conditions related to open electrical panels, Spring Lake police said.
The civil complaint, filed by the state Attorney General's Office and Bureau of Securities, names Digital Gas; Smith, 53; his wife, Lynn, also 53; and William Brown, an attorney from Canada. It alleges widespread fraud through several different methods.
Authorities say the scheme cost the company and investors millions of dollars, authorities said.
'Smith and Brown went to great lengths to rip off honest investors," Attorney General Stuart Rabner said. "It is critical that we put an immediate halt to their activities and secure restitution for those whose money was stolen. This is what we are doing now."
Smith and Brown could not be reached for comment yesterday.
The company's Web site describes Digital Gas as "a financier and business incubator of exceptional new technologies in the energy and natural resource fields." In reality, it was nothing more than a shell company with no operations, bank accounts or offices, officials charge.
Brian Smith took control of the business in early 1999 and began soliciting investors, even though he's not registered with the state to sell stock. He lured investors with lies, such as promising a 120 percent annualized return and falsely stating certain subsidiaries would be spun off from Digital Gas and become publicly traded companies on the American Stock Exchange, the lawsuit alleges.
Smith used bank accounts of a local acquaintance, a disbarred Red Bank attorney and others to deposit investor's money. Smith then had those people write checks to him that he used to pay for construction on his home and other personal expenses, according to the complaint.
Since early 2002, Smith and the Canadian lawyer, Brown, also
directed Digital Gas' stock transfer agent to issue and transfer millions of shares of stock to themselves and their associates, officials charge. In the past six years, Lynn Smith and trust accounts for their two daughters received 2.7 million shares, court papers said.
Brown received more than 3 million shares during that same time, but held just 150,000 shares as of May.
With shares in hand, Smith manipulated Digital Gas' stock price by issuing fake press releases about exclusive agreements or financing, the state charged. Before one campaign in May 2003, Smith e-mailed the disbarred attorney, "This will be my masterpiece. ... It will end up going to $5 per share. Sell between $.50-1.00 though by June 15."
Shares, which were trading at pennies, eventually climbed to just above 50 cents June 6, 2003, before falling back to about 20 cents by the end of the month.
The stock, which shot up to $1 a share in May of this year, closed at 30 cents yesterday, unchanged.
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