5th UPDATE: Spongetech Executives Accused In Alleged Fraud Scheme
06 May 2010 - 7:16AM
Dow Jones News
The top executives of Spongetech Delivery Systems Inc. (SPNG)
were arrested and charged Wednesday in an alleged scheme to defraud
investors by reporting falsely and grossly overstated sales
figures.
According to a criminal complaint filed Wednesday, Michael
Metter, Spongetech's chief executive and president, and Steven
Moskowitz, the New York pre-soaped sponge maker's chief operating
officer and chief financial officer, were charged with conspiracy
to commit securities fraud and obstruction of justice. They each
face up to five years in prison on the conspiracy charge.
"Mr. Metter vigorously denies the charges brought against him
today by the government," said Jeffrey Sklaroff, a lawyer for
Metter. "He looks forward to his day in court where he is confident
he will be fully vindicated."
A lawyer for Moskowitz didn't immediately return a phone call
seeking comment Wednesday.
Bail was set at $2 million each for Metter, 58, of Greenwich,
Conn., and Moskowitz, 45, of Flushing, N.Y., at a hearing before a
U.S. magistrate judge in federal court in Brooklyn Wednesday.
"The defendants in this case--Spongetech's highest corporate
officers--are charged with executing a bold scheme to portray
Spongetech as a company that was performing at a level far above
reality," U.S. Attorney Loretta Lynch said in a statement. "As
detailed in the complaint, the audacity of their scheme was matched
only by their obstructive efforts during the course of the SEC's
investigation."
The U.S. Securities and Exchange Commission also has filed civil
charges in the matter, calling the case a "pump-and-dump"
scheme.
In the complaint, prosecutors from the U.S. Attorney's office in
Brooklyn alleged Metter and Moskowitz between January 2007 and May
2010 publicly reported the company had secured purchase orders or
made sales to five customers that did not exist.
For the nine months ended Feb. 28, 2009, the purported sales to
those five customers accounted for as much as 99% of Spongetech's
revenue, prosecutors said.
During that time frame, the men allegedly filed multiple false
reports with the U.S. Securities and Exchange Commission and issued
numerous press releases touting the false sales figures, typically
via the Internet, prosecutors said in the criminal complaint.
In a civil lawsuit, the SEC said the purpose Metter, Moskowitz
and others flooded the market with false public information was in
order to fraudulently inflate the company's stock price, so they
could illegally sell shares through affiliated entities in
unregistered transactions.
Through affiliated entity RM Enterprises International, Metter,
Moskowitz and the company allegedly illegally distributed about 2.5
billion Spongetech shares at inflated prices, the SEC said.
They allegedly used false and baseless attorney opinion letters
to justify the unregistered sales, the SEC said. The men also
allegedly regularly understated the number of outstanding shares in
press releases and public filings, the SEC said.
Two New York lawyers and a Brooklyn self-employed consultant
also have been charged in the SEC's civil case.
Metter, Moskowitz and Spongetech spent portions of their illicit
profits to advertise with professional sports teams, including
teams in Major League Baseball, the National Football League, the
National Basketball Association, the National Hockey League and the
U.S. Tennis Association, the SEC said.
Since the SEC issued subpoenas in September as part of a formal
probe of Spongetech, Metter and Moskowitz allegedly have tried to
fabricate the existence of the five purported customers, according
to the complaint.
They allegedly sought to create websites and virtual offices for
the companies, have furnished investigators with phony purchase
orders and produced "questionable documentation" purportedly
constituting proof of payments by the customers, prosecutors said
in the complaint.
The SEC suspended trading of the company's stock on Oct. 5,
according to the complaint. The suspension expired Oct. 16, and
Spongetech has been trading only in the "grey market," a market for
securities not listed on any stock exchange, the Over-the-Counter
Bulletin Board or the pink sheets, according to the complaint.
A phone call to Spongetech wasn't immediately returned
Wednesday.
An automated message on the company's investor relations phone
line said the company would make no comment during the SEC
investigation and would only make public comments via press
releases.
-By Chad Bray, Dow Jones Newswires; 212-227-2017;
chad.bray@dowjones.com