Spongetech Delivery Systems, Inc. (fka SPNGQ)

[overachiever]

New York Post confirms SEC Inquiry

http://www.nypost.com/p/news/business/not_spongeworthy_ZZZ1QlWllnBaSYuVjqYysK

Not Spongeworthy
SpongeTech mops up books amid SEC inquiry

By KAJA WHITEHOUSE

Last Updated: 11:38 AM, September 17, 2009


Maybe SpongeTech should use one of its sponges on its financial books.

While the company behind popular soap-filled sponges looks like it's flying high, and one of its ads at the US Open unexpectedly took center court when tennis star Serena Williams screamed at a line judge seated nearby, the Manhattan-based company's business tactics have raised questions with regulators.

The Securities and Exchange Commission hasflagged SpongeTech's financial statements for the last two years because of problems with the company's auditor. What's more, the company missed yesterday's deadline to file an annual financial report with the SEC.

And its ticker is in jeopardy of being tagged with an "e" -- the financial equivalent of a scarlet letter that warns investors that the company hasn't complied with SEC reporting rules.

Meanwhile, the company's complex dealings with its penny shares have led to accusations that SpongeTech is running a stock manipulation scheme -- complaints that have made their way up to the SEC.

SpongeTech, which sells its wares through infomercials, posted an eye-popping 900 percent surge in sales, according to a June press release reporting that revenue had hit $50 million for the 12 months ended in May, vs. $5.6 million a year earlier

But on Friday, SpongeTech received a letter from the SEC ordering it to redo its financial statements for the last two years, including the one that just ended.

Drakeford & Drakeford, a firm with offices in three cities, including Los Angeles and New York, but just one partner, was SpongeTech's auditor. Drakeford lost its accreditation from the Public Company Accounting Oversight Board on June 16, according to a letter from the SEC.

"It has nothing to do with us," SpongeTech CEO Michael Metter told The Post.

But SpongeTech's replacement auditor, Robison Hill & Co., doesn't appear to be in the best standing with the PCAOB, either.

In a report earlier this year, the auditing watchdog blasted the Utah firm for numerous "audit deficiencies." The PCAOB determined that Robison "did not obtain sufficient competent evidential matter to support its opinion" on its clients' financial statements.

Metter acknowledged the report to The Post, saying he and his team "didn't know that" when they hired Robison in July. He said SpongeTech hired Deloitte & Touche to "oversee" Robison's work for 2008 and 2009, and to take over. Metter also said that SpongeTech has asked the SEC not to penalize it for the late filing.

Meanwhile, the company's complex stock trail has raised suspicions of stock manipulation. Timothy Sykes, a penny-stock trader and author of a book about running a hedge fund in college, has publicly accused the company of being "a blatant pump and dump" scam.

Sykes cites the fact that as of March, the company had 1.55 billion shares outstanding -- a 1,500 percent increase over last year. Several months prior, the company issued more than 300 million shares to a company tied to its executives, RM Enterprises, at a 40 percent discount.

More recently, SpongeTech has been publicizing a series of stock buybacks and reverse stock splits.. Shareholders say that with all the activity, they have no idea how many shares SpongeTech now has outstanding.

Metter declined to provide a number, or comment on speculation about the trading, but he vowed that neither he nor his fellow officers have sold a single share of the stock. The same holds true for RM Enterprises, he said.

SEC filings name Metter and his chief operating officer, Steven Moskowitz, as "control persons" and directors of RM Enterprises. But Metter denied to The Post that he is an RM Enterprises officer, saying it was Moskowitz's relationship.

SEC spokesman Kevin Callahan declined to comment, saying he cannot confirm or deny "the existence or non-existence" of any investigation.