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Wednesday, February 17, 2010 4:06:19 PM
4626693
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
Scottrade, Inc., )
)
Plaintiff, )
)
v. ) Case No. 4:07-cv-01982 HEA
)
Modern Energy Corporation; )
First Public Securities Transfer )
Corporation; )
)
Defendants; )
)
Merrill Lynch, Pierce Fenner & )
Smith, Inc.; Ridge Clearing & Outsourcing )
Solutions, Inc.; Penson Financial Services, Inc., )
E*Trade Financial Corporation; TD Ameritrade, )
Clearing Services, Inc.; )
)
Relief Defendants. )
FIRST AMENDED COMPLAINT FOR INJUNCTIVE AND DECLARATORY RELIEF
I. Introduction
In 2007, Defendant, Modern Energy Corporation (“Modern Energy”) purported to effect a “mandatory exchange” – actually a reverse stock split -- to reduce its issued and outstanding common shares from 1.2 billion to 1.2 million. The transaction was part of a fraudulent scheme designed to confuse holders of Modern Energy’s stock and induce them to take actions which would, in turn, create an artificial market for Modern Energy’s otherwise valueless common shares. On paper, the “mandatory exchange” was completed in October, 2007, before this action was commenced.
When the Court reviewed the transaction and the means by which it had been announced and effected, the Court concluded that the “mandatory exchange” had been effected without
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compliance with applicable provisions of Wyoming law (where Modern Energy is incorporated) and in violation of certain anti-fraud provisions of the Securities Act of 1934, specifically Section 10(b) of that statute, 15 U.S.C. §78j(b) and Rule 10b-17 promulgated pursuant thereto, 17 C.F.R. §240.10b-17. This Court declared the reverse stock split null and void (Docket Entry # 43, December 20, 2007) and subsequently permanently enjoined Modern Energy, its transfer agent First Public Securities Transfer Corp. (“First Public”), and all persons acting in concert with them from effecting transactions predicated upon the effectiveness of the reverse stock split (Docket Entry # 55, February 7, 2008).
These final, unappealed Judgments of this Court should have put an end to the matter. Unfortunately, Modern Energy and First Public refused to conduct themselves consistently with the Court’s Judgments. While publicly proclaiming they were taking actions to implement the Court’s Judgments, Modern Energy, First Public and persons acting in concert with them have engaged in a series of actions calculated both to flout those Judgments and to further the fraudulent scheme the Court’s Judgments were intended to halt. Modern Energy, First Public and persons acting in concert with them are persisting in their attempt to manipulate the market for Modern Energy common stock to the detriment of Plaintiff Scottrade, Inc.(“Scottrade”), and thereby force Scottrade to pay extortionate and artificial prices for Modern Energy shares that have no intrinsic value. While doing so, Modern Energy, First Public, and those acting in concert with it have persisted in their refusal to comply with the reporting requirements imposed by the Securities Exchange Act in a continuing effort to conceal the fact that Modern Energy is and at all relevant times was a an empty corporate shell having no intrinsic value and no legitimate business purpose.
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Scottrade is filing this First Amended Complaint to secure additional declaratory and injunctive relief calculated to finally put a halt to Defendants’ fraudulent scheme.
For its First Amended Complaint for permanent injunctive relief, along with a declaratory judgment, Scottrade states:
II. Jurisdiction and Venue
1. This Court has subject matter jurisdiction of this case pursuant to 15 U.S.C. § 78aa, in that the claims asserted herein arise under the Securities Exchange Act of 1934, particularly Sections 10 and 29 of that statute, 15 U.S.C. §§78j, 78cc. The Court also has jurisdiction pursuant to 28 U.S.C. §1392, in that Scottrade is a citizen of Arizona and Missouri, and none of the Defendants or the Relief Defendants are citizens of either of those states, and the amount in controversy, exclusive of interest and costs, exceeds $75,000.
2. Venue is proper in this District pursuant to 15 U.S.C. § 78aa in that all Defendants may be found, inhabit, or otherwise transact business in the Eastern District of Missouri. Venue is also proper under 28 U.S.C. § 1391(b), in that a substantial part of the events giving rise to the claim occurred in this District.
III. Parties
3. Scottrade is a corporation organized under the laws of Arizona and having its principal place of business in St. Louis, Missouri. Scottrade is a securities broker-dealer. It operates in the discount retail brokerage market.
4. Defendant Modern Energy is a corporation organized under the laws of Wyoming. At the outset of this action, Modern Energy claimed to have offices and its principal place of business in California. Today, while Modern Energy remains incorporated in Wyoming, persons purporting to act for Modern Energy have made filings with the Wyoming Secretary of
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State indicating that Modern Energy’s office and place of business is now located on Mindanao in the Philippine Islands. Modern Energy remains subject to the jurisdiction of this Court because at the inception of this case it was causing its common shares to be traded in national securities markets in the United States and it appeared and defended this matter in this Court.
5. Defendant First Public Securities Transfer Corporation (“First Public”) was, at the inception of this action, a corporation organized under the laws of Oregon with its principal place of business in a state other than Missouri or Arizona. Since this Court’s earlier judgments were rendered against it, First Public has forfeited its corporate charter from the State of Oregon by failing to file requisite reports with the Oregon Secretary of State. The filings made on behalf of First Public with the Oregon Secretary of State’s office prior to the time when its corporate charter was forfeited listed Sandy Winick as First Public’s president, and identified addresses in Toronto, Canada (where Sandy Winick resides) and in Los Altos, California (where an individual using the name David Korman is believed to reside).
6. Relief Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) is a corporation organized under the laws of Delaware, and having its principal place of business in New York. Merrill Lynch is a registered broker-dealer in the State of Missouri and maintains offices in this District. Merrill Lynch was a party to this case at its inception and is bound by the Court’s prior judgments in this matter. No new claim for relief against Merrill Lynch is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to Merrill Lynch.
7. Relief Defendant Ridge Clearing & Outsourcing Solutions, Inc. (formerly known as ADP Clearing & Outsourcing Services, Inc.) (“Ridge Clearing”) is a corporation organized under the laws of Delaware, and having its principal place of business in a state other than Missouri or
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Arizona. Ridge Clearing is a registered broker-dealer in the State of Missouri. Ridge Clearing was a party to this case at its inception and is bound by the Court’s prior judgments in this matter. No new claim for relief against Ridge Clearing is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to Ridge Clearing.
8. Relief Defendant Penson Financial Services, Inc. (“Penson”) is a corporation organized under the laws of North Carolina, and having its principal place of business in a state other than Missouri or Arizona. Penson is a registered broker-dealer in the State of Missouri. Penson was a party to this action at its outset and is bound by the Court’s prior judgments in this matter. No new claim for relief against Penson is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to Ridge Clearing.
9. Relief Defendant E*Trade Financial Corporation (“E*Trade”) is a corporation organized under the laws of Delaware, and having its principal place of business in a state other than Missouri or Arizona. E*Trade was a party to this action at its inception and is bound by the prior Judgments of this Court in this action. No new claim for relief against E*Trade is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to E*Trade.
10. Relief Defendant T. D. Ameritrade Clearing, Inc.(“Ameritrade”), is a corporation organized under the laws of Nebraska, and having its principal place of business in Nebraska. Ameritrade is now joined as a Relief Defendant in this matter because, subsequent to the entry of this Court’s prior judgments, demand has been made upon Ameritrade that it “buy-in” against Scottrade shares of Modern Energy common stock to settle transactions effected in 2007
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subsequent to Modern Energy’s attempt to effect a reverse stock split and has advised Scottrade that, absent an injunction binding upon it to refrain from doing so, it will “buy-in” shares of Modern Energy for Scottrade’s account to settle trades in Modern Energy common which this Court has determined to be null and void.
IV. Persons Acting In Concert With Modern Energy and First Public
11. Sandy Winick, as indicated above, is an individual whom the SEC has concluded organized and spun off a series of corporate shells having no legitimate business purpose with the intention of utilizing such corporate shells to perpetrate securities frauds. Modern Energy’s predecessor, Riverbank is apparently one such company, and Modern Energy’s transfer agent, First Public, is such a company. Sandy Winick has been named by the SEC as a defendant in a civil action filed in the U.S. District Court for the Southern District of New York and accused of perpetrating securities frauds through such spun off entities.
12. David Korman (“Korman”), also known as: Mark Pedley, Branch Vinedresser, Dr. David Korem, and perhaps other aliases, is an individual who has claimed at times to reside in Los Altos, California and purported to hold proxies making him effectively the controlling shareholder of Riverbank and Modern Energy. Korman was convicted of mail fraud in 1983 and served three years in a federal penitentiary for such offense; subsequently, in 1986, he was convicted of racketeering and sentenced to an eight year prison term. Korman was released from parole in 1994, shortly before Riverbank was formed. In addition to claiming to hold proxies for a controlling position in Modern Energy common shares, Korman has regularly and routinely purported to act for, and direct the affairs of, First Public.
13. Michael S. Ioane (“Ioane”) is an individual residing in California. Ioane is associated with a business operating under the name of Acacia Business Solutions (“Acacia”), which
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describes Ioane as its “Legal Tutor”. Ioane’s has frequently filed unfounded pleadings and lawsuits, prompting at least one U.S. District Court to enter an order prohibiting Ioane from filing any additional papers in that Court without prior permission of the Court. Presently, Ioane is under indictment in the U.S. District Court for the Central District of California for tax fraud. Ioane purports to own 5 million Modern Energy shares, either personally or through an Oregon corporation he purports to control called Western Investment Properties, Inc. (“Western”). These shares are traceable to 500,000 shares of Riverbank stock Ioane purportedly received from Korman for rendering business consulting services of an undisclosed nature to Riverbank and Korman. Beginning not later than December 21, 2007, Ioane began directing the actions purportedly taken by Modern Energy.
14. Teri Norgrove is an individual residing in Nevada. She is an employee of Acacia, and one of Ioane’s subordinates at Acacia. In or after December, 2007, Norgrove, at Ioane’s instance, publicly portrayed herself as Modern Energy’s president.
15. John Winnick, also known as John Frederick Winnick, Jack Chao, Chao Winnick and Jack Winnick, and perhaps other aliases, is an individual formerly residing in California and doing business there as a stock broker. John Winnick’s registration as an associated person of any FINRA member firm has been indefinitely suspended as of June 29, 2009. Commencing in or about 2009, and continuing until approximately December 21, 2009, John Winnick was publicly identified as Modern Energy’s president and director.
16. Sultan M.U. Saud (“Saud”) is purportedly an individual residing on the island of Mindanao in the Philippine Islands. Since December 21, 2009, Saud has been identified as the President and Director of Modern Energy.
4626693 - 8 -V. Facts Common To All Counts
17. Modern Energy is the corporate successor to a Delaware corporation called Riverbank Investments, Inc. (“Riverbank”). Riverbank was apparently one of numerous corporate entities created by or at the behest of an individual named Sandy Winick, which corporations, according to the United States Securities and Exchange Commission (the “SEC”), had and have no legitimate business purpose but were created as a means of perpetrating securities frauds on unsuspecting members of the investing public.
18. First Public, like Riverbank, is one of numerous corporate entities the SEC has concluded were created by or at the behest of Sandy Winick, which corporations had and have no legitimate business purpose but were created as a means of perpetrating securities frauds on unsuspecting members of the investing public.
19. The reverse stock split, described by Modern Energy as a “mandatory exchange” and declared null and void by this Court in its Judgments previously entered in this case, was part of one such securities fraud. As this Court recognized, that scheme was intended to operate by concealing from holders of Modern Energy common shares that their holdings of such shares had been reduced in volume by a factor of 1,000. The perpetrators of the scheme intended their fraud to induce some such holders to enter orders to sell many times more Modern Energy common shares than they (would have) held (had the purported reverse stock split been valid). The perpetrators planned that sellers so induced would be forced to buy Modern Energy common shares in the open market to “cover” the resultant “short” positions, or that the counterparties to those transactions would “buy-in” the shares in the open market to “cover” the shares the sellers failed to deliver in settlement of such transactions. When those “covering” purchases occurred,
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the perpetrators planned to be the sellers of Modern Energy shares and to demand artificially high prices for their shares, thus reaping profits from their fraud.
20. When Modern Energy, First Public and those persons acting in concert with them launched the fraudulent scheme enjoined by this Court, 1.2 billion shares of Modern Energy common stock were authorized, issued and outstanding. At that time, the “public float” of Modern Energy’s common shares consisted of approximately 500 million shares evidenced by stock certificates issued to CEDE & Company, a nominee of the Depository Trust Company (“DTC”). Approximately 700 million Modern Energy shares were held or controlled by Modern Energy insiders and were not part of the public float of Modern Energy shares. No sale or distribution of Modern Energy shares had ever been registered with the SEC pursuant to the Securities Act of 1933, 15 U.S.C. §77a et seq.
21. DTC held those (approximately) 500 million Modern Energy common shares for the accounts of its customers – principally, brokerage firms which, like Scottrade, held the shares for the accounts of its their customers.
22. Of the approximately 500 million Modern Energy common shares evidenced by certificates issued to CEDE & Company and held by DTC, 30,797,165 shares were held by DTC for Scottrade’s account. Scottrade, in turn, held such shares for the accounts of its customers.
23. To effect the reverse stock split declared null and void in this Court’s Judgement entered December 20, 2007, Modern Energy’s transfer agent, First Public, delivered certificates to CEDE for approximately 500,000 Modern Energy common shares and received in exchange for those certificates the certificates evidencing approximately 500 million Modern Energy common shares referenced in paragraph 14, above.
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24. Korman actively directed the actions of both Modern Energy and First Public in effecting the purported “mandatory exchange”.
25. Essentially concurrently with this exchange, DTC made entries in its books and records reducing the quantity of Modern Energy common shares shown by DTC’s records to be held by DTC for Scottrade’s account from 30,797,165 to 30,797.
26. As previously alleged and found by this Court, Scottrade, not knowing of the purported reverse stock split because Modern Energy had failed to give proper notice thereof, thereafter entered an order to sell 1 million shares of Modern Energy common stock for the account of one of Scottrade’s customers. The order was executed between October 23 and October 25, 2007 (the “Trades”).
27. When DTC and its sister corporation, National Securities Settlement Corporation (“NSCC”) processed the Trades for clearing and settlement, they did so after DTC had made the exchange with First Public described above and after DTC had made entries in its books and records reducing Scottrade’s holdings of Modern Energy common shares from 30,797,165 to 30,797 shares.
28. The process of clearing and beginning the settlement of the Trades resulted in DTC debiting Scottrade’s account for all 30,797 Modern Energy common shares reflected in DTC’s books and records as being held for Scottrade’s account, and crediting those shares to the accounts of Scottrade’s counterparties to the sales transactions in partial settlement of the Trades.
29. After this Court declared the reverse stock split to be null and void, held that Scottrade has no liability with respect to the Trades, and permanently enjoined Modern Energy and its transfer agent, First Public, as well as the Relief Defendants from taking the actions described in the Permanent Injunction, Modern Energy and First Public should have cancelled the certificates
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issued to CEDE & Company for approximately 500,000 Modern Energy shares in exchange for the certificates representing approximately 500 million Modern Energy shares CEDE & Company held prior to the purported reverse stock split and re-issued and delivered to CEDE & Company certificates evidencing the approximately 500 million Modern Energy shares Modern Energy intended to cancel in connection with the purported reverse stock split.
30. Upon receipt of those certificates, DTC, in turn, should have restored its customers’ accounts to the status quo ante, insofar as their holdings of Modern Energy common shares were concerned. At a minimum, Scottrade’s DTC account should have then held approximately 29,797.165 Modern Energy common shares, (after accounting for the sale of 1 million Modern Energy common shares pursuant to the Trades).
31. Modern Energy and First Public, however, took no such action.
32. Because Modern Energy and First Public did not cancel the certificates issued to CEDE & Company and delivered to DTC to effect the purported reverse stock split, and did not re-issue to CEDE & Company or deliver to DTC certificates evidencing the approximately 500 million Modern Energy common shares purportedly exchanged (and cancelled) as part of the reverse stock split, DTC did not restore to Scottrade’s account to the status quo ante respecting its holdings of Modern Energy common shares.
33. Subsequent to this Court’s declaration that the reverse stock split was null and void, Modern Energy, First Public and persons acting in concert with them have engaged in a series of actions calculated to perpetrate a fraud on Scottrade and other holders of Modern Energy shares by means dependent upon the initial reverse stock split but different from the means previously enjoined by the Court..
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34. On or before December 21, 2007, after being confronted during his December 14, 2007 deposition taken in this case with evidence of the fraud being perpetrated by individuals who had been directing his actions as Modern Energy’s President and director, James R. Stewart, who was then Modern Energy’s sole officer, director, and employee, resigned all of his positions with Modern Energy.
35. Prior to resigning those offices and positions, Mr. Stewart did not appoint any successor to himself (and any effort he might have made to appoint his own successor as a director of Modern Energy would have been invalid in any event).
36. The only legitimate means by which a new board of directors for Modern Energy could be established was to convene, upon proper notice, a meeting of Modern Energy’s shareholders for the purpose of electing one or more directors.
37. At all relevant times, Modern Energy’s common shares have been held by in excess of five hundred persons, and Modern Energy has claimed (albeit falsely) to have assets in excess of $1 million. Consequently, pursuant to Section 12(g) of the Securities Exchange Act of 1934, 15 U.S.C. §78l, Modern Energy was and is obliged to register its shares with the SEC and file with the SEC periodic reports on Forms 10-Q, 10-K and 8-K pursuant to Section 13 of the Securities Exchange Act of 1934, 15 U.S.C. §78m.
38. Modern Energy has never registered its shares with the SEC, and has never filed any reports or proxy statements with the SEC.
39. Modern Energy has not even issued any notices of shareholder meetings since at least June 1, 2007.
40. Consequently, no person or persons could have been properly elected as directors of Modern Energy following Mr. Stewart’s resignation as Modern Energy’s sole director on
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December 21, 2007, and, without any legitimately elected directors, Modern Energy could not have any properly appointed officers following Mr. Stewart’s resignation as Modern Energy’s sole officer on December 21, 2007.
41. Without properly elected directors, and without properly appointed officers, there was no person in a position to take any action on behalf of Modern Energy from and after December 21, 2007.
42. Nevertheless, subsequent to December 21, 2007, one or more persons acting in concert with Modern Energy and First Public, including Korman and Ioane, assumed control of Modern Energy’s website and such corporate records as Modern Energy had, and proceeded to orchestrate a series of actions designed to create the false impression that Modern Energy is in fact an active, operating corporation having assets and an actual business purpose.
43. Korman, upon receipt of notice from Stewart of his resignation, informed Stewart that Ioane would be assuming control of Modern Energy, and that an employee of Ioane’s, Norgrove, would be appointed President of Modern Energy.
44. After Ioane received Stewart’s resignation, Ioane communicated to Stewart acknowledging receipt of the resignation and requesting Norgrove’s appointment as Modern Energy’s President.
45. Sometime on or after December 21, 2007, a document was created purporting to show that Mr. Stewart both resigned his positions as an officer and director of Modern Energy and appointed an individual named Terri Norgrove as Modern Energy’s President.
46. Mr. Stewart was requested to transmit those records pertaining to Modern Energy that were in his custody to Michael Ioane. Mr. Stewart was similarly requested to transfer control of the telephone number maintained for Modern Energy to Michael Ioane, and he did so.
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47. Thereafter, persons acting in concert with Modern Energy and First Public published on Modern Energy’s website an announcement that Terri Norgrove was the new President of Modern Energy.
48. Following the public announcement that Terri Norgrove was the new President of Modern Energy, persons acting in concert with Modern Energy and First Public (a) announced that it had completed a 1,000:1 forward stock split on April 30, 2008, and (b) caused certificates purportedly representing approximately 499.5 million Modern Energy shares to be issued to CEDE & Company and delivered to DTC.
49. Subsequent to these events, an announcement was posted on Modern Energy’s website to the effect that Terri Norgrove had been succeeded as President of Modern Energy by an individual named John Winnick.
50. No proxy statement was issued to Modern Energy’s shareholders to convene a meeting of shareholders to vote on the election of directors of Modern Energy, and no such meeting was held. Consequently, it was impossible for John Winnick to have been validly appointed as Modern Energy’s president, there being no validly elected board of directors of Modern Energy to appoint John Winnick or any other person to hold any office with Modern Energy.
51. Most recently, persons acting in concert with Modern Energy and First Public have filed what purports to be an annual report for Modern Energy with the Wyoming Secretary of State, reporting that as of December 21, 2009, Sultan M.U. Saud, residing on Mindanao in the Philippine Islands is the Director and President of Modern Energy, and that the principal address of Modern Energy is now located in Cagayan De Oro City, Mindanao in the Philippine Islands.
52. As with the purported appointments of Terri Norgrove and John Winnick, no shareholders meeting was announced or convened to elect Sultan M.U. Saud as a director of
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Modern Energy, no proxy statement was issued or filed with the SEC concerning such meeting, and no properly constituted board of directors of Modern Energy exists or existed to appoint Sultan M.U. Saud as President of Modern Energy.
53. At the time of the purported April 30, 2008 forward stock split, Modern Energy had no properly elected directors who could authorize or approve such corporate action, no properly appointed officers or hired employees who could implement such action, and had not held any properly noticed shareholders meeting to authorize or take the actions necessary for Modern Energy to engage in a forward split of Modern Energy’s shares.
54. Consequently, the purported forward split announced April 30, 2008 was null, void and of no force and effect.
55. Moreover, at the time the forward split was purportedly authorized, Modern Energy already had issued and outstanding 1.2 billion shares of common stock (because the purported reverse stock split that Modern Energy was treating as reducing its issued and outstanding shares to 1.2 million shares as of October 19, 2007 [and continuing until the date of the forward split] was null and void, as declared by this Court in a judgment that, by April 30, 2008, had become final and non-appealable).
56. Modern Energy’s articles of incorporation, as amended, only authorize Modern Energy to issue 10 billion common shares.
57. Consequently, even if the 1,000:1 forward split Modern Energy announced on April 30, 2008 had been authorized by a duly elected board of directors of Modern Energy or by Modern Energy’s shareholders acting at a duly noticed meeting, the reported forward split would have violated Modern Energy’s corporate charter by causing Modern Energy to have 1.2 trillion common shares issued and outstanding at a time when Modern Energy’s corporate charter only
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authorized the issuance of 10 billion common shares. The purported forward split announce April 30, 2008 was null and void for that reason, as well as the other reasons stated above.
58. According to the announcement of the forward split, the objective of the forward split transaction was to comply with the Court’s earlier orders. That announcement was a false and misleading statement made in connection with the purchase or sale of securities, and therefore violative of 15 U.S.C. §78j(b) and SEC Rule 10b-5 promulgated pursuant thereto.
59. Such a forward split was unnecessary to implement the Court’s declaration that the reverse stock split was null and void, and it could not do so.
60. In reality, the forward split transaction was designed and intended by those persons acting in concert with Modern Energy and First Public, including but not limited to Korman and Ioane, and who drafted the press release announcing the purported forward split to further the fraudulent scheme Modern Energy, First Public and those acting in concert with them devised and launched when the (void) reverse stock split was announced in 2007.
61. Because Modern Energy and First Public did not act to re-establish the status quo ante after this Court declared the reverse stock split null and void and enjoined actions designed to capitalize on the intended effects of that (void) reverse stock split, DTC did not reverse the accounting entries it had made to reflect that reverse stock split, including the entries which reduced Scottrade’s holdings of Modern Energy common shares on DTC’s books from 30,797,165 shares to 30,797 shares.
62. Because DTC had further debited Scottrade’s DTC account for the 30,797 shares in that account in partial settlement of the Trades, when Modern Energy purported to effect a forward split of its shares on April 30, 2008 and delivered certificates to DTC purportedly evidencing
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shares distributable to DTC pursuant to the forward stock split, DTC’s records indicated that it held no Modern Energy common shares for Scottrade’s benefit.
63. Consequently, when allocating the Modern Energy shares purportedly distributed to DTC in connection with the forward split announced April 30, 2008, DTC did not allocate any such shares to Scottrade’s DTC account.
64. DTC’s handling of the Modern Energy shares purportedly represented by the certificates issued to DTC’s nominee, CEDE & Company in connection with the forward split announce April 30, 2008 was predictable and fully anticipated and expected by Modern Energy, First Public, and those persons acting in concert with them to perpetrate a fraud upon Scottrade and other participants in the securities markets, including DTC. Indeed, the persons acting in concert with Modern Energy and First Public to orchestrate the purported forward split of Modern Energy shares counted on DTC to handle the distribution of the (new) Modern Energy shares purportedly evidenced by the certificates delivered to DTC in connection with the purported forward split in the manner in which DTC handled such distribution.
65. Shortly after the forward split was announced, the persons acting in concert with Modern Energy and First Public to perpetrate the fraudulent scheme launched with the announcement of the purported reverse stock split engaged in a campaign to force Scottrade to deliver to the customers for whose accounts Scottrade held the 29,797.165 Modern Energy common shares not sold in the Trades certificates representing those shares or to pay damages to such customers for not doing so.
66. An unknown number of the persons acting in concert with Modern Energy and First Public to perpetrate the fraud on Scottrade are Scottrade customers who held Modern Energy shares in their Scottrade accounts immediately before the reverse stock split was announced.
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Among those persons are Michael Ioane and a corporation controlled by Michael Ioane, Western Investment Properties, Inc. (“Western”).
67. In the cases of Ioane and the entity Ioane controls, Western, the efforts to force Scottrade to enter the market to purchase otherwise valueless Modern Energy shares at extortionate and artificial prices or pay damages measured by such extortionate and artificial prices include filing arbitration proceedings seeking orders of specific performance and damages for past failures to deliver certificates representing Modern Energy shares.
68. Additionally, despite this Court’s earlier permanent injunction against attempts to buy-in at Scottrade’s expense Modern Energy shares to settle the Trades, persons acting in concert with Modern Energy and First Public have taken actions designed to cause Relief Defendant TD Ameritrade Clearing, Inc. to attempt to buy in 40,000 shares of Modern Energy at Scottrade’s expense to settle portions of the Trades.
69. Because Modern Energy and First Public did not act to restore the status quo ante following this Court’s declaration that the reverse stock split was null and void, and because Modern Energy, First Public and persons acting in concert with them are continuing to attempt to perpetrate the fraud set in motion by the purported, but void, reverse stock split, Scottrade is now at risk of having to obtain Modern Energy common shares at extortionate or artificial prices in order to satisfy its customers’ and other persons’ demands for delivery of otherwise valueless Modern Energy shares, or pay damages to such customers for its failures to do so.
70. Modern Energy is an empty corporate shell, having no legitimate business and no legitimate business purpose. It has no substantial assets or revenues. It has no properly elected board of directors, properly appointed officers or properly hired employees. It continues to violate the provisions of the federal securities laws which require corporations having in excess
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of 500 shareholders and claiming to have in excess of $1 million in assets to register their shares with the SEC and to file periodic financial reports with the SEC and to file (and furnish to shareholders) proxy statements in connection with the election of directors and other matters.
71. Consequently, Scottrade cannot obtain effective monetary relief in the form of damages from Modern Energy for the fraud perpetrated against Scottrade and which continues to be perpetrated against Scottrade.
72. First Public is now a defunct corporate entity, having forfeited its corporate charter for failing to file annual reports with the Oregon Secretary of State. It has and had no discernible assets of any value.
73. Consequently, Scottrade cannot obtain effective monetary relief in the form of damages from First Public for the fraud perpetrated against Scottrade and which continues to be perpetrated against Scottrade.
COUNT I
Request for Declaratory Relief
74. Scottrade incorporates by reference the allegations of paragraphs 1 – 73 as though the same were fully set forth herein.
75. There is a genuine controversy between Scottrade, Modern Energy, First Public and the persons acting in concert with Modern Energy and First Public over:
(a) whether Modern Energy and First Public have complied with or violated the spirit and the letter of this Court’s prior judgments in this matter, and in particular whether Modern Energy and First Public have violated the letter and spirit of the Court’s judgments by (a) not cancelling the certificates for Modern Energy shares issued in connection with the reverse stock split declared void by this Court, and (b) not reissuing to Modern Energy’s shareholders who
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exchanged certificates for Modern Energy shares outstanding immediately before the purported, but void, reverse stock split certificates representing the exchanged shares;
(b) whether Scottrade should now hold, through its account with DTC, 29,797,165 shares of Modern Energy common stock from the shares held by Scottrade through its account with DTC immediately preceding the supposed effective date of the purported, but void, reverse stock split;
(c) whether Modern Energy has violated and continues to violate the reporting requirements imposed on it by the federal securities laws, specifically 15 U.S.C. §§78l and 78m;
(d) whether Modern Energy now has or at any time since December 21, 2007 has had a properly constituted board of directors, properly appointed officers or employees, and has taken any action since December 21, 2007 which was a properly authorized action;
(e) whether Modern Energy has any assets or legitimate business purpose and, consequently, whether its shares have any value, or if its purported existence as a corporate entity is being continued solely to further the fraud launched with the announcement of the purported, but void, reverse stock split.
76. In fact:
(a) Modern Energy and First Public have not complied with and have violated the spirit and the letter of this Court’s prior judgments in this matter;
(b) Based on this Court’s prior judgments rendered in this matter, Scottrade’s DTC account should now reflect that it continues to own 29,797,165 of the 30,797,165 Modern Energy common shares Scottrade held through its DTC account for the accounts of Scottrade customers on October 19, 2007;
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(c) Modern Energy has violated and continues to violate the reporting requirements imposed on it by the federal securities laws, specifically 15 U.S.C. §§78l and 78m;
(d) Modern Energy does not now have, and since December 21, 2007 has not had a properly constituted board of directors, properly appointed officers or employees, and no action purportedly taken by Modern Energy at any time since December 21, 2007 was a properly authorized action by Modern Energy, every such action having been taken by persons acting in Modern Energy’s name but without any authority to so act;
(e) Modern Energy has no assets or legitimate business purpose, its shares are valueless, and its purported existence as a corporate entity is being continued solely to further the fraud launched with the announcement of the purported, but void, reverse stock split.
WHEREFORE, Scottrade prays that this Court enter its declaratory judgment that:
(a) Modern Energy and First Public have not complied with and have violated the spirit and the letter of this Court’s prior judgments in this matter;
(b) Based on this Court’s prior judgments rendered in this matter, Scottrade’s DTC account should now reflect that it continues to own 29,797,165 of the 30,797,165 Modern Energy common shares Scottrade held through its DTC account for the accounts of Scottrade customers on October 19, 2007;
(c) Modern Energy has violated and continues to violate the reporting requirements imposed on it by the federal securities laws, specifically 15 U.S.C. §§78l and 78m;
(d) Modern Energy does not now have, and since December 21, 2007 has not had a properly constituted board of directors, properly appointed officers or employees, and no action purportedly taken by Modern Energy at any time since December 21, 2007 was a properly authorized action by Modern Energy, every such action having been taken by
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persons (including Korman and Ioane) acting in Modern Energy’s name but without any authority to so act;
(e) Modern Energy has no substantial assets or legitimate business purpose, its shares are valueless, and its purported existence as a corporate entity is being continued solely to further the fraud launched with the announcement of the purported, but void, reverse stock split.
And affording Scottrade such other and further relief to which it may be entitled under the circumstances.
COUNT II
Request for Permanent Injunctive Relief
77. Scottrade hereby incorporates by reference paragraphs 1 – 76 as if fully set forth herein.
78. Unless Defendants Modern Energy, First Public and all persons acting in concert with them, and Relief Defendant TD Ameritrade Clearing Corporation are permanently enjoined as described below, Scottrade will be irreparably harmed.
79. Scottrade has no adequate remedy at law.
80. The harm resulting from the imposition of the requested injunctive relief is minimal compared to the irreparable harm suffered by Scottrade if Defendants are permitted to perpetuate their fraudulent scheme and/or the buy-ins are executed.
81. The public interest is served by the imposition of the requested injunctive relief.
WHEREFORE, Scottrade respectfully requests that in accordance with Rule 65(d), Fed. R. Civ. P., the Court enter judgment in the form of a Permanent Injunction against Defendants Modern Energy, First Public, and all persons in active concert or participation with them, including but not limited to Ioane and Korman, and against Relief Defendant T.D. Ameritrade Clearing, Inc., awarding the following relief:
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a. As to Relief Defendant T.D. Ameritrade Clearing, Inc., a permanent injunction enjoining Relief Defendant T.D. Ameritrade Clearing, Inc. in substantially the manner and from substantially the same types of activities as this Court enjoined the other Relief Defendants in the Permanent Injunction previously entered by this Court on February 7, 2007;
b. As to Defendants Modern Energy and First Public, and all persons acting or purporting to act as a transfer agent for Modern Energy shares, and all persons who are in active concert or participation with any of them, including Korman and Ioane, a permanent injunction:
1. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from issuing any additional securities purporting to be issued by Modern Energy without the express, prior approval of this Court;
2. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from transferring or purporting to transfer, of record, ownership of any securities heretofore issued or purportedly issued by Modern Energy without the express, prior approval of this Court;
3. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from issuing any further announcements, press releases, or other form of communication with actual or purported shareholders of Modern Energy or the investing public and purporting to be from or concerning Modern Energy without the prior express approval of this Court;
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4. Requiring that Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, shut down the website currently operated at www.modernenergycorporation.com, and prohibiting such persons from creating, operating, or maintaining any website or posting any content to any website purporting to be a website of Modern Energy Corporation;
5. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from making any further filings with the Wyoming Secretary of State’s office in the name of Modern Energy Corporation without the prior express approval of this Court;
6. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from taking any actions directly or indirectly intended to perpetuate the manipulative scheme described above, including, but not limited to, taking any actions which would directly or indirectly cause, force, or result in Scottrade having to purchase or pay for any shares of Modern Energy;
And affording Scottrade such other and further relief as to which it may be entitled under the circumstances.
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Respectfully submitted,
THOMPSON COBURN LLP
By: /s/ Thomas E. Douglass
Thomas E. Douglass, #3008
Kenton E. Knickmeyer, #3577
One US Bank Plaza
St. Louis, Missouri 63101
314-552-6000
FAX 314-552-7000
Attorneys for Plaintiff Scottrade, Inc.
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CERTIFICATE OF SERVICE
I hereby certify that the foregoing has been filed with the court via electronic court filing and served on the parties accordingly. Service via first class mail postage prepaid, on January 25, 2010, to Modern Energy and First Public Securities.
Joseph F. Devereux, Jr.
Vicki Little
Devereux and Murphy
190 Carondelet Plaza, 11th Floor
St. Louis, MO 63105
(314) 721-1516
(314) 721-4434 (fax)
jfdevereuxjr@devereuxmurphy.com
Attorneys for E*Trade Financial Corporation
Adam Behar
Mark Digidio
(212) 747-7184
(516) 472-5008
adam.behar@ridgeclearing.com
mark.digidio@ridgeclearing.com
Attorneys for Defendant Ridge Clearing
Tim Davis
Penson Financial Services, Inc
1700 Pacific Avenue, Suite 1400
Dallas, TX 75201
(214) 765-1568
(214) 217-1682 (fax)
tidavis@penson.com
Attorneys for Defendant Penson
Edwin L. Noel
F. Scott Galt
Armstrong Teasdale LLP
One Metropolitan Square, Suite 2600
St. Louis, MO 63102-2740
(314) 621-5070
(314) 621-5065 (fax)
enoel@armstrongteasdale.com
sgalt@armstrongteasdale.com
Attorneys for Merrill Lynch, Pierce Fenner & Smith, Inc.
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Modern Energy Corporation
Registered Agent
Corporation Service Company
1821 Logan Avenue
Cheyenne, WY 82001
R. Burns, Registered Agent
First Public Securities Transfer Corporation
6 Coronado Shores
Lincoln City, OR 97367
/s/Thomas Douglass
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
Scottrade, Inc., )
)
Plaintiff, )
)
v. ) Case No. 4:07-cv-01982 HEA
)
Modern Energy Corporation; )
First Public Securities Transfer )
Corporation; )
)
Defendants; )
)
Merrill Lynch, Pierce Fenner & )
Smith, Inc.; Ridge Clearing & Outsourcing )
Solutions, Inc.; Penson Financial Services, Inc., )
E*Trade Financial Corporation; TD Ameritrade, )
Clearing Services, Inc.; )
)
Relief Defendants. )
FIRST AMENDED COMPLAINT FOR INJUNCTIVE AND DECLARATORY RELIEF
I. Introduction
In 2007, Defendant, Modern Energy Corporation (“Modern Energy”) purported to effect a “mandatory exchange” – actually a reverse stock split -- to reduce its issued and outstanding common shares from 1.2 billion to 1.2 million. The transaction was part of a fraudulent scheme designed to confuse holders of Modern Energy’s stock and induce them to take actions which would, in turn, create an artificial market for Modern Energy’s otherwise valueless common shares. On paper, the “mandatory exchange” was completed in October, 2007, before this action was commenced.
When the Court reviewed the transaction and the means by which it had been announced and effected, the Court concluded that the “mandatory exchange” had been effected without
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compliance with applicable provisions of Wyoming law (where Modern Energy is incorporated) and in violation of certain anti-fraud provisions of the Securities Act of 1934, specifically Section 10(b) of that statute, 15 U.S.C. §78j(b) and Rule 10b-17 promulgated pursuant thereto, 17 C.F.R. §240.10b-17. This Court declared the reverse stock split null and void (Docket Entry # 43, December 20, 2007) and subsequently permanently enjoined Modern Energy, its transfer agent First Public Securities Transfer Corp. (“First Public”), and all persons acting in concert with them from effecting transactions predicated upon the effectiveness of the reverse stock split (Docket Entry # 55, February 7, 2008).
These final, unappealed Judgments of this Court should have put an end to the matter. Unfortunately, Modern Energy and First Public refused to conduct themselves consistently with the Court’s Judgments. While publicly proclaiming they were taking actions to implement the Court’s Judgments, Modern Energy, First Public and persons acting in concert with them have engaged in a series of actions calculated both to flout those Judgments and to further the fraudulent scheme the Court’s Judgments were intended to halt. Modern Energy, First Public and persons acting in concert with them are persisting in their attempt to manipulate the market for Modern Energy common stock to the detriment of Plaintiff Scottrade, Inc.(“Scottrade”), and thereby force Scottrade to pay extortionate and artificial prices for Modern Energy shares that have no intrinsic value. While doing so, Modern Energy, First Public, and those acting in concert with it have persisted in their refusal to comply with the reporting requirements imposed by the Securities Exchange Act in a continuing effort to conceal the fact that Modern Energy is and at all relevant times was a an empty corporate shell having no intrinsic value and no legitimate business purpose.
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Scottrade is filing this First Amended Complaint to secure additional declaratory and injunctive relief calculated to finally put a halt to Defendants’ fraudulent scheme.
For its First Amended Complaint for permanent injunctive relief, along with a declaratory judgment, Scottrade states:
II. Jurisdiction and Venue
1. This Court has subject matter jurisdiction of this case pursuant to 15 U.S.C. § 78aa, in that the claims asserted herein arise under the Securities Exchange Act of 1934, particularly Sections 10 and 29 of that statute, 15 U.S.C. §§78j, 78cc. The Court also has jurisdiction pursuant to 28 U.S.C. §1392, in that Scottrade is a citizen of Arizona and Missouri, and none of the Defendants or the Relief Defendants are citizens of either of those states, and the amount in controversy, exclusive of interest and costs, exceeds $75,000.
2. Venue is proper in this District pursuant to 15 U.S.C. § 78aa in that all Defendants may be found, inhabit, or otherwise transact business in the Eastern District of Missouri. Venue is also proper under 28 U.S.C. § 1391(b), in that a substantial part of the events giving rise to the claim occurred in this District.
III. Parties
3. Scottrade is a corporation organized under the laws of Arizona and having its principal place of business in St. Louis, Missouri. Scottrade is a securities broker-dealer. It operates in the discount retail brokerage market.
4. Defendant Modern Energy is a corporation organized under the laws of Wyoming. At the outset of this action, Modern Energy claimed to have offices and its principal place of business in California. Today, while Modern Energy remains incorporated in Wyoming, persons purporting to act for Modern Energy have made filings with the Wyoming Secretary of
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State indicating that Modern Energy’s office and place of business is now located on Mindanao in the Philippine Islands. Modern Energy remains subject to the jurisdiction of this Court because at the inception of this case it was causing its common shares to be traded in national securities markets in the United States and it appeared and defended this matter in this Court.
5. Defendant First Public Securities Transfer Corporation (“First Public”) was, at the inception of this action, a corporation organized under the laws of Oregon with its principal place of business in a state other than Missouri or Arizona. Since this Court’s earlier judgments were rendered against it, First Public has forfeited its corporate charter from the State of Oregon by failing to file requisite reports with the Oregon Secretary of State. The filings made on behalf of First Public with the Oregon Secretary of State’s office prior to the time when its corporate charter was forfeited listed Sandy Winick as First Public’s president, and identified addresses in Toronto, Canada (where Sandy Winick resides) and in Los Altos, California (where an individual using the name David Korman is believed to reside).
6. Relief Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) is a corporation organized under the laws of Delaware, and having its principal place of business in New York. Merrill Lynch is a registered broker-dealer in the State of Missouri and maintains offices in this District. Merrill Lynch was a party to this case at its inception and is bound by the Court’s prior judgments in this matter. No new claim for relief against Merrill Lynch is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to Merrill Lynch.
7. Relief Defendant Ridge Clearing & Outsourcing Solutions, Inc. (formerly known as ADP Clearing & Outsourcing Services, Inc.) (“Ridge Clearing”) is a corporation organized under the laws of Delaware, and having its principal place of business in a state other than Missouri or
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Arizona. Ridge Clearing is a registered broker-dealer in the State of Missouri. Ridge Clearing was a party to this case at its inception and is bound by the Court’s prior judgments in this matter. No new claim for relief against Ridge Clearing is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to Ridge Clearing.
8. Relief Defendant Penson Financial Services, Inc. (“Penson”) is a corporation organized under the laws of North Carolina, and having its principal place of business in a state other than Missouri or Arizona. Penson is a registered broker-dealer in the State of Missouri. Penson was a party to this action at its outset and is bound by the Court’s prior judgments in this matter. No new claim for relief against Penson is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to Ridge Clearing.
9. Relief Defendant E*Trade Financial Corporation (“E*Trade”) is a corporation organized under the laws of Delaware, and having its principal place of business in a state other than Missouri or Arizona. E*Trade was a party to this action at its inception and is bound by the prior Judgments of this Court in this action. No new claim for relief against E*Trade is intended to be asserted in this First Amended Complaint, and no relief beyond that already granted by the Court in its prior judgments is requested as to E*Trade.
10. Relief Defendant T. D. Ameritrade Clearing, Inc.(“Ameritrade”), is a corporation organized under the laws of Nebraska, and having its principal place of business in Nebraska. Ameritrade is now joined as a Relief Defendant in this matter because, subsequent to the entry of this Court’s prior judgments, demand has been made upon Ameritrade that it “buy-in” against Scottrade shares of Modern Energy common stock to settle transactions effected in 2007
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subsequent to Modern Energy’s attempt to effect a reverse stock split and has advised Scottrade that, absent an injunction binding upon it to refrain from doing so, it will “buy-in” shares of Modern Energy for Scottrade’s account to settle trades in Modern Energy common which this Court has determined to be null and void.
IV. Persons Acting In Concert With Modern Energy and First Public
11. Sandy Winick, as indicated above, is an individual whom the SEC has concluded organized and spun off a series of corporate shells having no legitimate business purpose with the intention of utilizing such corporate shells to perpetrate securities frauds. Modern Energy’s predecessor, Riverbank is apparently one such company, and Modern Energy’s transfer agent, First Public, is such a company. Sandy Winick has been named by the SEC as a defendant in a civil action filed in the U.S. District Court for the Southern District of New York and accused of perpetrating securities frauds through such spun off entities.
12. David Korman (“Korman”), also known as: Mark Pedley, Branch Vinedresser, Dr. David Korem, and perhaps other aliases, is an individual who has claimed at times to reside in Los Altos, California and purported to hold proxies making him effectively the controlling shareholder of Riverbank and Modern Energy. Korman was convicted of mail fraud in 1983 and served three years in a federal penitentiary for such offense; subsequently, in 1986, he was convicted of racketeering and sentenced to an eight year prison term. Korman was released from parole in 1994, shortly before Riverbank was formed. In addition to claiming to hold proxies for a controlling position in Modern Energy common shares, Korman has regularly and routinely purported to act for, and direct the affairs of, First Public.
13. Michael S. Ioane (“Ioane”) is an individual residing in California. Ioane is associated with a business operating under the name of Acacia Business Solutions (“Acacia”), which
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describes Ioane as its “Legal Tutor”. Ioane’s has frequently filed unfounded pleadings and lawsuits, prompting at least one U.S. District Court to enter an order prohibiting Ioane from filing any additional papers in that Court without prior permission of the Court. Presently, Ioane is under indictment in the U.S. District Court for the Central District of California for tax fraud. Ioane purports to own 5 million Modern Energy shares, either personally or through an Oregon corporation he purports to control called Western Investment Properties, Inc. (“Western”). These shares are traceable to 500,000 shares of Riverbank stock Ioane purportedly received from Korman for rendering business consulting services of an undisclosed nature to Riverbank and Korman. Beginning not later than December 21, 2007, Ioane began directing the actions purportedly taken by Modern Energy.
14. Teri Norgrove is an individual residing in Nevada. She is an employee of Acacia, and one of Ioane’s subordinates at Acacia. In or after December, 2007, Norgrove, at Ioane’s instance, publicly portrayed herself as Modern Energy’s president.
15. John Winnick, also known as John Frederick Winnick, Jack Chao, Chao Winnick and Jack Winnick, and perhaps other aliases, is an individual formerly residing in California and doing business there as a stock broker. John Winnick’s registration as an associated person of any FINRA member firm has been indefinitely suspended as of June 29, 2009. Commencing in or about 2009, and continuing until approximately December 21, 2009, John Winnick was publicly identified as Modern Energy’s president and director.
16. Sultan M.U. Saud (“Saud”) is purportedly an individual residing on the island of Mindanao in the Philippine Islands. Since December 21, 2009, Saud has been identified as the President and Director of Modern Energy.
4626693 - 8 -V. Facts Common To All Counts
17. Modern Energy is the corporate successor to a Delaware corporation called Riverbank Investments, Inc. (“Riverbank”). Riverbank was apparently one of numerous corporate entities created by or at the behest of an individual named Sandy Winick, which corporations, according to the United States Securities and Exchange Commission (the “SEC”), had and have no legitimate business purpose but were created as a means of perpetrating securities frauds on unsuspecting members of the investing public.
18. First Public, like Riverbank, is one of numerous corporate entities the SEC has concluded were created by or at the behest of Sandy Winick, which corporations had and have no legitimate business purpose but were created as a means of perpetrating securities frauds on unsuspecting members of the investing public.
19. The reverse stock split, described by Modern Energy as a “mandatory exchange” and declared null and void by this Court in its Judgments previously entered in this case, was part of one such securities fraud. As this Court recognized, that scheme was intended to operate by concealing from holders of Modern Energy common shares that their holdings of such shares had been reduced in volume by a factor of 1,000. The perpetrators of the scheme intended their fraud to induce some such holders to enter orders to sell many times more Modern Energy common shares than they (would have) held (had the purported reverse stock split been valid). The perpetrators planned that sellers so induced would be forced to buy Modern Energy common shares in the open market to “cover” the resultant “short” positions, or that the counterparties to those transactions would “buy-in” the shares in the open market to “cover” the shares the sellers failed to deliver in settlement of such transactions. When those “covering” purchases occurred,
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the perpetrators planned to be the sellers of Modern Energy shares and to demand artificially high prices for their shares, thus reaping profits from their fraud.
20. When Modern Energy, First Public and those persons acting in concert with them launched the fraudulent scheme enjoined by this Court, 1.2 billion shares of Modern Energy common stock were authorized, issued and outstanding. At that time, the “public float” of Modern Energy’s common shares consisted of approximately 500 million shares evidenced by stock certificates issued to CEDE & Company, a nominee of the Depository Trust Company (“DTC”). Approximately 700 million Modern Energy shares were held or controlled by Modern Energy insiders and were not part of the public float of Modern Energy shares. No sale or distribution of Modern Energy shares had ever been registered with the SEC pursuant to the Securities Act of 1933, 15 U.S.C. §77a et seq.
21. DTC held those (approximately) 500 million Modern Energy common shares for the accounts of its customers – principally, brokerage firms which, like Scottrade, held the shares for the accounts of its their customers.
22. Of the approximately 500 million Modern Energy common shares evidenced by certificates issued to CEDE & Company and held by DTC, 30,797,165 shares were held by DTC for Scottrade’s account. Scottrade, in turn, held such shares for the accounts of its customers.
23. To effect the reverse stock split declared null and void in this Court’s Judgement entered December 20, 2007, Modern Energy’s transfer agent, First Public, delivered certificates to CEDE for approximately 500,000 Modern Energy common shares and received in exchange for those certificates the certificates evidencing approximately 500 million Modern Energy common shares referenced in paragraph 14, above.
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24. Korman actively directed the actions of both Modern Energy and First Public in effecting the purported “mandatory exchange”.
25. Essentially concurrently with this exchange, DTC made entries in its books and records reducing the quantity of Modern Energy common shares shown by DTC’s records to be held by DTC for Scottrade’s account from 30,797,165 to 30,797.
26. As previously alleged and found by this Court, Scottrade, not knowing of the purported reverse stock split because Modern Energy had failed to give proper notice thereof, thereafter entered an order to sell 1 million shares of Modern Energy common stock for the account of one of Scottrade’s customers. The order was executed between October 23 and October 25, 2007 (the “Trades”).
27. When DTC and its sister corporation, National Securities Settlement Corporation (“NSCC”) processed the Trades for clearing and settlement, they did so after DTC had made the exchange with First Public described above and after DTC had made entries in its books and records reducing Scottrade’s holdings of Modern Energy common shares from 30,797,165 to 30,797 shares.
28. The process of clearing and beginning the settlement of the Trades resulted in DTC debiting Scottrade’s account for all 30,797 Modern Energy common shares reflected in DTC’s books and records as being held for Scottrade’s account, and crediting those shares to the accounts of Scottrade’s counterparties to the sales transactions in partial settlement of the Trades.
29. After this Court declared the reverse stock split to be null and void, held that Scottrade has no liability with respect to the Trades, and permanently enjoined Modern Energy and its transfer agent, First Public, as well as the Relief Defendants from taking the actions described in the Permanent Injunction, Modern Energy and First Public should have cancelled the certificates
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issued to CEDE & Company for approximately 500,000 Modern Energy shares in exchange for the certificates representing approximately 500 million Modern Energy shares CEDE & Company held prior to the purported reverse stock split and re-issued and delivered to CEDE & Company certificates evidencing the approximately 500 million Modern Energy shares Modern Energy intended to cancel in connection with the purported reverse stock split.
30. Upon receipt of those certificates, DTC, in turn, should have restored its customers’ accounts to the status quo ante, insofar as their holdings of Modern Energy common shares were concerned. At a minimum, Scottrade’s DTC account should have then held approximately 29,797.165 Modern Energy common shares, (after accounting for the sale of 1 million Modern Energy common shares pursuant to the Trades).
31. Modern Energy and First Public, however, took no such action.
32. Because Modern Energy and First Public did not cancel the certificates issued to CEDE & Company and delivered to DTC to effect the purported reverse stock split, and did not re-issue to CEDE & Company or deliver to DTC certificates evidencing the approximately 500 million Modern Energy common shares purportedly exchanged (and cancelled) as part of the reverse stock split, DTC did not restore to Scottrade’s account to the status quo ante respecting its holdings of Modern Energy common shares.
33. Subsequent to this Court’s declaration that the reverse stock split was null and void, Modern Energy, First Public and persons acting in concert with them have engaged in a series of actions calculated to perpetrate a fraud on Scottrade and other holders of Modern Energy shares by means dependent upon the initial reverse stock split but different from the means previously enjoined by the Court..
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34. On or before December 21, 2007, after being confronted during his December 14, 2007 deposition taken in this case with evidence of the fraud being perpetrated by individuals who had been directing his actions as Modern Energy’s President and director, James R. Stewart, who was then Modern Energy’s sole officer, director, and employee, resigned all of his positions with Modern Energy.
35. Prior to resigning those offices and positions, Mr. Stewart did not appoint any successor to himself (and any effort he might have made to appoint his own successor as a director of Modern Energy would have been invalid in any event).
36. The only legitimate means by which a new board of directors for Modern Energy could be established was to convene, upon proper notice, a meeting of Modern Energy’s shareholders for the purpose of electing one or more directors.
37. At all relevant times, Modern Energy’s common shares have been held by in excess of five hundred persons, and Modern Energy has claimed (albeit falsely) to have assets in excess of $1 million. Consequently, pursuant to Section 12(g) of the Securities Exchange Act of 1934, 15 U.S.C. §78l, Modern Energy was and is obliged to register its shares with the SEC and file with the SEC periodic reports on Forms 10-Q, 10-K and 8-K pursuant to Section 13 of the Securities Exchange Act of 1934, 15 U.S.C. §78m.
38. Modern Energy has never registered its shares with the SEC, and has never filed any reports or proxy statements with the SEC.
39. Modern Energy has not even issued any notices of shareholder meetings since at least June 1, 2007.
40. Consequently, no person or persons could have been properly elected as directors of Modern Energy following Mr. Stewart’s resignation as Modern Energy’s sole director on
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December 21, 2007, and, without any legitimately elected directors, Modern Energy could not have any properly appointed officers following Mr. Stewart’s resignation as Modern Energy’s sole officer on December 21, 2007.
41. Without properly elected directors, and without properly appointed officers, there was no person in a position to take any action on behalf of Modern Energy from and after December 21, 2007.
42. Nevertheless, subsequent to December 21, 2007, one or more persons acting in concert with Modern Energy and First Public, including Korman and Ioane, assumed control of Modern Energy’s website and such corporate records as Modern Energy had, and proceeded to orchestrate a series of actions designed to create the false impression that Modern Energy is in fact an active, operating corporation having assets and an actual business purpose.
43. Korman, upon receipt of notice from Stewart of his resignation, informed Stewart that Ioane would be assuming control of Modern Energy, and that an employee of Ioane’s, Norgrove, would be appointed President of Modern Energy.
44. After Ioane received Stewart’s resignation, Ioane communicated to Stewart acknowledging receipt of the resignation and requesting Norgrove’s appointment as Modern Energy’s President.
45. Sometime on or after December 21, 2007, a document was created purporting to show that Mr. Stewart both resigned his positions as an officer and director of Modern Energy and appointed an individual named Terri Norgrove as Modern Energy’s President.
46. Mr. Stewart was requested to transmit those records pertaining to Modern Energy that were in his custody to Michael Ioane. Mr. Stewart was similarly requested to transfer control of the telephone number maintained for Modern Energy to Michael Ioane, and he did so.
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47. Thereafter, persons acting in concert with Modern Energy and First Public published on Modern Energy’s website an announcement that Terri Norgrove was the new President of Modern Energy.
48. Following the public announcement that Terri Norgrove was the new President of Modern Energy, persons acting in concert with Modern Energy and First Public (a) announced that it had completed a 1,000:1 forward stock split on April 30, 2008, and (b) caused certificates purportedly representing approximately 499.5 million Modern Energy shares to be issued to CEDE & Company and delivered to DTC.
49. Subsequent to these events, an announcement was posted on Modern Energy’s website to the effect that Terri Norgrove had been succeeded as President of Modern Energy by an individual named John Winnick.
50. No proxy statement was issued to Modern Energy’s shareholders to convene a meeting of shareholders to vote on the election of directors of Modern Energy, and no such meeting was held. Consequently, it was impossible for John Winnick to have been validly appointed as Modern Energy’s president, there being no validly elected board of directors of Modern Energy to appoint John Winnick or any other person to hold any office with Modern Energy.
51. Most recently, persons acting in concert with Modern Energy and First Public have filed what purports to be an annual report for Modern Energy with the Wyoming Secretary of State, reporting that as of December 21, 2009, Sultan M.U. Saud, residing on Mindanao in the Philippine Islands is the Director and President of Modern Energy, and that the principal address of Modern Energy is now located in Cagayan De Oro City, Mindanao in the Philippine Islands.
52. As with the purported appointments of Terri Norgrove and John Winnick, no shareholders meeting was announced or convened to elect Sultan M.U. Saud as a director of
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Modern Energy, no proxy statement was issued or filed with the SEC concerning such meeting, and no properly constituted board of directors of Modern Energy exists or existed to appoint Sultan M.U. Saud as President of Modern Energy.
53. At the time of the purported April 30, 2008 forward stock split, Modern Energy had no properly elected directors who could authorize or approve such corporate action, no properly appointed officers or hired employees who could implement such action, and had not held any properly noticed shareholders meeting to authorize or take the actions necessary for Modern Energy to engage in a forward split of Modern Energy’s shares.
54. Consequently, the purported forward split announced April 30, 2008 was null, void and of no force and effect.
55. Moreover, at the time the forward split was purportedly authorized, Modern Energy already had issued and outstanding 1.2 billion shares of common stock (because the purported reverse stock split that Modern Energy was treating as reducing its issued and outstanding shares to 1.2 million shares as of October 19, 2007 [and continuing until the date of the forward split] was null and void, as declared by this Court in a judgment that, by April 30, 2008, had become final and non-appealable).
56. Modern Energy’s articles of incorporation, as amended, only authorize Modern Energy to issue 10 billion common shares.
57. Consequently, even if the 1,000:1 forward split Modern Energy announced on April 30, 2008 had been authorized by a duly elected board of directors of Modern Energy or by Modern Energy’s shareholders acting at a duly noticed meeting, the reported forward split would have violated Modern Energy’s corporate charter by causing Modern Energy to have 1.2 trillion common shares issued and outstanding at a time when Modern Energy’s corporate charter only
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authorized the issuance of 10 billion common shares. The purported forward split announce April 30, 2008 was null and void for that reason, as well as the other reasons stated above.
58. According to the announcement of the forward split, the objective of the forward split transaction was to comply with the Court’s earlier orders. That announcement was a false and misleading statement made in connection with the purchase or sale of securities, and therefore violative of 15 U.S.C. §78j(b) and SEC Rule 10b-5 promulgated pursuant thereto.
59. Such a forward split was unnecessary to implement the Court’s declaration that the reverse stock split was null and void, and it could not do so.
60. In reality, the forward split transaction was designed and intended by those persons acting in concert with Modern Energy and First Public, including but not limited to Korman and Ioane, and who drafted the press release announcing the purported forward split to further the fraudulent scheme Modern Energy, First Public and those acting in concert with them devised and launched when the (void) reverse stock split was announced in 2007.
61. Because Modern Energy and First Public did not act to re-establish the status quo ante after this Court declared the reverse stock split null and void and enjoined actions designed to capitalize on the intended effects of that (void) reverse stock split, DTC did not reverse the accounting entries it had made to reflect that reverse stock split, including the entries which reduced Scottrade’s holdings of Modern Energy common shares on DTC’s books from 30,797,165 shares to 30,797 shares.
62. Because DTC had further debited Scottrade’s DTC account for the 30,797 shares in that account in partial settlement of the Trades, when Modern Energy purported to effect a forward split of its shares on April 30, 2008 and delivered certificates to DTC purportedly evidencing
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shares distributable to DTC pursuant to the forward stock split, DTC’s records indicated that it held no Modern Energy common shares for Scottrade’s benefit.
63. Consequently, when allocating the Modern Energy shares purportedly distributed to DTC in connection with the forward split announced April 30, 2008, DTC did not allocate any such shares to Scottrade’s DTC account.
64. DTC’s handling of the Modern Energy shares purportedly represented by the certificates issued to DTC’s nominee, CEDE & Company in connection with the forward split announce April 30, 2008 was predictable and fully anticipated and expected by Modern Energy, First Public, and those persons acting in concert with them to perpetrate a fraud upon Scottrade and other participants in the securities markets, including DTC. Indeed, the persons acting in concert with Modern Energy and First Public to orchestrate the purported forward split of Modern Energy shares counted on DTC to handle the distribution of the (new) Modern Energy shares purportedly evidenced by the certificates delivered to DTC in connection with the purported forward split in the manner in which DTC handled such distribution.
65. Shortly after the forward split was announced, the persons acting in concert with Modern Energy and First Public to perpetrate the fraudulent scheme launched with the announcement of the purported reverse stock split engaged in a campaign to force Scottrade to deliver to the customers for whose accounts Scottrade held the 29,797.165 Modern Energy common shares not sold in the Trades certificates representing those shares or to pay damages to such customers for not doing so.
66. An unknown number of the persons acting in concert with Modern Energy and First Public to perpetrate the fraud on Scottrade are Scottrade customers who held Modern Energy shares in their Scottrade accounts immediately before the reverse stock split was announced.
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Among those persons are Michael Ioane and a corporation controlled by Michael Ioane, Western Investment Properties, Inc. (“Western”).
67. In the cases of Ioane and the entity Ioane controls, Western, the efforts to force Scottrade to enter the market to purchase otherwise valueless Modern Energy shares at extortionate and artificial prices or pay damages measured by such extortionate and artificial prices include filing arbitration proceedings seeking orders of specific performance and damages for past failures to deliver certificates representing Modern Energy shares.
68. Additionally, despite this Court’s earlier permanent injunction against attempts to buy-in at Scottrade’s expense Modern Energy shares to settle the Trades, persons acting in concert with Modern Energy and First Public have taken actions designed to cause Relief Defendant TD Ameritrade Clearing, Inc. to attempt to buy in 40,000 shares of Modern Energy at Scottrade’s expense to settle portions of the Trades.
69. Because Modern Energy and First Public did not act to restore the status quo ante following this Court’s declaration that the reverse stock split was null and void, and because Modern Energy, First Public and persons acting in concert with them are continuing to attempt to perpetrate the fraud set in motion by the purported, but void, reverse stock split, Scottrade is now at risk of having to obtain Modern Energy common shares at extortionate or artificial prices in order to satisfy its customers’ and other persons’ demands for delivery of otherwise valueless Modern Energy shares, or pay damages to such customers for its failures to do so.
70. Modern Energy is an empty corporate shell, having no legitimate business and no legitimate business purpose. It has no substantial assets or revenues. It has no properly elected board of directors, properly appointed officers or properly hired employees. It continues to violate the provisions of the federal securities laws which require corporations having in excess
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of 500 shareholders and claiming to have in excess of $1 million in assets to register their shares with the SEC and to file periodic financial reports with the SEC and to file (and furnish to shareholders) proxy statements in connection with the election of directors and other matters.
71. Consequently, Scottrade cannot obtain effective monetary relief in the form of damages from Modern Energy for the fraud perpetrated against Scottrade and which continues to be perpetrated against Scottrade.
72. First Public is now a defunct corporate entity, having forfeited its corporate charter for failing to file annual reports with the Oregon Secretary of State. It has and had no discernible assets of any value.
73. Consequently, Scottrade cannot obtain effective monetary relief in the form of damages from First Public for the fraud perpetrated against Scottrade and which continues to be perpetrated against Scottrade.
COUNT I
Request for Declaratory Relief
74. Scottrade incorporates by reference the allegations of paragraphs 1 – 73 as though the same were fully set forth herein.
75. There is a genuine controversy between Scottrade, Modern Energy, First Public and the persons acting in concert with Modern Energy and First Public over:
(a) whether Modern Energy and First Public have complied with or violated the spirit and the letter of this Court’s prior judgments in this matter, and in particular whether Modern Energy and First Public have violated the letter and spirit of the Court’s judgments by (a) not cancelling the certificates for Modern Energy shares issued in connection with the reverse stock split declared void by this Court, and (b) not reissuing to Modern Energy’s shareholders who
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exchanged certificates for Modern Energy shares outstanding immediately before the purported, but void, reverse stock split certificates representing the exchanged shares;
(b) whether Scottrade should now hold, through its account with DTC, 29,797,165 shares of Modern Energy common stock from the shares held by Scottrade through its account with DTC immediately preceding the supposed effective date of the purported, but void, reverse stock split;
(c) whether Modern Energy has violated and continues to violate the reporting requirements imposed on it by the federal securities laws, specifically 15 U.S.C. §§78l and 78m;
(d) whether Modern Energy now has or at any time since December 21, 2007 has had a properly constituted board of directors, properly appointed officers or employees, and has taken any action since December 21, 2007 which was a properly authorized action;
(e) whether Modern Energy has any assets or legitimate business purpose and, consequently, whether its shares have any value, or if its purported existence as a corporate entity is being continued solely to further the fraud launched with the announcement of the purported, but void, reverse stock split.
76. In fact:
(a) Modern Energy and First Public have not complied with and have violated the spirit and the letter of this Court’s prior judgments in this matter;
(b) Based on this Court’s prior judgments rendered in this matter, Scottrade’s DTC account should now reflect that it continues to own 29,797,165 of the 30,797,165 Modern Energy common shares Scottrade held through its DTC account for the accounts of Scottrade customers on October 19, 2007;
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(c) Modern Energy has violated and continues to violate the reporting requirements imposed on it by the federal securities laws, specifically 15 U.S.C. §§78l and 78m;
(d) Modern Energy does not now have, and since December 21, 2007 has not had a properly constituted board of directors, properly appointed officers or employees, and no action purportedly taken by Modern Energy at any time since December 21, 2007 was a properly authorized action by Modern Energy, every such action having been taken by persons acting in Modern Energy’s name but without any authority to so act;
(e) Modern Energy has no assets or legitimate business purpose, its shares are valueless, and its purported existence as a corporate entity is being continued solely to further the fraud launched with the announcement of the purported, but void, reverse stock split.
WHEREFORE, Scottrade prays that this Court enter its declaratory judgment that:
(a) Modern Energy and First Public have not complied with and have violated the spirit and the letter of this Court’s prior judgments in this matter;
(b) Based on this Court’s prior judgments rendered in this matter, Scottrade’s DTC account should now reflect that it continues to own 29,797,165 of the 30,797,165 Modern Energy common shares Scottrade held through its DTC account for the accounts of Scottrade customers on October 19, 2007;
(c) Modern Energy has violated and continues to violate the reporting requirements imposed on it by the federal securities laws, specifically 15 U.S.C. §§78l and 78m;
(d) Modern Energy does not now have, and since December 21, 2007 has not had a properly constituted board of directors, properly appointed officers or employees, and no action purportedly taken by Modern Energy at any time since December 21, 2007 was a properly authorized action by Modern Energy, every such action having been taken by
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persons (including Korman and Ioane) acting in Modern Energy’s name but without any authority to so act;
(e) Modern Energy has no substantial assets or legitimate business purpose, its shares are valueless, and its purported existence as a corporate entity is being continued solely to further the fraud launched with the announcement of the purported, but void, reverse stock split.
And affording Scottrade such other and further relief to which it may be entitled under the circumstances.
COUNT II
Request for Permanent Injunctive Relief
77. Scottrade hereby incorporates by reference paragraphs 1 – 76 as if fully set forth herein.
78. Unless Defendants Modern Energy, First Public and all persons acting in concert with them, and Relief Defendant TD Ameritrade Clearing Corporation are permanently enjoined as described below, Scottrade will be irreparably harmed.
79. Scottrade has no adequate remedy at law.
80. The harm resulting from the imposition of the requested injunctive relief is minimal compared to the irreparable harm suffered by Scottrade if Defendants are permitted to perpetuate their fraudulent scheme and/or the buy-ins are executed.
81. The public interest is served by the imposition of the requested injunctive relief.
WHEREFORE, Scottrade respectfully requests that in accordance with Rule 65(d), Fed. R. Civ. P., the Court enter judgment in the form of a Permanent Injunction against Defendants Modern Energy, First Public, and all persons in active concert or participation with them, including but not limited to Ioane and Korman, and against Relief Defendant T.D. Ameritrade Clearing, Inc., awarding the following relief:
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a. As to Relief Defendant T.D. Ameritrade Clearing, Inc., a permanent injunction enjoining Relief Defendant T.D. Ameritrade Clearing, Inc. in substantially the manner and from substantially the same types of activities as this Court enjoined the other Relief Defendants in the Permanent Injunction previously entered by this Court on February 7, 2007;
b. As to Defendants Modern Energy and First Public, and all persons acting or purporting to act as a transfer agent for Modern Energy shares, and all persons who are in active concert or participation with any of them, including Korman and Ioane, a permanent injunction:
1. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from issuing any additional securities purporting to be issued by Modern Energy without the express, prior approval of this Court;
2. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from transferring or purporting to transfer, of record, ownership of any securities heretofore issued or purportedly issued by Modern Energy without the express, prior approval of this Court;
3. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from issuing any further announcements, press releases, or other form of communication with actual or purported shareholders of Modern Energy or the investing public and purporting to be from or concerning Modern Energy without the prior express approval of this Court;
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4. Requiring that Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, shut down the website currently operated at www.modernenergycorporation.com, and prohibiting such persons from creating, operating, or maintaining any website or posting any content to any website purporting to be a website of Modern Energy Corporation;
5. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from making any further filings with the Wyoming Secretary of State’s office in the name of Modern Energy Corporation without the prior express approval of this Court;
6. Prohibiting Modern Energy, its transfer agents including, but not limited to First Public, and all persons who are in active concert or participation with them, including, but not limited to Korman and Ioane, from taking any actions directly or indirectly intended to perpetuate the manipulative scheme described above, including, but not limited to, taking any actions which would directly or indirectly cause, force, or result in Scottrade having to purchase or pay for any shares of Modern Energy;
And affording Scottrade such other and further relief as to which it may be entitled under the circumstances.
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Respectfully submitted,
THOMPSON COBURN LLP
By: /s/ Thomas E. Douglass
Thomas E. Douglass, #3008
Kenton E. Knickmeyer, #3577
One US Bank Plaza
St. Louis, Missouri 63101
314-552-6000
FAX 314-552-7000
Attorneys for Plaintiff Scottrade, Inc.
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CERTIFICATE OF SERVICE
I hereby certify that the foregoing has been filed with the court via electronic court filing and served on the parties accordingly. Service via first class mail postage prepaid, on January 25, 2010, to Modern Energy and First Public Securities.
Joseph F. Devereux, Jr.
Vicki Little
Devereux and Murphy
190 Carondelet Plaza, 11th Floor
St. Louis, MO 63105
(314) 721-1516
(314) 721-4434 (fax)
jfdevereuxjr@devereuxmurphy.com
Attorneys for E*Trade Financial Corporation
Adam Behar
Mark Digidio
(212) 747-7184
(516) 472-5008
adam.behar@ridgeclearing.com
mark.digidio@ridgeclearing.com
Attorneys for Defendant Ridge Clearing
Tim Davis
Penson Financial Services, Inc
1700 Pacific Avenue, Suite 1400
Dallas, TX 75201
(214) 765-1568
(214) 217-1682 (fax)
tidavis@penson.com
Attorneys for Defendant Penson
Edwin L. Noel
F. Scott Galt
Armstrong Teasdale LLP
One Metropolitan Square, Suite 2600
St. Louis, MO 63102-2740
(314) 621-5070
(314) 621-5065 (fax)
enoel@armstrongteasdale.com
sgalt@armstrongteasdale.com
Attorneys for Merrill Lynch, Pierce Fenner & Smith, Inc.
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Modern Energy Corporation
Registered Agent
Corporation Service Company
1821 Logan Avenue
Cheyenne, WY 82001
R. Burns, Registered Agent
First Public Securities Transfer Corporation
6 Coronado Shores
Lincoln City, OR 97367
/s/Thomas Douglass
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