Spongetech Delivery Systems, Inc. (fka SPNGQ)

[starfire]

FINANCIALS BY END OF THE MONTH AS STATED IN THE NEW YORK TIMES 6 MAY2010.
http://www.nytimes.com/2010/05/06/business/06place.html?ref=business
Market Place
S.E.C. Charges SpongeTech With Fraud
By FLOYD NORRIS
Published: May 5, 2010


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If the Securities and Exchange Commission and the Justice Department know what they are talking about, then Steven Y. Moskowitz is a very good liar.

On Tuesday, Mr. Moskowitz, the chief financial and chief operating officer of a penny stock known as SpongeTech Delivery Systems, insisted in an interview in his office that suspicions about his company were completely unfounded.

The company, which only a year ago was advertising at sports stadiums around the country, was being investigated by the S.E.C. for no good reason, as far as he was concerned.

On Wednesday, he and Michael Metter, the company’s chief executive, were arrested by F.B.I. agents. They were charged with conspiracy to commit securities fraud and with obstruction of justice. The S.E.C. filed civil fraud charges against them and the company.

The suits accuse SpongeTech, which makes sponges infused with soap, of falsifying its financial reports by claiming sales to nonexistent companies. They say the two executives led a large “pump and dump” scheme that allowed insiders to distribute 2.5 billion shares of stock while denying that the shares existed.

“Investors were deceived into believing that SpongeTech was a successful business, while SpongeTech and its senior executives were illegally dumping shares into the market,” said Christopher Conte, an associate enforcement director for the commission.

Loretta E. Lynch, the United States attorney in Brooklyn, said the defendants were charged “with executing a bold scheme to portray SpongeTech as a company that was performing at a level far above reality.” She added, “The audacity of their scheme was matched only by their obstructive efforts during the course of the S.E.C.’s investigation.”

SpongeTech may never have been a successful business, but it did buy a lot of promotions at sports stadiums and on broadcasts. Last year, the company says, it had deals with at least 30 teams, in baseball, hockey, basketball and football. The S.E.C. says some of those deals were financed through the illegal sales of stock. Some of the teams and stadiums have sued SpongeTech for not living up to its obligations.

On Tuesday, sitting in a conference room in SpongeTech’s offices, across the street from the Empire State Building, Mr. Moskowitz offered a series of statements that were directly contradicted by the government’s accusations.

That the S.E.C. was interested in the company was old news. The commission temporarily suspended trading in the stock in October, but allowed it to resume after 10 days. In December the company said it had been notified that the enforcement staff planned to recommend to the commission that a suit be filed, but that there had been no public developments since then.

In the interview, he said that the S.E.C. was investigating only two things.

The first was that the company had given a different profit figure in a news release than it gave in an S.E.C. filing. He said the S.E.C. filing, made later the same day, was correct, and that his lawyers had told him there was no need for a corrective news release, given that the S.E.C. filing had already corrected it.

The second issue, he said, concerned sales of stock by persons who had done so using legal opinions — saying the shares were freely tradable — whose accuracy the commission evidently doubted. He said he did not know who the lawyers or the shareholders were. None of the shares, he added, were sold by the company’s officers or directors, or by entities associated with them.

He added that the company had 723 million shares outstanding, just as it had reported in the last financial statements it filed with the commission, in April 2009.

He said the company’s profit claims would be vindicated later this month, when it filed overdue audited financial statements.

The commission’s suit and the federal charges, filed in Federal District Court in Brooklyn, contradict almost everything Mr. Moskowitz said. The S.E.C. put the number of outstanding shares in SpongeTech at almost three billion.

The commission says some of the legal letters in question were supposedly signed by a nonexistent lawyer who used the name David Bomart and also used the same fax number as Mr. Moskowitz. It said the stock was sold by RM Enterprises, a company controlled by Mr. Moskowitz and Mr. Metter, and that Mr. Moskowitz fired SpongeTech’s stock transfer agent when it demanded a meeting with Mr. Bomart.

After the S.E.C. began investigating and asked for ways to contact SpongeTech’s major customers, the suit says, RM Enterprises hired George Speranza, whom the S.E.C. describes as a consultant “who operates the Internet stock hype site, ‘nohypenobull.com.’ ” He was assigned to create false Web sites and false office listings for the fictitious customers, the S.E.C. said. He was also named as a defendant in the S.E.C. case.

SpongeTech shares, which traded for more than 28 cents last summer, when the promotion was at its height, fell 3.4 cents to seven-tenths of a penny in over-the-counter trading on Wednesday. More than 177 million shares were traded.

If the government accusations are correct, then the company should rank as among the most aggressive penny-stock frauds ever.

Two weeks ago, it filed a suit in New York state court seeking $100 million from The New York Post, which has aggressively covered the company’s disputes with sports teams, and from a hedge fund manager and others the company said were involved in a “short and distort stock manipulation scheme” to drive down the price of SpongeTech stock.

“SpongeTech has been, and continues to be, greatly injured in name and reputation including, inter alia, public opinion of SpongeTech as a company and an investment vehicle is unfavorable and the company and its executives have suffered contempt, ridicule, aversion, shame and disgrace among others in their community and in the business world, among citizens of the state of New York, the nation and the world,” the suit asserted.

A call to SpongeTech’s office seeking comment on Wednesday reached a message saying the phone line was temporarily out of service. Mr. Moskowitz did not respond to an e-mail message. He and Mr. Metter were released by a federal magistrate Wednesday afternoon on $2 million bond each, secured by property.