Securities And Exchange Commission v. eSafetyWorld, Inc. (now known as EZ Auctions and Shipping Inc.) and Raymond Burghard, Civil Action No. CV 05 5851 (United States District Court for the Eastern District of New York) (Judge Hurley)
Securities And Exchange Commission Files Charges in Fraud Involving eSafetyWorld, Inc. Former CEO and CFO Consent to Injunctions, Officer and Director Bars, and Penalties On December 15, 2005, the SEC filed two civil injunctive actions in federal district court for the Eastern District of New York related to fraudulent schemes perpetrated at eSafetyWorld, Inc. (now known as EZ Auctions and Shipping Inc.) ("eSafety").
The first complaint alleges that Edward A. Heil and R. Bret Jenkins, respectively eSafety's CEO and CFO at the relevant time, engaged in fraudulent schemes in 2001 involving a false press release, financial fraud, and/or a market manipulation. The complaint alleges that:
During the mailed-anthrax scare, Heil drafted and issued eSafety's October 19, 2001 false press release about a supposed revolutionary anthrax-containment device. The press release caused a one-day price increase of 413% and a volume increase of 57,085%. Heil devised, and Heil and Jenkins implemented, eSafety's revenue recognition policy for consulting services which was contrary to GAAP. They also failed to restate eSafety's first through third quarter 2001 reports, improperly deferred costs in eSafety's 2001 Form 10-KSB thereby understating net loss, and aided and abetted eSafety's electronic filing violations. In 2001, in order to manipulate the stock of eSafety, Heil directed the purchase and sale of eSafety stock and transferred $473,288 in eSafety funds to an entity that he controlled and another entity. Heil executed a false loan agreement and provided eSafety's auditors with a false loan confirmation to conceal the use of monies in the manipulation. Heil and Jenkins each have agreed to settle the complaint by consenting, on a neither admit nor deny basis, to the entry of an injunction based on the anti-fraud, books and records, internal controls and electronic signature provisions of the federal securities laws. Heil's injunction is based on violations of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder; and his aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 13a-1, 13a-13, 12b-20, and 12b-25 thereunder, and Section 232.302 of Regulation S-T. Jenkins' injunction is based on violations of Section 13(b)(5) of the Exchange Act; and his aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 13a-1, 13a-13, 12b-20, 12b-25, 13b2-1 and 13b2-2 thereunder, and Section 232.302 of Regulation S-T. They each also agreed to a 10-year officer and director bar. Heil will pay a penalty of $60,000 and Jenkins will pay a penalty of $50,000.
In a separate but related action, Heil has offered to settle an administrative proceeding pursuant to Rule 102(e) of the Commission's Rules of Practice by accepting a bar from practicing before the Commission as an accountant with a right to request reinstatement in five years.
In the second federal court action, the Commission alleges that eSafety engaged in each of the fraudulent schemes described above, and that Raymond Burghard aided and abetted eSafety's financial fraud by signing a false loan agreement and a false loan confirmation that he knew would be provided to eSafety's auditors. In so doing, the Commission alleges that Burghard aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-1, 13b2-1, and 13b2-2 thereunder.
The Commission seeks injunctive relief and penalties from eSafety and Burghard.
Administrative Proceedings The list below provides links to notices and orders concerning the institution and/or settlement of administrative proceedings.
Alleged Pyramid Scheme Operators Banned from Multi-level Marketing Federal Trade Commission [Dec 16 2005 12:23AM GMT] $1.5 Million in Consumer Redress Required to Settle FTC Charges The Federal Trade Commission has settled charges against three corporations and their owners and officers that the defendants used deceptive practices to promote their http://c.moreover.com/click/here.pl?x439085243&f=3000000268279
ASX turns the heat on inside traders The Age [Dec 15 2005 10:26PM GMT] INSIDER trading on the Australian Stock Exchange will be targeted by a new intelligence unit, but the ASX denies the crackdown is a reaction to any high-profile trading scandalshttp://c.moreover.com/click/here.pl?x439037534&f=3000000268279
New law to rein in money-laundering Kuwait Times [Dec 15 2005 4:27AM GMT] By Nancy OteifaKUWAIT: On the concluding ceremony of the International Conference on Money Laundering, which was held in the Arab organisation headquarter, Ibrahim Al-Ghanem, Director General of the Customs in Kuwait said, 'In order to curb the menace http://c.moreover.com/click/here.pl?x438623106&f=3000000268275
SEC May Again Pursue Outside Directors This is not a first--I posted here about a similar case back in August 2003--but it is highly unusual for the SEC to go after a public company's outside directors for financial shenanigans or fraud at the company. Yet that is what the SEC is reportedly doing with respect to three high-profile outside directors (two current, one former) of Hollinger International Inc. who served on the company's audit committee. According to a Bloomberg report discussed here,
the SEC has sent Wells notices to James Thompson, Richard Burt, and Marie-Josee Kravis. Thompson, the chairman of law firm Winston & Strawn, had served as Hollinger's audit committee chairman. He still serves on the board, as does Burt, a former U.S. ambassador to Germany. Kravis, a director of Ford Motor Co. since 1995 (and the wife of buyout icon Henry Kravis), resigned from the Hollinger board in 2003.
The article states that the Hollinger audit committee approved more than $275 million in payments to former Hollinger chairman Conrad Black, his business partners, and to Ravelston Corp., a separate company they controlled.
The report of these Wells calls comes almost simultaneously with comments made yesterday by the SEC's Peter Bresnan, Deputy Director of Enforcement, that the Enforcement Division would be recommending that the SEC bring actions against against outside directors in certain cases currently on the agency's calendar. According to BNA's Securities Law Daily, Bresnan stated on an ABA webcast yesterday that the Enforcement Division
will pursue cases in which the outside director "has taken no care in ensuring the accuracy of the statement [he or she] make[s]." He added, "When they sign something, it has to have some basis."
Ex-Hollinger CFO pleads not guilty John "Jack" Boultbee pleaded not guilty to charges that he defrauded shareholders out of millions. December 7, 2005: 11:15 AM EST
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CHICAGO (Reuters) - Former Hollinger International Inc. Chief Financial Officer John "Jack" Boultbee pleaded not guilty Wednesday to U.S. charges that he defrauded shareholders out of millions of dollars.
Judge Amy St. Eve of the U.S. District Court ordered Boultbee, 62, to post a $1.5 million cash bond and told him he could only travel between the United States and Canada.
He was indicted on the fraud charges last month along with toppled media baron Conrad Black and two others, all of whom also have pleaded not guilty.
Boultbee, who lives in the Vancouver area, had skipped last week's scheduled arraignment on eight mail and wire fraud counts and prosecutors had threatened him with extradition, telling the judge that he had shown disrespect for the U.S. court system.
On Thursday he signed an affidavit waiving his right to contest any future extradition order -- meaning that he could be forced to return to the U.S. court at any time.
Robert Kent, a prosecutor in the U.S. Attorney's office in Chicago, said additional charges in the case could be filed by next week. He did not say against whom the new charges might be filed.
Judge St. Eve ordered Boultbee, Black and the other defendants to appear at a status hearing in the case on Dec.16 in her court.
Last month's indictments accused Black, Boultbee and the others of pocketing $84 million in non-compete payments made during asset sales from Black's once-sprawling newspaper empire. The other two defendants are former Hollinger attorneys Mark Kipnis and Peter Atkinson.
Black's one-time lieutenant, David Radler was indicted earlier and reached a plea agreement in which he said he would testify against the others in exchange for a 29-month prison term and $250,000 fine.
Each fraud count carries a maximum five-year prison term plus fines and possible restitution.
Boultbee was described in the indictment as Chicago-based Hollinger International's (Research) former accountant who oversaw company finances, including matters related to taxes.
Through Mowitza Holdings Inc. Boultbee also owned nearly 1 percent of Ravelston Corp. Ltd., Black's and Radler's now-insolvent holding company that controlled Hollinger International through Toronto-based Hollinger Inc. Ravelston was also named in an earlier indictment and its representatives have pleaded not guilty.
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Conrad Black could face up to 40 years in prison if convicted for defrauding shareholders, click here for more.
"Things I wish I knew before now but everyone neglected to tell me"
"As a shareholder in CYPT.ob [denotes Yahoo user] I have been amazed at the selling pressure on the stock over the past couple weeks. After phoning investor relations I was made aware of your service. After several hours of investigation to find your website it is clear the negative affect your allegations have had on the stock price. Although I don't negate your findings, my issue with your service is that it does not show up on any of the many financial news services that I use nor the search engines that I systematically use to source news on companies that I am invested or plan to invest in. From the inception of your reports on Calypte I have been negatively impacted to the tune of $45,000 +. If your service is truly meant to protect investors (by exposing foul play) & not attracting short sellers, you should make sure your statements are visible to all."
unsolicited email from a concerned investor
WE COULDN'T AGREE MORE!
Public companies that commit fraud in the stock markets have a knowing yet silent accomplice in plain sight yet the market says nothing, investors are in the dark and the SEC is powerless to intervene.
Public companies distribute their press releases to the market and the world by using one of several Press Release/news dissemination services. The largest of these are Business Wire and PR Newswire. In the first few words of the body of every press release you will see the name of the distribution service clearly stated.
These Press Release distributors charge a fee to their clients depending upon the length of the release and upon the level of distribution the client wants. Fees can range from around $100 for a release of limited size and distribution plus wire services to $1,500 and more for broad distribution into newspapers, publications and services globally.
Both private and public companies can publish just about any kind of statement about themselves they want so long as the release isn't completely and blatantly illegal or immoral. All they have to do is sign up for the service and pay the fee. Unfortunately, part of the press release distributors obligation is NOT to check for the accuracy of a company's representations. Since the lies these scoundrels tell are usually about themselves in some regard, it isn't logical to expect these distributors to check every claim for its veracity. Instead these services take great pains to disclaim any responsibility for what is being said by their clients. Heck, they aren't writing the release, just putting them out over the wire. Assuming the proper checks and balances are in place, this process would seem logical and appropriate.
Still, this process creates fertile soil for fraud and, as is always the case, where there is a clear opportunity to rip off investors, the professional criminals along with businessmen of every ilk yet sharing a common shortcoming, the complete lack of moral fibre, are not far behind. It should come as no surprise to anyone then, that many of the 10b-5 violations prosecuted by the SEC are the result of materially false and/or misleading press releases issued by dishonest company officers and unscrupulous stock promoters.
Such is the nature of the financial community and nothing will change that tendency yet, with the proper checks and balances, it can still function for the investing community. We will get to the lack of those all important checks and balances and why the individual investor is still at great and unnecessary risk in just a moment but first, let's continue exploring the process and explore yet another problem built into it.
When press releases are submitted over the "wire" they are captured and displayed by hundreds of internet based quotation systems and financial web pages by virtue of their stock trading symbol. Yet, each individual service or website decides which press release and news services' releases they will capture and display. From almost universal capturing of the primary providers, Business Wire and PR Newswire, to less penetration by the second tier providers like MarketWire and PrimeZone each provider's releases are captured by a differing number of websites.
Only a few websites actually provide the investor with virtually all of the available information linked to the various public companies. Even the most frequented, Yahoo.com and the industry itself at nasdaq.com fall amazingly short of publishing all the news and announcements that are released. Of course, this fact is not prominently displayed and easily found by the user. It is, instead, buried in the terms and conditions or elsewhere in the vast inner reaches of their sites. The two best web sites for publishing most if not all the information that comes out are Wallstreetcity.com and pcquote.com. For this reason, we recommend that all individual investors use one of these sites for all their news and stock information needs. (we are not affiliated with these folks and were not paid to say that either).
This creates a problem for the individual investor who logs on to Yahoo every day to check his/her stocks and is completely unaware of the fact that some relevant news was published about one of his stocks simply because Yahoo had chosen not to capture news from that specific distributor. This can be even more troubling if the investor notices a dramatic change in one of their stock's price yet sees nothing to explain it in the way of news on the quote page (simply because Yahoo didn't carry it) and trusts that, if it was important, it would be there. Big mistake, HUGE! Of course, Yahoo and the rest of the financial sites have well crafted disclaimers as well so you can forget having any luck in passing the blame on to them. After all, you should have been smart enough to spend an hour or so digging around in our fine print and familiarizing yourself with what we don't do for you before you ever trusted us you foolish investor.
Investors have a right to know all the news, developments and information available about their stocks when they log on to their favorite financial web site or be warned most clearly each and every time of the fact that they could be missing essential information.
Additionally, although press release distributors will say they discourage third parties from using stock symbols to link their opinion based promotional materials to a public company's stock by using the company's stock symbol, often times those promotional pieces will also be displayed along with the press releases issued by the companies themselves. Also attached to a company's symbol and available on most quotation systems and financial websites are the "hard" news stories about individual public companies that are published by the mainstream news media such as the DOW Jones NewsWire and Reuters to name but two.
The PR distribution industry is both competitive and matured and, as a result, companies can get the information they choose out to the world, quickly and cost effectively. Everything from simple "disclosure" releases with only the minimum facts as required by law to full blown promotional pieces that extol the virtues of just about any occasion or situation the company is experiencing or that management can dream up, regardless of how feeble the information's relationship is to the truth, can be on the wire within minutes of submitting it to one of these distributors.
Unfortunately for the innocent investors, especially in the world of the Bulletin Board and Pink Sheet stocks, a simple cold call to a company about exploring the possibility of discussing the concept of possibly negotiating a working relationship at some time in the future can magically turn into a "strategic alliance" between the two companies in a press release. A grant application to the government which hasn't even been filed, can suddenly be deemed to be "close to approval". A non-existent and completely fabricated "buy" recommendation, supposedly issued by an established investment house, that was simply conjured up in the devious mind of a stock manipulator can suddenly show up in a press release with all the apparent credibility of a highly respected Merrill Lynch telecommunications analyst's recommendation on a NYSE company. (OK, bad choice for an analogy but you get the point).
Since press releases by companies are not subject to verification of accuracy or truthfulness by the services that distribute them, the investing public has no idea that any of them are anything but reliable and truthful information and only subject to the usual safe harbor provisions which say, "all this might never happen as stated". Sadly it doesn't say, "every word here could just as easily be a big fat lie intended only for the purpose of ripping off the investing public and enriching the promoters and insiders".
It is true that, companies that manipulate their stocks through false or misleading press releases can be, and often are, held accountable by the SEC but, unfortunately, this can often take several years to come to light and that is long after the proverbial horse has left the proverbial barn and all that remains is the pain of loss and the bad taste left in the investor's mouth from another betrayal of trust.
There are only a handful of groups that work to inform the public about scams and rip offs by public companies that use illegal or questionable tactics in promoting their stock. These tactics usually include the publishing of false or misleading press releases. Our-Street.com is one such group. You would think, with so many companies pumping their stock and so few of us exposing them, that we would have our collective hands full just writing enough reports and complaints. Sort of a case of "So much crime- So little time". However, writing and publishing the reports is only a part of the problem because of stock fraud's silent accomplice.
None of the primary or second tier press release distributors, with the exception of M2 PressWire, Europe's largest distributor but a lesser player in the US markets, will allow companies like Our-Street.com to issue a truthful press release through them that sheds a negative light on any public company, whether a customer of theirs or not. We want to applaud the courage of M2 PressWire for being the ONLY distributor we have found to show the courage to actually act as a legitimate news portal and allow both sides to be heard. We respect the fact they recently were called upon to test that courage and, upon reviewing our practices have determined that our releases are accurate and fairly represent newsworthy information and as such have allowed us to continue. Of course M2 PressWire, like the others, do not attest to the accuracy of our releases anymore than they attest to the accuracy of the other releases they distribute. As a result of their courage, we want to recommend them to anyone wishing to distribute news about their company. They also happen to be the most cost effective as well. We suggest everyone check them out and consider giving them some of your business. (this endorsement was not solicited or paid for)
The reasons the other distributors give are as varied as the services themselves. We have been told that "policy prohibits third party releases". Stated simply, this means that a press release must be about your company and cannot be about, and therefore linked to, another. We have been told, "It simply isn't worth it" to have the subject of a release call and yell at us until we give up and pull the release. We have been told that, that the company itself "owns" the symbol and any press release by a third party must be approved by the company before distributing. Of course, the simple fact is that the National Association of Securities Dealers (the NASD) assigns trading symbols to companies in order to facilitate an orderly market and since a pubic company cannot, to our knowledge, sell a symbol, we doubt very much if they own them either. Finally, we have simply been told that the simple and factual press releases we issue are not something they are willing to distribute.
We know the services' refusal to accept the releases published by the small band of watchdogs is not based upon the accuracy of the releases themselves since accuracy is not a concern regarding the thousands of public companies issuing through them every day. Besides, aside from the companies we expose, no one has ever challenged the truthfulness of one of our releases and no one has ever proven that one of our press releases is anything but completely accurate.
We believe that, by distributing press releases for public companies without regard to truthfulness while simultaneously blocking all attempts by those groups who would expose the lies, the industry has virtually eliminated the all-important checks and balances we mentioned earlier and effectively become a willing accomplice and facilitator in the ongoing problem of stock manipulation and fraud. We have written both PR Newswire and Business wire and asked them to comment on this problem. In our email we explained our perception of the problem and closed with these two paragraphs:
"By allowing fraudulent press releases to be distributed while refusing to distribute press releases exposing these frauds to the public, it seems as if you are creating an uneven playing field. Wouldn't you serve the public and the industry better by allowing both to be distributed thereby taking a truly neutral position of news portal and not that of facilitator and protector?
How do you justify providing a service which distributes fraudulent press releases while protecting the criminals against exposure by refusing press releases from companies such as Our-Street.com?"
You will note we do not differentiate between "knowingly" and "unknowingly" distributing these releases since no effort is made to discern between the two. All services recognize that some of the releases they distribute are fraudulent and thusly they "know" that each press release could be fraudulent yet they distribute them anyway. To date, we have not received a response. We will publish them here if we get one but don't hold your breath.
So, why do these companies shy away from distributing releases which expose the lies of the unethical companies? The reasons are not totally clear but we have a theory which we feel is most likely. It is based upon our experience and our conversations with industry types from both sides of the equation. When a company issues a fraudulent or false or misleading press release the only one to complain at the time would be the individual investor and a few watchdog sites like Our-Street.com who are skilled at exposing the well crafted lies of the dishonest corporate executives and unscrupulous stock promoters. None of us have the leverage or resources necessary to intimidate a BusinessWire or PRnewswire into retracting a press release. They simply say, "The only one who can pull a press release is the company that issued it".
On the other hand, when something negative is published about a public company, the press release distributor knows full well, or will quickly find out, that that company or its attorney will probably be on the phone threatening that service with all kinds of unspeakable horrors while using disturbing phrases like "illegal short selling" and "manipulating the stock down". This kind of talk has a tendency to cloud even a rational person's thinking to the point where they forget that the fraudulent and misleading press releases being exposed were themselves designed to manipulate the stock to irrational heights so as to allow people who were given vast quantities of stock to promote those lies could sell their stock while innocent investors are buying the stock based upon those lies.
Simply put, it isn't risky in the least to let public companies publish false or misleading press releases and satisfying customers (releasing what they submit) is an important part of doing business. It does, however, require principal and a willingness to stand for something to take on even one of the few watchdogs as customers knowing that you will have to take some heat for doing the right thing. When you compare the thousands of public companies (the core of their business) against the few watchdogs (unnecessary irritants), allowing them to expose the lies of even a few of those solid paying customers could at the very least prove upsetting and in the worst case, could cost you some business or make you (gasp) have to defend what is right. In business today on both sides of the Atlantic, these qualities are rare indeed.
In conclusion, individual investors today are faced with two significant challenges when it comes to staying informed and on top of their equity investments.
1. The lack of consistent and effective distribution of releases throughout the internet. This requires an awareness of the limitations of ones financial website regarding how much of the relevant information they capture as it is released. CHOOSE YOUR QUOTE SITE CAREFULLY!
2. Trying to discern the truth from the lies within a system that facilitates the distribution of fraudulent, false or misleading press releases while sheltering the perpetrators from those who would expose them. (SUBSCRIBE AND SUPPORT OUR-STREET.COM)
These two challenges are responsible for untold losses as investors find themselves buying when they wouldn't and not selling when they would, if only they knew the truth, a truth which was out there but unavailable to them because their web site failed to inform them of their limitations or stock fraud's silent accomplice kept the news off the wire and out of sight. Something needs to change if we are ever going to successfully take back Our Street!
NOTE: If you like this editorial, please share it with as many people as you can. The only way things will ever change is if we all become informed and demand a change. If you wish to write someone to complain, write these people or your favorite business news reporter and complain long and loud.
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