It began with a trading suspension. Continued the next year with the filing of an enforcement action. Persisted through a preliminary injunction. Now it has largely ended with the settlement of the CEO and CFO with the Commission. It’s the story of Spongetech Delivery Systems, Inc., its principals and attorneys and a huge pump and dump manipulation. SEC v. Spongetech Delivery Systems, Inc., Civil Action No. 10-cv-2031 (E.D.N.Y. Filed May 5, 2010).
Beginning in 1999 Spongetech sold a single product, a pre-soaped sponge. Sales were lackluster. By early 2007 CEO Michael Metter and CFO Steven Moskowitz, along with the company began telling the public about new customers, new sales orders and new revenue Spongetech. The stock price climbed. The tales of new customers and revenues were repeated in filings made with the Commission. The claims were false, according to the complaint.
Stock promoter George Speranza helped boost the climbing stock price with internet websites and virtual office space for the fictitious customers with whom the company claimed to do business. As the stock price increased Messrs. Metter and Moskowitz began distributing 2.5 billion Spongetech shares through affiliate RM Enterprises Inc. and others. The shares were not registered. Attorneys Pensley and Halperin, both named as defendants, facilitated the process with false opinions given to the transfer agent. The restrictive legends were removed from the shares
Illicit profits from stock sales were plowed back into the operation of the scheme, according to the complaint. Messrs. Metter and Moskowitz advertised the company with professional sports teams. Deals were made with teams in Major League Baseball, the National Football League, the National Basketball Association, the National Hockey league and the United States Tennis Association.
By October 2009 Spongetech was delinquent in its periodic filings. There were questions about the reliability of the available financial information. The Commission suspended trading in the shares of the company. See Exchange Act Release No. 60788 (Oct. 5, 2009).
Seven months later the SEC filed a civil injunctive action against the company, its principals, affiliate company and former attorneys. The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 15(d). At about the same time the U.S. Attorney’s Office for the Eastern District of New York brought criminal charges against Messrs. Moskowitz and Metter.
By July 2010 the company filed for bankruptcy. The next year the Court granted the Commission’s motion for a preliminary injunction against six defendants. Asset freezes against Messrs. Metter and Moskowitz and RM Enterprises were entered.
Now defendants Metter Moskowitz have settled with the Commission. Each consented to the entry of a permanent injunction. Under the orders entered by the Court each man will also be barred from serving as an officer or director of a public company and from engaging in any penny stock offering. The Court will determine the amount of the disgorgement and penalty to be paid by each defendant at a later date. In the parallel criminal case Mr. Moskowitz pleaded guilty to securities fraud. Charges are pending against Mr. Metter. See also Lit. Rel. No. 22586 (Jan. 4, 2013).