Securities Fraud and a Pump-and-Dump Scheme: SEC v. Curshen
In SEC v. Curshen, No.11–CV–20561–JLK, 2012 WL 3755527 (S.D. Fla. Aug. 28, 2012), the United States District Court of the Southern District of Florida granted the Security and Exchange Commission’s (“SEC”) motion for summary judgment against two defendants, Yitzchak Zigdon, an accountant, and Ariav Weinbaum, a businessman, for violations of the antifraud provisions in both the Securities Exchange Act of 1934 and Securities Act of 1933.
This case involved the sale of common stock in a limited private company incorporated in the United Kingdom called CO2 Tech (“CO2” or “the company”). According to the SEC’s allegations, the company had a registered business address in London and purported to have a manufacturing and research development facility in Israel. The company claimed that it had experts with over a decade of experience in the pollution control industry and partnerships/alliances with leading companies and research institutions.
In reality, according to the SEC, CO2’s London office was simply a rented mail drop, and its manufacturing and research development facility could not be located. Additionally, with respect to the officers, the CEO “had not traveled outside of Israel since November 1, 2003” and the President was the CEO’s 72-year-old mother.
Sections 10(b) and 10b-5 of the Exchange Act and Section 17(a) of the Securities Act prohibit certain types of false statements. They also prohibit schemes to defraud. The latter type of violation did not necessarily require a misstatement or omission, but was aimed at a “broader fraudulent scheme.”
The court found that there were no facts in dispute and that the SEC had met its burden establishing violations of Section 17(a) and Rule 10b-5. According to the opinion:
A pump-and-dump stock scheme is a classic violation of these provisions. The actions of Defendants . . . repeatedly violated the anti-fraud provisions of the Securities Act and Exchange Act. Defendants . . . converted C02 Tech into a public company by instructing Defendant Krome to find a public shell corporation; opened a brokerage account at Red Sea management to facilitate the stock manipulation; and directed matching buy and sell orders to artificially inflate C02 Tech's stock value. Individually, Defendant Weinbaum transferred money to Defendant Krome for the shell purchase and hired Defendant Weidenbaum to promote the stock and help organize buy and sell orders. Defendant Zigdon orchestrated the false media campaign surrounding C02 Tech.
The court also found the defendants liable for the sale of unregistered securities under section 5 of the Securities Act. According to the court, the SEC produced undisputed facts showing CO2 sold unregistered shares and that the defendants were “at the very least, necessary participants and substantial factors” in the sale of the shares.
The primary materials for this case may be found on the DU Corporate Governance website.