Securities Law Blog

Spongetech Delivery Systems Inc.’s two top executives were arrested May 5, 2010 for their alleged involvement in a conspiracy to commit securities fraud and obstruction of justice. According to the criminal complaint, filed by the U.S. Attorney’s office in Brooklyn, New York, Spongetech’s president and CEO Michael Metter, and chief operating officer Steven Moskowitz allegedly defrauded investors by reporting exaggerated sales figures in an effort to boost interest in the company’s stock.

The Securities and Exchange Commission (SEC) also charged the pair, along with Spongetech, its affiliate, RM Enterprises International, Inc., two of the company’s former attorneys, Jack Halperin and Joel Pensley, and stock promoter George Speranza.

The SEC alleges Metter and Moskowitz ran a typical pump-and-dump scheme in which they deceived investors into believing they were buying stock in a highly successful company that sells soap-filled sponges. Beginning in 2007, Spongetech issued dozens of phony press releases and fraudulent SEC filings boasting larger sales orders and revenue. The company claimed there were five primary customers who made up 99% of sales adding up to millions of dollars in business. The SEC claims, that Speranza even went so far as to create websites and rent office space, in an attempt to legitimize the customers.

According to the SEC complaint, Metter, Moskowitz, Spongetech and RM Enterprises used “false and baseless” attorney opinion letters by Pensley and Halperin to distribute shares of Spongetech to the public. False and misleading attorney letters were also forged in Pensley’s name and in the name of a fictitious lawyer, and then distributed to Spongetech’s transfer agents.

After flooding the market with the false information, in order to inflate the stock prices and pump up demand, Metter, Moskowitz, and Spongetech allegedly dumped approximately 2.5 billion shares by illegally selling them to the public through affiliated entities in unregistered transactions, according to the SEC claims.

Trading in Spongetech was suspended by the SEC on October 5, 2009, when questions began to arise regarding the accuracy of the company’s press releases and SEC filings.