Source: https://www.sec.gov/litigation/complaints/comp18173.htm
Timestamp: 2019-04-19 16:20:16+00:00

Document:
1. The Commission brings this action to prevent Defendants from violating the registration and antifraud provisions of the federal securities laws in connection with the unregistered offering of securities by Defendant Public Communication Services, Inc. n/k/a Sprawlnet.com, Inc. ("Sprawlnet" or "the Company"). Sprawlnet was a "diversified communications services company" that concentrated on the pay telephone, prepaid phone card and Internet search engine/portal businesses. From at least May 1997 through August 2001, Sprawlnet, its principal, Defendant Alfredo Susi ("Susi"), and one of its top sales agents, Defendant Richard Balber ("Balber"), raised approximately $7 million from more than 300 investors nationwide through an in-house boiler room operation of unlicensed sales agents. Sprawlnet's offering materials, disseminated to prospective investors, contained material misrepresentations and omissions concerning, among other things, Sprawlnet's use of investor proceeds, commissions paid to Sprawlnet's sales representatives, the status of a purported upcoming Initial Public Offering ("IPO") of Sprawlnet's stock, the Company's operations, the safety of the investment, and price predictions for Sprawlnet's stock. Sprawlnet's unlicensed sales agents repeated and expanded upon these written misrepresentations in telephone solicitations of investors. These misrepresentations and omissions of material facts to investors in connection with their investments resulted in losses of millions of dollars.
2. Sprawlnet is a Florida corporation, incorporated in December 1989, with principal offices located at 1811 N.E. 146th Street, North Miami, Florida.
3. Susi is 50 years old and resides in North Miami Beach, Florida. Susi is the principal owner, chief executive officer and president of Sprawlnet.
4. Balber is 51 years old and resides in Hollywood, Florida. Balber was Sprawlnet's vice president of marketing.
5. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d) and 77v(a); and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d), 78u(e) and 78aa.
6. This Court has personal jurisdiction over the Defendants and venue is proper in the Southern District of Florida because many of the Defendants' acts and transactions constituting violations of the Securities Act and the Exchange Act occurred in the Southern District of Florida. In addition, the principal offices of Defendant Sprawlnet are located in the Southern District of Florida and Defendants Susi and Balber reside in the Southern District of Florida.
7. The Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, the means and instruments of transportation and communication in interstate commerce, and the mails, in connection with the acts, practices, and courses of business set forth in this Complaint.
8. Sprawlnet operated a "diversified communications services company" specializing in the pay telephone, prepaid phone card and Internet search engine/portal business.
9. Purportedly to fund the operations, the Defendants raised money from the general public by offering potential investors securities in the form of common stock. Sprawlnet offered these securities from at least May 1997 through August 2001, and raised at least $7 million from more than 300 investors throughout the country. Sprawlnet accepted investors' funds without regard to their accreditation status, and required no minimum investment.
10. Sprawlnet solicited investors over the Internet and through approximately ten in-house sales representatives working from lead lists. The sales representatives operated in a typical boiler room manner, pitching the investment through unsolicited telephone calls.
11. The sales representatives used a telemarketing script that Susi primarily prepared to introduce the Company to prospects.
12. After they introduced Sprawlnet's investment opportunity, the Company would send the prospect (by overnight delivery) certain marketing and offering materials. These materials included, among other things, a Private Placement Memorandum ("PPM"), Sprawlnet newsletters, a list of references, copies of Sprawlnet press releases, a one-page letter signed by Susi, a three-page description of Sprawlnet, the investor subscription agreement, forms so an investor could establish an individual retirement account to invest in Sprawlnet securities, and payment instructions.
13. No registration statement was filed or was in effect with the Commission in connection with the securities Sprawlnet offered and sold. Moreover, Sprawlnet did not require that its sales representatives be licensed.
14. In connection with the offer and sale of its stock, Sprawlnet falsely represented to investors that: (a) unexpended investor funds would temporarily be invested in government securities, certificates of deposit, and high-rated short-term commercial paper; (b) the Company would not pay any commissions for sales its employees made; (c) the Company had obtained audited financial statements; (d) the investment would produce a 100%-600% return when the Company did an IPO in six to twelve months; (e) the Company had the rights to a new "executive infomercial phone"; and (f) an investment in the Company's securities had little or no risk. These material misrepresentations and omissions, as set forth in further detail below, were made knowingly or with severe recklessness by and/or at the direction of Susi and Balber.
15. In the "Use of Proceeds" section of its PPM, Sprawlnet disclosed the intended use of investor funds. With regard to short-term investment of the proceeds, the PPM provided "that the company may temporarily invest any unexpended balances on hand in government securities, certificates of deposit and high-rated short-term commercial paper"- in other words, in secure instruments.
16. In reality, Sprawlnet used investor funds to trade heavily in volatile stocks from the spring through the fall of 1999. One of the first stocks in which Sprawlnet traded heavily was an over-the-counter bulletin board stock. Later, Sprawlnet began day-trading several different NASDAQ and NYSE listed stocks. As a result, Sprawlnet suffered aggregate trading losses of approximately $850,000.
17. The cover page of the PPM for Sprawlnet's offering represented that no commissions would be charged for sales Sprawlnet employees made. Nevertheless, Sprawlnet used a significant portion of investor funds to pay commissions to its sales representatives. The commissions varied, depending on how much money the sales representatives brought in for the month, and whether a sales representative was a "fronter" or a "closer."
18. Fronters received a weekly salary, plus a commission of 1%-2% of the total amount the closers brought in from the fronters' prospects.
19. Closers, on the other hand, were provided weekly advances that were deducted from their monthly commissions, based upon how much investor funds they brought in each month. The closers' commissions ranged from 7% if they brought in less than $12,500 to 15% for bringing in $100,000 or more for the month. Closers also received a $2,000 bonus for bringing in $100,000 or more for the month.
20. Sprawlnet represented to investors at different times that its audit was almost complete or had been completed in preparation for its purported upcoming IPO. Sprawlnet's Fall/Winter 1999 newsletter stated that Sprawlnet's auditors had begun preparing the "facts and figures for our IPO."
21. A year later, Sprawlnet's Fall/Winter 2000 newsletter stated that Sprawlnet's auditors had "finalized the paperwork for our year-end numbers and completed their review..." In addition, throughout the offering, Sprawlnet's sales representatives told investors that Sprawlnet's audited financials were near completion or had been "finalized."
22. Sprawlnet's representations about the status of its audited financials were false. Although Sprawlnet hired an accounting firm in July 1999 to conduct an audit, it was never near completion. Sprawlnet never had a reasonable basis to believe that its auditors had "finalized" their paperwork or "completed their review," because it never fully cooperated with the auditors' requests for material source documents. The auditors never provided Sprawlnet with an audit report or any other written documentation reflecting that the audit had been completed or was near completion. Nor did the auditors ever lead Sprawlnet to believe an audit was near completion.
23. Sprawlnet's Fall/Winter 1999 newsletter stated that "we will see you at the stock exchange when we blow out the New Year with our opening." Also, throughout the offering, Sprawlnet's sales representatives orally represented that Sprawlnet was selling shares in anticipation of conducting an IPO within six months to a year.
24. These statements regarding an IPO were false. Sprawlnet never filed the necessary registration statement with the Commission in order to sell shares publicly.
25. In addition, in March 1999, Sprawlnet hired a consulting firm to assist in its preparations for an IPO, but by the summer of 1999 that consulting company had quit performing any substantive work for Sprawlnet. Further, as discussed in Paragraphs 21 through 23 above, Sprawlnet never had a reasonable basis to believe that its audit had been completed or was about to be completed. Therefore, Sprawlnet's projection of an imminent IPO, constantly reiterated over two years, was baseless in that no substantive progress was ever made on the preliminary steps necessary to complete an IPO.
26. Sprawlnet's Fall/Winter 2000 newsletter falsely discussed the rollout of its new line of executive infomercial payphones, a payphone containing a liquid crystal display that can provide information or advertisements on it that change on a timed basis to airports "near and far." This claim was patently false for several reasons.
27. First, the company designing the executive payphones was still working on the prototype design and was not ready to begin selling the phones.
28. Second, Sprawlnet had never entered into more than preliminary negotiations for distribution rights with the company designing the executive payphone.
29. Finally, Susi told others Sprawlnet had no intention of buying the rights to the executive payphones, but had just wanted to use the information to attract additional investors.
30. Sprawlnet's sales staff told investors that their investment had "no risk" and was "a sure thing" because Sprawlnet would either be going public, would sell the business, or was going to be acquired by a third party.
31. Contrary to these representations, Sprawlnet had not taken any significant steps to go public. Nor was the Company marketable to sell or be acquired since it had few hard assets, was operating at a substantial loss, had limited prospects, had no experience in two market sectors it was entering - prepaid phone cards and the Internet - and was misusing investor funds.
32. In addition, the sales representatives also made predictions regarding the price at which Sprawlnet's securities would trade in the public market. Sprawlnet represented to potential investors that within six to twelve months, pre-IPO stock they purchased at $3 per share would publicly trade at a price of $6 to $21 per share. Sometimes the sales representatives buttressed these statements by providing an independent valuation, which was computed based upon false information provided by the Company, that showed Sprawlnet's shares were worth $8 a share. These statements made to investors were baseless and grossly misleading.
33. As the owner, CEO and president of Sprawlnet, Susi had ultimate decision-making authority at Sprawlnet. He created and approved its PPM, was the sole signature authority over its bank and brokerage accounts, and reviewed all written materials, including but not limited to, letters, marketing materials and newsletters, before Sprawlnet sent them out.
34. Susi was aware that the PPM represented how investor proceeds were to be used. Nonetheless, Susi funneled investor funds into his personal brokerage account to make speculative stock trades with them. Further, Susi was aware that Sprawlnet's newsletters, distributed to investors under his signature, misrepresented Sprawlnet's efforts to get audited financial statements in preparation for its purported IPO and the status of the new executive infomercial payphones. Susi therefore knew or recklessly disregarded that Sprawlnet's representations were false and misleading.
35. Susi also determined the price at which Sprawlnet's shares were sold to investors and was aware, through investor complaints, that Sprawlnet's sales agents were telling investors that Sprawlnet would be going public within six to twelve months with a projected return of 100%-600%. Susi also was primarily responsible for drafting Sprawlnet's telemarketing script that sales agents used.
36. Additionally, Susi had the ability to listen in on the sales agents' telephone calls and did so frequently. Therefore, Susi either knew the sales agents were giving investors false information or was severely reckless in allowing sales agents to misrepresent the Company's upcoming IPO and future rates of return on an investment in Sprawlnet stock.
37. Based on the foregoing and the other allegations set forth in this Complaint, Susi knew, or was severely reckless in not knowing, that Sprawlnet's offering materials, PPM's and oral representations contained the material misrepresentations and omissions set forth in Paragraphs 1 through 32 above.
38. As the vice-president of marketing, Balber solicited investors to purchase Sprawlnet stock and contacted current investors seeking to have them invest additional funds in Sprawlnet. Balber's sole job at Sprawlnet was to sell its stock, and he was consistently one of Sprawlnet's top sales agents, earning income strictly on a commission basis.
39. Balber made oral misrepresentations to investors to convince them to invest in Sprawlnet stock. For instance, Balber, who attended meetings with the auditors, knew that Sprawlnet's audit had not been completed, and that the Company had not taken any significant steps to conduct an IPO. Yet he repeatedly told investors Sprawlnet would be going public within six to twelve months, and told at least one investor Sprawlnet's IPO would be taking place in four days. Additionally, Balber informed several investors that Sprawlnet's shares would go public at $21 a share when he had no basis for predicting that price.
40. Further, although Balber had been involved in meetings with the owners of the executive payphones, and knew they were still in prototype stage and that Sprawlnet had no intention of buying them, he nonetheless touted the payphones to investors as a reason to invest in Sprawlnet.
41. Finally, Balber (who received commissions) knew or was severely reckless in not knowing Sprawlnet's representations that no commissions would be paid were false.
42. Based on the foregoing and the other allegations set forth in this Complaint, Balber knew, or was severely reckless in not knowing, that Sprawlnet's offering materials, PPM's and oral representations contained the material misrepresentations and omissions set forth in Paragraphs 1 through 32 above.
43. The Commission repeats and realleges Paragraphs 1 through 42 of this Complaint.
44. No registration statement was filed or was in effect with the Commission pursuant to the Securities Act and no exemption from registration existed with respect to the securities and transactions described in this Complaint.
45. From at least May 1997 through August 2001, Defendants Sprawlnet, Susi and Balber, directly and indirectly: (a) made use of the means or instruments of transportation or communication in interstate commerce or of the mails to sell securities as described herein, through the use or medium of a prospectus or otherwise; (b) carried securities or caused such securities, as described in this Complaint, to be carried through the mails or in interstate commerce, by any means or instruments of transportation, for the purpose of sale or delivery after sale; and/or (c) made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise, as described in this Complaint, without a registration statement having been filed or being in effect with the Commission as to such securities.
46. By reason of the foregoing, Defendants Sprawlnet, Susi and Balber, directly and indirectly, have violated, and unless enjoined, will continue to violate Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c).
47. The Commission repeats and realleges Paragraphs 1 through 42 of this Complaint.
48. From at least May 1997 through August 2001, Defendants Sprawlnet, Susi and Balber, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by use of the mails, in the offer or sale of securities, as described in this Complaint, knowingly, willfully or recklessly employed devices, schemes or artifices to defraud.
49. By reason of the foregoing, Defendants Sprawlnet, Susi and Balber, directly and indirectly, have violated and, unless enjoined, will continue to violate Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1).
50. The Commission repeats and realleges Paragraphs 1 through 42 of this Complaint.
51. From at least May 1997 through August 2001, Defendants Sprawlnet, Susi and Balber, directly and indirectly, by use of the means and instrumentality of interstate commerce, and of the mails in connection with the purchase or sale of the securities, as described in this Complaint, knowingly, willfully or recklessly: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices and courses of business that have operated as a fraud upon the purchasers of such securities.
52. By reason of the foregoing, Defendants Sprawlnet, Susi and Balber, directly or indirectly, have violated and, unless enjoined, will continue to violate Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder.
53. The Commission repeats and realleges Paragraphs 1 through 42 of this Complaint.
54. From at least May 1997 through August 2001, Defendants Sprawlnet, Susi and Balber, directly and indirectly, by use of the means or instruments of transportation or communication in interstate commerce and by the use of the mails, in the offer or sale of securities, as described in this Complaint: (a) obtained money or property by means of untrue statements of material facts and omissions to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (b) engaged in transactions, practices and courses of business that have operated as a fraud or deceit upon purchasers and prospective purchasers of such securities.
55. By reason of the foregoing, Defendants Sprawlnet, Susi and Balber, directly and indirectly, have violated and, unless enjoined, will continue to violate Sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(2) and 77q(a)(3).
56. The Commission repeats and realleges Paragraphs 1 through 42 of this Complaint.
57. From at least May 1997 through August 2001, Defendant Balber solicited the purchase of securities by the public through a general solicitation for transaction-based compensation. By offering and selling these securities, Defendant Balber was, directly or indirectly, effecting and inducing these investments while not registered with the Commission as a broker-dealer in violation of Section 15(a)(1) of the Exchange Act, 15 U.S.C. § 78o(a)(1).
Declare, determine and find that Defendants Sprawlnet, Susi and Balber committed the violations of the federal securities laws alleged in this Complaint.
(c) Defendant Balber, his officers, representatives, servants, employees, attorneys, and all persons in active participation with them, and each of them, from violating Section 15(a)(1) of the Exchange Act, 15 U.S.C. § 78o(a)(1).
Issue Orders requiring Defendants Susi and Balber to disgorge amounts representing ill-gotten proceeds received as a result of the acts and/or courses of conduct complained of herein, plus prejudgment interest thereon.
Issue Orders directing Defendants Susi and Balber to pay civil monetary penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d); and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).
Issue an Order pursuant to Section 20(e) of the Securities Act, 15 U.S.C. § 77t(e); and Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2); barring Susi from serving as an officer or director of any issuer required to file reports with the Commission pursuant to Sections 12(b), 12(d) or 15(d) of the Exchange Act, 15 U.S.C. §§ 78l(b) and (g), and § 78o(d).

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