Chief Officers of Spongetech Delivery Systems, Inc., Arrested and Charged with Conspiracy to Commit Securities Fraud and Obstruction of Justice
CEO and CFO Defrauded Shareholders by Reporting and Touting Phony Sales Figures That Overstated Actual Revenue and Then Obstructed SEC’s Investigation
A criminal complaint was unsealed this morning in federal court in Brooklyn charging Michael Metter, the Chief Executive Officer and President of Spongetech Delivery Systems, Inc. (Spongetech), and Steven Moskowitz, Spongetech’s Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer, and Secretary, with conspiracy to commit securities fraud and obstruction of justice.1 The defendants’ initial appearances are scheduled to be held later today before United States Magistrate Judge Ramon E. Reyes, Jr., at the United States Courthouse, 225 Cadman Plaza East, Brooklyn, New York.
The charges were announced by Loretta E. Lynch, United States Attorney for the Eastern District of New York, George Venizelos, Special Agent-in-Charge of the Federal Bureau of Investigation, New York Field Office, and Patricia J. Haynes, Special Agent-in-Charge, Internal Revenue Service, Criminal Investigation, New York.
As alleged in the complaint, between approximately January 2007 and May 2010, the defendants Michael Metter and Steven Moskowitz, and others, executed a scheme to defraud Spongetech’s existing and potential investors by publicly reporting — in its filings with the United States Securities and Exchange Commission (SEC) and in numerous press releases — false and grossly overstated sales figures. Specifically, Metter and Moskowitz publicly reported that Spongetech had secured purchase orders from and/or had made sales to five customers that, in reality, did not exist. The complaint charges that the amounts of these orders and sales were material. For example, for the nine months ended February 28, 2009, Spongetech reported that sales to these five customers constituted approximately 99% of Spongetech’s revenue.
The complaint states that beginning in or about early September 2009, the SEC’s Enforcement Division issued subpoenas to various entities and individuals, including Metter and Moskowitz, as part of its investigation of Spongetech. Since then, Metter and Moskowitz allegedly obstructed the SEC’s investigation by fraudulently attempting to fabricate the existence of the five purported customers by (1) seeking to create Internet websites and virtual offices for the customers, (2) furnishing phony purchase orders purportedly issued by the customers, and (3) producing documents they falsely claimed were proof of payments by the non-existent customers.
According to the complaint, Spongetech designs, produces, markets, and sells various cleaning care products, including pre-loaded soap sponges such as the SpongeBob SquarePants soap-filled bath sponges for children. Its headquarters is in New York City, and its shares trade over the counter.
“The defendants in this case — Spongetech’s highest corporate officers — are charged with executing a bold scheme to portray Spongetech as a company that was performing at a level far above reality,” stated United States Attorney Lynch. “As detailed in the complaint, the audacity of their scheme was matched only by their obstructive efforts during the course of the SEC’s investigation. This Office will use all available resources to protect investors from fraud.”
Ms. Lynch thanked the SEC for its assistance. The SEC today filed a corresponding civil complaint in the United States District Court for the Eastern District of New York.
FBI Special Agent-in-Charge Venizelos stated, “As charged in the complaint, the blatant fraud carried out by these defendants went beyond fictitious reporting of sales and receivables to inflate Spongetech’s financial condition. They allegedly created out of whole cloth the very existence of some of the companies with which they claimed to have done business. The FBI is committed to protecting investors and preventing the windfall of unjust enrichment that comes of fraudulent schemes like this one.”
IRS Special Agent-in-Charge Haynes stated, “These recent enforcement actions should serve as a continued warning to those involved in financially based fraud schemes. IRS Criminal Investigation remains committed with our law enforcement partners in bringing those responsible to justice.”
If convicted of conspiracy, each defendant faces up to five years’ imprisonment.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
The government’s case is being prosecuted by Assistant United States Attorneys William E. Schaeffer and Jeffrey A. Goldberg.
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