I never thought I would see a headline like this one. But earlier today CEO Michael Metter and CFO Steven Moskowitz were arrested and charged by the SEC for defrauding investors. Metter and Moskowitz are the top executives of SpongeTech Delivery Systems Inc. – a company that makes the SpongeBob SquarePants and other soap-filled bath sponges. The two were charged with conspiracy to commit securities fraud and obstruction of justice. Among other things, the SEC is claiming that the two:
- Created fictitious customers for fictitious sales – According to the SEC, for the nine months ended in February 2009, the five nonexistent customers constituted about 99 percent of SpongeTech’s revenue.
- As the SEC began its investigation, Metter and Moskowitz hired a consultant who began creating fake websites and contact information for the non-existent customers.
- Filed false SEC reports with fraudulent financial statements.
- Issued press releases stating how well the company was doing to pump up the penny stock- while at the same time illegally trading their own shares.
- Used the fictitious revenues to purchase ad space in stadiums across the country, then not paying for the space.
The executives denied any wrongdoing today, but with the list of evidence the SEC seems to have, it’s going to be tough to argue their way out of this one. If convicted, the two could face up to 5 years in prison as well as a host of fines. This case could also end up being the largest penny stock fraud ever. SpongeTech shares fell 83 percent to less than 1 cent today, compared to a high of 35 cents. This will definitely be an interesting case to watch.