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Securities and Exchange Commission v. Mandaci

September 27, 2004

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
GURSEL MANDACI, DEFENDANT.



The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

OPINION, INJUNCTION AND ORDER

This matter, in which Plaintiff Securities and Exchange Commission ("SEC" or"Plaintiff") seeks injunctive and monetary relief in connection with an alleged "pump-and-dump" scheme operated by Defendant Pro Se Gursel Mandaci ("Mandaci" or"Defendant"), comes before the Court on the parties' cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. *fn1 The SEC alleges that Mandaci purchased certain stocks and then endeavored to artificially inflate the market prices of those stocks by posting false information and making groundless price predictions on Internet message boards before selling out his positions in those stocks in order to make a profit. The SEC contends that Mandaci's fraudulent scheme violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C.A. § 77q(a) (West 2004), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.A. § 78j(b) (West 2004), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The SEC seeks a permanent injunction restraining Mandaci from future violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, an order requiring Mandaci to disgorge any gains he received from his allegedly unlawful conduct plus prejudgment interest, and an order requiring Mandaci to pay a third-tier civil penalty pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.

The Court has considered thoroughly all of the submissions the parties have made in connection with the instant motions. For the following reasons, Plaintiff's motion for summary judgment is granted, and Defendant's cross-motion for summary judgment is denied.

BACKGROUND

The following facts are undisputed except where specified otherwise. Defendant Gursel Mandaci is a foreign national who entered the United States on a student visa in 1996. (Mandaci Test. at 8, Exh. 2 to Declaration of James S. Kasmarcik ("Kasmarcik Decl.").) Mandaci was a student at Baruch College and has been employed as a driver for Victory Car Service. (Id. at 6-8.) Mandaci has not formally studied finance or the stock market. (Id. at 9.)

In February 1999, Mandaci opened an online margin trading account on E*Trade. (Id. at 9.) Mandaci made an initial deposit of $2,000.00 into the account on March 3, 1999, and then deposited an additional $3,500.00 into the account on April 5, 1999. (E*Trade Production at 001005, 001014, Exh. 3 to Kasmarcik Decl.) Throughout the rest of 1999, Mandaci lost money in connection with his E*Trade account. (Id. at 001010-001033.) Then, in early 2000, Mandaci began posting messages on Internet bulletin boards. (Mandaci Test. at 13-14, Exh. 2 to Kasmarcik Decl.) At around the same time that Mandaci began posting these messages on the Internet, Mandaci started to make a profit in connection with his E*Trade account. (Id.)

The SEC has proffered undisputed evidence that Mandaci purchased shares of six companies and, after making the purchases, began posting messages on Internet bulletin boards touting those stocks and predicting that the prices of those stocks would rise to certain target levels. After the prices of those stocks began to rise but before the prices reached Mandaci's predicted target levels, Mandaci sold his positions in those stocks at a profit.

Parallel Technologies, Inc.

On February 7, 2000, Mandaci, through his E*Trade account, bought 25,000 shares of stock in Parallel Techologies, Inc. ("PLLK") for $3,519.95 at a price of $0.1400 per share. On that same day, Mandaci purchased an additional 2,750 shares of PLLK stock for $391.20 at a price of $0.1350 per share. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.).

After purchasing the stock, Mandaci, using multiple screen names, posted numerous messages on the Yahoo! Finance Internet message board from February 7, 2004, through February 9, 2004, touting PLLK's stock. In his postings, Mandaci also set various shortterm target prices for PLLK stock. (Mandaci PLLK Internet Postings, Exhs. 5-12 to Kasmarcik Decl.) Mandaci changed his target price in successive postings (after setting his target price at $2.00 per share, he lowered it to $0.50-$0.60 before raising it again to $0.75), some of which were only a few minutes apart. (Id., Exh. 8 to Kasmarcik Decl.) According to Mandaci, his messages recommending the stock were premised largely on information about the company's revenues and customer base found on the company's website. (Mandaci Dep. at 21-23, Exh. 1 to Kasmarcik Decl.) However, after buying the shares of PLLK stock and posting the messages, Mandaci telephoned the company whose website he had reviewed and learned that the company whose information on which he was relying was not PLLK, but rather another privately held company named Parallel Technologies, Inc. ("PT"). (Id. at 24.) In addition, Mandaci, using various screen names, had posted multiple messages on February 7, 2000, and at least one more message on February 9, 2000, touting PLLK, but actually containing language copied from a 1999 press release referring to PT. (Mandaci PLLK Internet Postings, Exs. 5,6, 11, 12 to Kasmarcik Decl.; PT Press Release Exh. 13 to Kasmarcik Decl.). Mandaci testified that he believes that he made a posting identifying his mistake after he learned that he had been relying on information about the wrong company, but was unable to proffer any documentation relating to such a posting. (Mandaci Dep. at 17, 39-40, Exh. 1 to Kasmarcik Decl.)

On February 9, 2000, Mandaci sold his shares of PLLK stock at prices ranging from $0.3600 to $0.3650 per share, for a total profit of $6,127.36. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.) According to the SEC, PLLK's stock experienced a sharp increase in trading volume and share price beginning on February 7, 2004, despite no reported news regarding the company. (PLLK Chart, Exh. 14 to Kasmarcik Decl.) On February 8, 2004, the day after Mandaci began posting messages relating to PLLK, the company's trading volume peaked at more than six million shares, after having traded at less than two million shares per day the week before. (Id.) PLLK's stock price peaked at $.3800 per share on February 9, 2000, the day that Mandaci sold his position in PLLK stock, before declining dramatically in the days to follow. (Id.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding PLLK ceased after he sold his position in that company. At the time Mandaci began posting messages touting PLLK stock, PLLK's most recent SEC filing containing financial information, a Form 10-K for fiscal year 1993, reported net losses of $1,581,542. (PLLK Form 10-K at 9, Exh. 4 to Kasmarcik Decl.)

PayForView.Com

On February 15, 2000, Mandaci bought 20,000 shares of PayForView.Com ("PAYV") stock at $0.6000 per share for $12,019.95 through his E*Trade account. Mandaci then bought an additional 2,800 shares of PAYV stock at $0.7700 per share for $2,175.95 on February 16, 2000, and an additional 9,760 shares of PAYV stock at $0.8300 per share for $8,120.75 on February 18, 2004. (E*Trade Production at 001038-001039, Exh. 3 to Kasmarcik Decl.)

Subsequent to making his initial purchase of PAYV stock, Mandaci, using multiple screen names, posted at least five messages on the Yahoo! Finance and ClearStation Internet message boards recommending PAYV stock. (Mandaci PAYV Internet Postings, Exhs. 16-20 to Kasmarcik Decl.; Mandaci Dep. at 40, 41, 42, 46, 47, 49, Exh. 1 to Kasmarcik Decl.) On February 15, 2000, Mandaci posted at least two messages on the Yahoo! Finance message board, touting PAYV as a "STRONG BUY" and predicting that the market price would make a "QUICK JUMP TO $1-$1.5 RANGE." (Mandaci PAYV Internet Postings, Exhs. 16,17 to Kasmarcik Decl.) Mandaci also posted information about PAYV on his own "Weekly Penny Picks" website. (Mandaci Dep. at 45, Exh. 1 to Kasmarcik Decl.) Mandaci testified that these recommendations were based on information that he saw posted on message boards and the fact that the stock was trading at unusual volume. (Id. at 42-44.) On February 18, 2000, Mandaci posted a message on the Yahoo! Finance message board stating, inter alia, that the price of PAYV stock was on the up trend and targeted to reach $2.00 over the short term. (Mandaci PAYV Internet Postings, Exh. 18 to Kasmarcik Decl.) On February 20, 2000, Mandaci posted a message on the ClearStation message board predicting that PAYV stock would reach a target price of $10.00 in the short term, and referring readers to the Weekly Penny Picks website, which, according to the posting, had set a $25.00 target price. (Id., Exh. 19 to Kasmarcik Decl.) The message failed to inform readers that Mandaci, himself, was solely responsible for the content of the Weekly Penny Picks site. On February 22, 2000, Mandaci posted another message on the Yahoo! Finance board calling PAYV a strong buy with a "12 Months Target Price $25.00." (Id., Exh. 20 to Kasmarcik Decl.)

On February 16, 2000, Mandaci sold 2,500 shares of the PAYV stock he had bought for $0.8200 per share. On February 23, 2000, Mandaci sold 19,760 shares at $0.9000 per share. (E*Trade Production at 001038-001039, Exh. 3 to Kasmarcik Decl.) According to the SEC, Mandaci's trading in PAYV stock between February 15, 2000, and February 23, 2000, resulted in a total profit of $5,284.56. The SEC asserts, and Mandaci does not dispute, that Mandaci seems to have made no postings relating to PAYV after February 23, 2003. According to the SEC, during the time Mandaci was touting PAYV, trading volume in PAYV increased from less than 1.5 million shares on February 14, 2000, to approximately 4 million shares on February 24, 2000, and the price of PAYV's stock rose from $0.53 to a high of $1.50 per share on February 24, 2000. (PAYV Chart, Ex. 21 to Kasmarcik Decl.)

Power Technologies, Inc.

On February 10, 2000, Mandaci bought 7,500 shares of Power Technologies, Inc. ("PWTC") stock through his E*Trade account for $9,394.69, or $1.2500 per share. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.) Later that day, Mandaci purchased another 100 shares of PWTC stock for $122.26, or $1.2200 per share. (Id.)

After these purchases, Mandaci posted at least three messages on the Yahoo! Finance and ClearStation message boards touting PWTC stock. Hours after making the second purchase of PWTC shares, Mandaci posted a message on the ClearStation board stating that PWTC looks strong and that the float would be 7 million, and predicting that the price would be "GOING TO $3.00 SOON." (Mandaci PWTC Internet Postings, Exh. 23 to Kasmarcik Decl.) Mandaci testified that he based his prediction on information found on web pages and other Internet message boards. (Mandaci Dep. at 69-70, Exh. 1 to Kasmarcik Decl.) Mandaci posted another message on the ClearStation board on February 10, 2000, stating that PWTC was a strong buy with a float of only 2 million shares and a "12 Months Target Price $20.00." (Mandaci PWTC Internet Postings, Exh. 24 to Kasmarcik Decl.) Mandaci testified that he "cut and paste" the target price information from another website, although he could not recall with certainty which one (he thought it might have been the issuing company's site but was unsure). (Mandaci Dep. at 71-72, Exh. 1 to Kasmarcik Decl.) On February 14, 2000, Mandaci posted a message on the Yahoo! Finance board stating, inter alia, that PTWC was on a strong uptrend with a float of only 2 million, and referring readers to a full story about the company on the Weekly Penny Picks website. (Mandaci PWTC Internet Postings, Exh. 25 to Kasmarcik Decl.) Again, Mandaci failed to inform readers that he was responsible for the content on the Weekly Penny Picks site.

On February 11, 2000, Mandaci sold 1,600 shares of PWTC stock for $1.2200 per share. On February 15, 2000, Mandaci liquidated the remainder of his position in PWTC, selling 7,540 shares at prices ranging from $1.6100 to $1.6250 per share. By virtue of his trading in PWTC stock from February 10, 2000, through February 15, 2000, Mandaci made a profit of $2,141.01. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding PWTC ceased after he sold his position in that company. According to the SEC, PWTC stock experienced an increase in trading volume, from less than 350,000 shares on February 9, 2000, to over 1.8 million shares on February 10, 2000, and market price, from less than $1.00 per share on February 9, 2000, to $2.00 per share on February 16, 2000, despite a lack of any reported news about the company. (PWTC Chart, Exh. 26 to Kasmarcik Decl.) At the time that Mandaci began posting messages touting PWTC stock, PWTC's most recent SEC filing containing financial information, a Form 10-QSB for the period ended October 31, 1999, reported a net loss of $460,909 for the nine months ended October 31, 1999, and a shareholder deficit of $193,172. (PWTC Form 10-QSB at 2,6, Exh. 22 to Kasmarcik Decl.)

Internet Businesses International, Inc.

On February 23, 2000, Mandaci bought 27,500 shares of stock in Internet Businesses International, Inc. ("IBUI") through his E*Trade account for $17,748.95 at prices ranging from $0.6250 to $0.7500 per share. ...


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