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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, September 30, 2009

SEC Obtains Preliminary Injunction in Florida Against Microcap Offering Fraud

The SEC announced that, on September 29, the United States District Court for the Middle District of Florida entered preliminary injunction orders by consent against Stephen W. Carnes, Lawrence A. Powalisz, their companies K&L International Enterprises, Inc., Signature Leisure, Inc., and Signature Worldwide Advisors, LLC (collectively, the Stock Distributors), as well as Jared E. Hochstedler and Enzyme Environmental Solutions, Inc. (Enzyme Environmental). The orders enjoin the defendants from violating Sections 5(a) and (c) of the Securities Act of 1933 for the duration of the litigation and, with respect to the Stock Distributor Defendants, order an asset freeze and a preliminary penny stock bar. The Court had already issued a temporary restraining order on September 25.

The Commission's complaint, filed on September 24, alleges that the defendants engaged in an ongoing scheme to evade the registration provisions of the federal securities laws by selling billions of shares of stock issued by microcap companies to the investing public without adhering to the registration requirements of Section 5 of the Securities Act. According to the complaint, the scheme involved a series of transactions between the Stock Distributors and the microcap companies, including Enzyme Environmental (the Issuers), with the same essential characteristics: First, a Stock Distributor either purported to lend money to an Issuer or the Issuer identified a "debt" owed to its officer that the Issuer and officer assigned to the Stock Distributor. Second, to reduce or eliminate the loan or the assigned debt, the Issuer issued shares of its stock to the Stock Distributor. Third, before or after the stock issuances, the Stock Distributor paid the Issuer or an affiliate of the Issuer. Finally, the Stock Distributor immediately sold the shares into the public market. In two years, the Stock Distributors generated approximately $7 million in illegal profits, the complaint alleged.

In addition to the emergency relief already obtained, the Commission is seeking permanent injunctions, disgorgement of ill-gotten gains, and civil penalties against all defendants. The Commission is also seeking penny stock bars against the Stock Distributors.

http://lawprofessors.typepad.com/securities/2009/09/sec-obtains-preliminary-injunction-in-florida-against-microcap-offering-fraud.html

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