Opinion
Civil No. 2:03 CV 0914K
December 14, 2003
Thomas M. Melton, Karen L. Martinez, Salt Lake City, Utah, for Plaintiff
PLAINTIFF'S PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING PRELIMINARY INJUNCTION AGAINST STEM GENETICS, INC.
Plaintiff Securities and Exchange Commission (the "Commission"), by and through its counsel of record, hereby submits Proposed Findings of Facts and Conclusions of Law.
INTRODUCTION
On October 16, 2003, the Commission filed a civil action against Stem Genetics, Inc. ("Stem") and others for a Preliminary Injunction for violations of federal securities laws. Although duly served, Stem has failed to respond to the Commission's Motion for Preliminary Injunction. The Commission has submitted evidence supporting the allegations that Stem violated Section 17(a) of the Securities Act of 1933 ("Securities Act") [ 15 US.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [ 15 U.S.C § 78j(b)] and Rule 10b-5 promulgated thereunder [17 CRF.R. § 240.1 Ob-5].
FINDINGS OF FACT
1. Stem Genetics, Inc. is a Nevada Corporation headquartered in Salt Lake City, Utah. Stem Genetics offered its stock to foreign investors through Sukumo Limited ("Sukumo"),
2. Howard H. Robertson, M.D., resident of Salt Lake City, Utah, is the current President of Stem Genetics.
3. In or about early 2002, Sukumo told Alien Wolfson, David Wolfson's father, that Sukumo could sell stock in a stem cell or genetic research company to potential investors.
4. Although Alien Wolfson tried to locate and acquire such a company, he was unable to do so.
5. In April 2002, Alien Wolfson created a Nevada corporation named Stem Genetics, Inc.
6. At approximately the same time, and at Sukumo's suggestion, Alien Wolfson arranged for creation of a Stem Genetics' website. That website was active until June 13, 2003, when David Wolfson replaced it with a new website.
7. The home page for the original website stated that "[a]t Stem Genetics we research and develop technologies useful for the isolation, storage, and therapeutic use of umbilical cord and adult-derived stem cells."
8. The original website listed the names and curricula vitae of the various Scientific Advisory Board members falsely portraying that a board of advisors actively provided scientific direction. Frost Dec. ¶¶ 64-65.
9. Sukumo directed investors to the original Stem website as part of its sales pitch. Cleal Dec., ¶ 5; Durham Dec., ¶ 5. Investors visited the website to research the company before wiring their money to the escrow account in the United States. Durham Dec., ¶ 5; Feather Dec., ¶ 6, Dymond Dec., ¶ 3.
10. The original website had a link to Stem's filings with the Commission, filings which affirmatively misrepresented Stem as a company with on-going research, researchers, and discoveries.
11. Stem with the Commission also misrepresented the nature of Stem's relationship with Sukumo. Frost Dec., ¶ 51.
12. In early May 2002, Alien Wolfson asked a Robert Youngblood, a Salt Lake City plastic surgeon, to serve as President of Stem Genetics.
13. Youngblood executed an Offshore Agreement with Sukumo in or about May or June 2002.
14. During the approximately 12 months that the Youngblood served as President, the doctor's sole activity was signing documents presented to him by David Wolfson and NuWay. The doctor was never aware of any stem cell research having been conducted by Stem Genetics.
15. Through 15 June 30, 2003, at least $5.3 million was raised from investors by Sukumo from sales of Stem Genetics stock. Frost Dec., ¶ 59. Sukumo instructed the investors to wire payment for shares purchased from Sukumo into various escrow accounts held at banks in Utah and Arizona.
16. The invested funds were distributed with 70% going to Sukumo and the remaining amount divided between Stem Genetics and entities controlled by David Wolfson. Frost Dec., ¶ 60, 61.
17. Sukumo misrepresented to investors that it was only receiving a 2% commission on its sales of stock.
18. Investors were told that the company was currently conducting stem cell research, that the Commission had approved $7 as the IPO price for the company, that the company would be quoted on the Nasdaq Stock Market within two months, and that Stem Genetics had received a $300 million grant from the U.S. Food and Drug Administration. Feather Dec., UK 6, 7, 8; Charters Dec., ¶ 4, 5, 6; Dymond Dec., ¶¶ 2, 3. These statements were false. Feather Dec., ¶ 28; Cleal Dec., ¶ 25.
19. On or about March 3, 2003, Youngblood resigned from his position as President of Stem.
20. In early July 2003 Wolfson hired Howard H. Robertson as the new President of Stem. Frost Dec., Exh. 29 to Frost Dec.
21. Robertson testified that prior to being hired by Wolfson in early July 2003, ". . . Stem Genetics did nothing, and it was up to me to make it so that Stem Genetics would do something." Frost Dec., ¶ 56, Exh. 26 to Frost Dec.
22. At the time Robertson was President, Stem's address was a box at a Salt Lake City Mail Boxes, Etc. Stem had no office, Stem documents were stored at NuWay, and Stem Genetics did not have any research facilities. Frost Dec., ¶ 57, 58, Exhs. 10, 26 to Frost Dec.
23. Upon Robertson's move from Arizona to Salt Lake City, Robertson planned to set up a lab in his basement because "I need a very small area, just a work bench . . ." to conduct research. Id.
24. Immediately upon becoming Stem's new President, Wolfson asked Robertson to sign new Offshore Agreements with Sukumo. Id.
25. Robertson was not a signatory on the Stem's corporate bank account and did not receive an accounting from the Stem Genetics escrow agent, Carlucci, regarding the escrow account.
26. Several investors spoke with Robertson who told investors that Stem was a legitimate company. Dymond Dec., ¶ 25; Feather Dec., ¶ 28.
27. On August 12, 2003, Robertson posted a message to the UK investors on the message board where he referred investors to Stem's website, stated that the website was accurate, and stated that the Form SB-2 filings with the Commission were withdrawn because they were not accurate.
CONCLUSIONS OF LAW
1. The Commission has made a prima facie case that Stem Genetics violated Section 17(a) of the Securities Act;
2. The Commission has made a prima facie showing that Stem Genetics violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and
3. The evidence shows that unless preliminarily restrained, there is a reasonable likelihood that Stem Genetics will, in the future, violate Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.