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PDFThat conclusion really needs to be revisited.
SpongeTech was no ordinary pump-and-dump penny-stock scheme; it was, to play off Churchill’s famous definition of Russia, a fraud wrapped in a stock-market rig inside a money-laundering conspiracy.
Let’s consider a few of the less well-known aspects of the fraud first.
What SpongeTech was supposed to be was a rapidly growing retailer of soap-infused sponges. Its marketing campaign made it ubiquitous; it became impossible to watch a major sporting event and not see the company’s signage. In reality, it made up nearly all of its customers, and its financial filings were more satire than accounting. Its only truly ambitious action was to sue critics. The company sued a fellow named Dave Patch, an engineer whose real vocation is as an Internet gadfly and whose long-running obsession with naked short selling has usually made him an ally of the very same scammy companies that moan about critics. (Disclosure: As a reporter writing about those companies, I have long been an easy target for the guy.) It also sued Kaja Whitehouse and Teri Buhl, a pair of reporters who wrote critically about the company. (More disclosure: I’m mentioned in the company’s suit as a co-conspirator. Patch has recently countersued the company’s management and attorneys for $2 million, and I am incredibly also mentioned in that complaint.)
To plumb the depths of the SpongeTech fraud, you should understand where a fellow named Norman Feinberg fits into this passion play. You might feel sorry for a few minutes when you ponder Feinberg -- In a brutally cosmic irony, he and his wife Sondra were apparently wiped out in the Madoff fraud — until you realize that, for a while now, he has been an occasional, helpful ally for SpongeTech COO Steven Moscowitz in his own multi-year quest to marry investor capital and his bank account.
The first documentation of the Feinberg –Moscowitz magic is seen in a State of New York Division of Tax Appeals filing from August 2006 resulting from a state claim that some pre- Sept. 11 vintage business failure of Moscowitz’ named Romantic Moments didn’t pay sales tax. One of the witnesses claimed that Feinberg and another fellow forged signatures on tax documents and checks.
Thefinancialinvestigator.com has obtained some internal emails indicating that Feinberg went literally door to door at various retail stores -- most likely Walgreen’s -- buying up hundreds of boxes of sponges with company money to lend the appearance of consumer demand. He would then send them via UPS (paid for by SpongeTech) back to headquarters.
On May 22, 2009, at 11:17 p.m. Feinberg, using his Norsond@earthlink.net address — the same one he used to register a comment with the DOJ on the then-pending Madoff sentencing above — wrote Moscowitz:
STEVEN — I WENT BACK TO SOME OF THE STORES I VISITED 2 WEEKS AGO.THEY JUST RECEIVED NEW STOCK WED/THUR I BOUGHT A LOT OF INVENTORY.AND HAVE ONLY $200 LEFT. IN SOME OF THE STORES ONE OR TWO OF THE NEW INVENTORY WAS SOLD. NORMAN
The day before at 2:25 p.m., he had written to inquire about returning the product he was buying up:
GOOD MORNING STEVEN I HAVE OVER 100 BOXES TO RETURN.PLEASE SEND ME THE COMPANY’S -UPS-NUMBER. I HAVE ABOUT 16 NO PRODUCTS IN STORE IF YOU WANT STORE NUMBERS LET ME KNOW NORMAN
To get his comment on all of this, I stopped in to Feinberg’s last known address but was told by a condominium employee that the Feinbergs (whom she insisted were “lovely, lovely people… a tragedy, they lost all that money”) had decamped in 2009 to Florida. So I rang them up at their new place in Palm Beach Gardens, Fla., but no one answered repeated calls, nor did Norman return an email I sent last week.
Regardless of Feinberg’s use of working capital to generate sales, the SEC’s exhibit dump a few weeks back provided a treasure trove of internal SpongeTech documents showing conclusively that the company’s claims to be doing substantial and profitable business with Walgreen’s were a joke.
At a time when five of their six top customers were an illusion, Walgreen’s -- the sixth -- was certainly not. However, the business they were doing (when not fraudulent) appears to have been spectacularly unprofitable. To wit: Shipping product to a retailer across the nation at a unit cost of $6 (less a 5% discount) and then preparing for it to be discounted straightaway to $4.99 from $9.99, while guaranteeing the store its margins, bearing all return costs and committing to a $15 million ad campaign is just a really hard way to earn a living.
That there were a lot of costs and risk embedded in a national product launch is valid and rings quite true; it is also why even the biggest consumer-product companies budget for three- and five-year breakeven periods. Then again, most companies that launch a product nationally have more than $34,570 in cash in the bank.
Based on the SEC exhibits filed on PACER, all of the Walgreen’s purchase orders add up to a grand total of $206,622. Moreover, the majority of the orders -- just under $181,000 -- were entered on Feb. 13 last year as part of the national Walgreen’s rollout. More importantly for SpongeTech, though, was the fact that these orders were included in the quarter ended Feb. 28, just in time for the last available financial filing.
Indeed, the purchase orders tell a very stark tale about America’s interest in a soap-infused sponge insofar as Walgreen’s is a proxy for consumer demand (and with over 7,500 stores, a compelling argument can be made that it is.) After the initial spate of orders on Feb. 13, the follow-up orders in April were for dollar amounts that were many times less. The last few orders, on July 23 and Aug. 6, were for $72. As a stand-alone idea, their product was basically a novelty item -- save for the fact that many novelty items have extraordinary sales.
So for a nine-month period ending Feb. 28, 2009, whereby the company claimed its revenue grew from $1.56 million in 2008 to over $31 million, the sum total of SpongeTech’s revenues appear to be this: whatever a 70-plus-year-old nearly-bankrupt former colleague of Moscowitz could vacuum up with the company’s own money from the stores in his driving radius, plus whatever sales Walgreen’s made.
That figure is $10,000, according to the FBI’s affidavit. Perhaps some context would help: Most every name-brand scam of the past two decades had, at its core, a legitimate enterprise that could have conceivably been managed properly and provided returns to its investors. Enron would have been a pipeline company with a small trading operation attached; Madoff would have been a brokerage firm with a derivative volatility fund attached to it.
Not SpongeTech however.
CEO Michael Metter and his colleague Moscowitz can be said to be many things, but “business geniuses” is probably one title that won’t be pinned on them. (I managed to reach Metter on his cell, but when I asked him to answer some questions, he said, “I don’t talk to you” and hung up. He later replied to an email, so I presented him with my questions. If he replies, I will post the answers in full. I also called Moscowitz on his cell and left a message, never receiving a reply. Since he is no longer employed at Spongetech, a woman answering the phone refused to take a message.)
Then there is the rig.
A working definition of a rig is a stock whose share-price movement is closely controlled, or rigged. The stock moves up because some “good news” is strategically manufactured and leaked to a group of select participants. It drops as the same group gets out before reality sets in. In the lexicon, those left selling on the way up or buying on the way down -- or holding the stock -- are called “marks,” “stucks” or “bagholders.” In SpongeTech’s case, a rig was crucial because the company largely existed in the hopes and dreams of legions of deluded “stucks,” as opposed to, per above, in any economic sense.
Thefinancialinvestigator.com obtained internal emails that show Moscowitz discussing payment procedures for supporting the company’s share price with a day trader named Cody DeBarge. On June 12, 2009, DeBarge wrote Moscowitz at 7:54 p.m., “We bounced it hard. What about the wire?” Moments later, Moscowitz replied, “Yes, thank you.” On June 8, at 7:35 a.m., Moscowitz wrote to another trader/promoter in on the price-support scheme, using the email address momostocks@yahoo.com, saying, “You will see it before I send it." (In their email strings, “it” refers to SpongeTech’s share price, and “bounce” refers to the trader — and his allies — being able to push the stock price higher. In Moscowitz’s reference, “it” is a wire transfer.)
The promoter/trader named “Momostocks,” a vocal supporter of all things SpongeTech on the message boards, did not reply to an email seeking comment.
Both traders’ emails are constantly pleading with Moscowitz as to the whereabouts of wire transfers. On June 5, at 11:20 a.m. DeBarge wrote, “Send another 25k. We are good to go for next week.” A few hours later, Moscowitz emailed and asked him for the FED number — or wire-transfer instructions — and issues a cheery “Let’s have a good week.” At 4:17, comes the reply, “Thank you.”
It is apparent reading DeBarge’s emails that he considered himself a member of — or a key component in — a fairly extensive network. “Today was a good day,” he wrote to Moscowitz on June 5 at 2:36 p.m. “And I look for great things from our team next week as well! We are strong now. Keep all the same components in place to keep the uptrend.”
DeBarge shows up in Internet searches as a day trader and a consultant. When DeBarge did not return an email to his Yahoo! account seeking comment, I called Small Cap Consulting and spoke to its owner Joe Masciovecchio to see if he had a line on his whereabouts -- but alas, he didn’t. He said DeBarge was merely an “outside contractor we hire from time to time to do some website stuff, maybe post a CEO interview.” He said he did not have a phone number for him. Masciovecchio, who is based in Connecticutt, said his Fargo, N.D.-registered firm provides investor relations and corporate finance advice for small- and micro-cap companies, as well as Chinese reverse-merger candidates, but does not do actual promotions.
In April 2009, DeBarge received 2.25 million shares of SpongeTech from the company. Based on an average price of 2 cents per share for April, DeBarge reaped a $45,000 gain if he sold the stock immediately. If he didn’t, he stood to make a whole lot more since the SpongeTech promotion really took off in May and June.
Also playing an important role in the rig was an unlikely pair: Douglas Furth and Stephen Hess.
Furth was the general partner of the Signature Fund, an Ohio-based money manager that at one point owned about 5.1% of the company. Besides falling for management’s story hook-line-and-sinker and incinerating his client’s investment, Furth’s contribution to the world of SpongeTech appears to be the well-documented way he sought to bolster morale among his fellow shareholders: Attack critics and then attack some more.
In the eyes of shareholders, Furth’s power came from his access to management, which allowed him to speak authoritatively on monthly revenues, the share count and the sheer amount of stock he and “his group” controlled. This was a gambit that was not without risks, since Furth had his fair share of self-inflicted bruises. Not helping his effort to establish the moral high ground was the fact that his business partner and research chief, Dr. Marc Bernstein, was forced to surrender his medical license after acknowledging some astoundingly inappropriate behavior.
(The point here is not to argue that SpongeTech critics are morally or temperamentally superior — they surely are not — it is just that Furth’s utter contempt for his critics and his sharply personal attacks are baffling given the big question marks suggested in the background of himself and his colleague.)
Hess is an even odder duck. He moderated a popular message-board forum thread until he posted a barely coherent message discussing how he frequently lied and deceived his fellow posters. According to an email, he also seemed to spend an inordinate amount of time feverishly passing around the most outlandish rumors and scuttlebutt from SpongeTech management, including claims about a pending $2 billion buyout from a European hedge fund.
Together, Hess and Furth collaborated on a 26-page report called “Risk Assessment --SpongeTech Delivery Systems.” Meant to evoke the white papers churned out by the serious and deep-thinking the world over, the report actually seemed more akin to a marriage between The Protocols of the Elders of Zion and DeepCapture. It is a lengthy analysis of the sundry pumpers and promoters in the micro-cap space surrounding SpongeTech that assumes that the problems with the company are because people conspired against it, rather than, say, having a product no one wants and running a corporate crime petting zoo.
But the importance of “Risk Assessment -- SpongeTech Delivery Systems” isn’t the research on the unindicted sorts kicking around the company; it is to keep the shareholders at bay, which is the most important aspect of rigging a stock. (I emailed Hess and Furth seeking comments, but neither one replied.)
Executed properly, this gambit offers a magnificent payoff. Not only will the ordinary investors remain unified in outrage against the sundry injustices aligned against them, but they will also discount future adverse developments and hold the stock in contravention of logical self-interest. Of course, as the rig collapses, the share values plummet and those investors are, in short order, wiped out.
But again, the key is doing this properly. Given the absence of things like sales, assets or prospects, a true bull case for SpongeTech was a difficult argument to make. Actually, it was impossible. The company needed someone to argue the logical equivalent of two plus three equaling the color orange -- and to keep doing it for hours, days and weeks on end.
That’s where Alan Palmer Jr. comes in.
A 25-year-old with roots in the Chicago area and something of a background in commodities, the young man proved superior in launching spittle-flecked message board and email attacks on anyone who disagreed with the thesis that SpongeTech was not a compelling reservoir of shareholder value.
So for a while, Kaja Whitehouse of the New York Post was public enemy number one. Because she committed the heresy of discovering that five of the six customers doing nearly every dollar of sales the company claimed were fake, Palmer — using variations of the online moniker “Mingy”— launched a campaign that included contacting hundreds of people with pictures of her family members (culled from Facebook) and a Rube Goldberg argument that her father was somehow involved in naked short sales of stock. Additional emails went out to dozens of regulators and colleagues within the Post, its parent corporation News Corp. and other news organizations accusing her of crimes high and low -- again, with no small amount of personal detail.
Whitehouse should consider herself lucky. Palmer’s truly wretched behavior was saved for a high-profile cyber-sleuth and forensic analyst of Hispanic heritage named Roberto Villasensor, perhaps better known online as “The_ worm06.” In what was truly remarkable invective, even for the no-holds-barred world of stock chat rooms, he posted numerous messages framing Villasensor’s family in a series of vulgar racial and sexual slurs. (It is clear, given Villasensor's track record of uncovering dozens of Nasdaq and OTC-listed frauds -- including convicted boy band impresario Lou Pearlman -- why he attracted Palmer's fury.)
From March 3 on the Yahoo! SpongeTech message board: “Give me her address, I’ll send her a Dora explorer sponge so she can use it to clean her crotch before the long party. She’s going to making the tacos and I don’t want her poor hygiene tainting our tacos. I figured Dora would be the most appropriate sponge, you know, from an ethnic standpoint.”
From Feb. 27 on the Yahoo! SpongeTech message board: “Robertaco’s sister is going to be giving free BJ’s to longs in the men’s room at the long party. Yipeeee”
From March 1 on the Yahoo! SpongeTech message board: “Maybe you should tell your mother to get her rest, after a long night of making taco’s for the long party shes going to be giving $5 BJ’s to all the longs in the men’s room.”
Palmer wasn’t just a young Archie Bunker; he had a streak of the street thug about him. In repeated email posts, he sought help in getting personal and confidential information about skeptical message-board posters, critical reporters and others who weren’t on board with SpongeTech management. He certainly wasn’t the only one, but he clearly was central to the effort. The goal wasn’t to frame SpongeTech in the best possible light; it was to destroy those who would shine light upon the company.
Until the very last days, Palmer continued to threaten those with whom he disagreed. In an email to Dave Patch on April 23, two weeks before the federal claims were released, he informed the engineer that, “So it looks like we are just a c*nt hair away from utter war Mr. Patch. Probably should have done just a bit more research into me before you decided to pursue this route.”
In addition to his actions against company critics, Palmer was relentless in inventing new ways of looking at the now standard criticism of short sellers operating in cabal-like ecosystems, replete with unfettered access to the media and regulators. He was -- and this is something of a compliment -- a conspiracy theorist of the first order.
In crafting new narratives to explain what could not be explained, the man wasn’t just inventive, he was prodigious. According to Palmer, well-known short seller Jim Chanos was involved in shorting the company’s shares, and there were European and domestic mafia short-selling crews operating against the company. To be more specific, New York’s Luchese organized crime family and “a couple of German banks” were involved in the scheme. Per Palmer, it was never clear if Chanos might have been taking orders from the Germans or the mob, or maybe they kept to themselves -- sort of a penny-stock reunion of the Second World War’s Axis Powers -- but then it didn’t need to be.
In fact, some combination of all or none of the above -- with myself possibly (or possibly not) included -- was inhibiting the company’s realization of its full market potential, which he calculated to be as high as $178, a model that would have given the company a market capitalization of almost $378 billion, about twice that of AIG at its peak. To reach this figure, he relied on a shareholder comment letter from Universal Express, perhaps the only company whose investor base is more consistently deluded about the value of their equity than is SpongeTech’s own. To be fair, he was seemingly aware that the world that would support this valuation model for SpongeTech was similar in scope to that of James Cameron’s Avatar, and he soon pulled back to a more sensible $10 to $15 value, implying a $12 billion to $16 billion market-cap range, perhaps a more reasonable range for a company that mostly did not exist.
The truth is that, for Mingy and his brethren, facts did not matter. There is a reason for this.
By paying just pennies a share, they could spend $1,500 or $3,000 and wind up with a good-sized block of stock in a company whose product anyone could understand. There were ads galore, the reported numbers were going to the moon -- and as for prospects, well, couldn’t most anyone use a sponge like that at least once a year?
When battle-hardened sleuths like Villasensor began to hone in on the legions of inconsistencies in the company’s filings and statements in early 2009, posters like Palmer played an emotionally vital role for shareholders. With grand tales of unseen alignments against their modest hopes, of shadowy and complex forces operating against the principles of fair trade and American enterprise, Palmer gave them cover to claim victim status as a psychological crutch. Better still, with thousands of shareholders getting meaningful sums of personal savings wiped out, he created a clubby worldview.
(I should note that one shareholder I spoke to, Martin Hodas, the man responsible for the porning of Times Square, who owned 10 million shares of SpongeTech, is resolute in refusing to see himself as a victim. "I'm 78 years old," the affable and engaging former pornographer told me. "And I sold a business for $9 million a few years ago, so what's $100,000 (at risk)? I bought in at a penny, sold at a dime and then bought some back in at 15 cents and lost most of that. It’s investing, its gambling, whatever. I’ve been in the markets since I’m 21, and I’ve seen everything.”)
I emailed Palmer repeatedly to his several AOL addresses, and he responded once to (fairly) dispute one part of a question I posed. He did not reply to further additional requests for comment.
Now comes the money laundering, the least defined aspect of the SpongeTech affair, although the SEC has filed a series of motions over the past few weeks designed to freeze the personal assets of Metter and Moscowitz, as well as to (presumably) trace the movement of their personal assets.
An obvious red flag is the opening of a Swiss office last year purportedly to help boost European sales. Given Swiss banking laws, as well as the fact that the company didn’t really have any domestic sales, we can assign a fair degree of probability to a hunch that the office was helpful in less legally compelling ways.
Also at issue is the sale of about 2.5 billion dubiously registered shares, which if assigned an average price of about 7 cents per share, equals a cool $175 million. While the checking account ledger entries released with the SEC exhibits do indicate that the largest bills -- the stadium signage leases -- were at least initially paid and much of SpongeTech’s legitimate business was a loss-inducing disaster, it seems difficult to believe that the company used that much cash.
SpongeTech did indeed have a business, but it had nothing to do with selling sponges.
SpongeTech stands apart from recent public scams because it used fraud as a central component of its growth strategy, rather than something that was stumbled into as legitimate business plans collapsed. Yet there is a bare glimmer of hope in the wreckage that consumed the hard-earned capital of thousands. It can be seen in this email, sent from Palmer to Patch on May 5, a few hours after the news surfaced of the DOJ and SEC action.
Dear Dave,
I can’t describe the pain I feel. While I lost everything, what hurts the worst is realizing how much I’ve hurt others. I can’t put into words the intensity of my feelings and regret. I’m so sorry for everything I’ve done to you and others. I don’t think I will ever get over what my actions have caused.
Alan
There will be another SpongeTech, and there are plenty of financial predators out there, wearing suits and trailing expensive lawyers. There are, it would seem, fewer people willing to publicly apologize for their sins.
