SEC Litigation Release No. 22742
July 3, 2013
Securities and Exchange Commission v. Magdalena Tavella, et al.
Civil Action No. 13 CIV 4609 (S.D.N.Y.)
The Securities and Exchange Commission filed a complaint against 8 Argentine citizens who are alleged to have unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also secured a TRO, freezing assets held in U.S. securities firms in accounts of the eight defendants and two other Argentine citizens who had Biozoom shares but had not yet sold them. Last week the SEC suspended trading in Biozoom due to concerns that some shareholders may be unlawfully distributing its securities.
The SEC alleges that from March to June 2013, the defendants received more than 20 million shares of Biozoom (formerly Entertainment Art, Inc.) or one-third of the company's total outstanding shares. In a one-month period beginning in May, 8 of the Defendants sold more than 14 million shares yielding almost $34 million. $17 million out of the sales proceeds was wired to overseas bank accounts.
According to the SEC's complaint, the Defendants claimed to have acquired the bulk of the shares in March 2013 from Biozoom’s former shareholders who purchased them in private placements that began in 2007. Each of the defendants provided stock purchase agreements between them and the former shareholders purportedly signed by the defendants and those shareholders.
The SEC alleges that the documents were false because the Entertainment Art investors had sold all of their stock in the company in 2009, almost four years earlier. As the complaint alleges:
On July 18, 2008, Entertainment Art filed a Form S-1 registration statement with the Commission to register the resale transactions for the 34 shareholders who acquired Entertainment Art stock in these private placements ("the Form S-1 Shareholders"). In particular, of the total 1,810,000 shares outstanding at the time of the Form S-1, Entertainment Art's S-1 covered 610,000, or approximately one-third, of the company's then outstanding shares.
The remaining 1,200,000 shares of Entertainment Art stock were held by the three company officers in three identical 400,000 share blocks.
On May 1, 2009, Entertainment Art announced, in a public filing with the Commission, that the three Entertainment Art officers sold their total 1,200,000 shares of Entertainment Art to "Medford Financial" a Belizean entity, for a purchase price of $120,000.
Contrary to this disclosure, however, Medford Financial purchased more than 1,200,000 shares of Entertainment Art. In fact, Medford Financial also purchased all of the 610,000 shares that had been purchased by the S-1 shareholders. Thus, in this transaction, Medford Financial purchased all of the outstanding shares, including the shares then held by the Form S-1 Shareholders.
Each of the S-1 shareholders received their initial investment back, with an additional, small return on their investment. Thus, by on or around May 2009, each of the S-1 shareholders had no remaining shares or other interest in Entertainment Art.
According to company filings, on June 30, 2009, Entertainment Art's board of directors approved the implementation of a 33:1 forward split for Entertainment Art stock without correspondingly increasing the authorized shares of common stock for Entertainment Art. On July 21, 2009, the forward split became effective, and as a result of the forward split, the company had 59,730,000 shares of common stock outstanding-which was all owned by Medford Financial.
On October 25, 2012, Entertainment Art reported, in a public filing with the Commission, that on October 19 Medford Financial sold 39,600,000 common shares of Entertainment Art in a private transaction with LeMond Capital for a purchase price of $430,000, which equates to approximately $0.01 per share.
LeMond Capital purports to be a foreign entity based in the British Virgin Islands. As a result of the sale, Entertainment Art disclosed that LeMond Capital controlled over 66.3% of the Company's issued and outstanding common stock.
However, on information and belief, Le Mond Capital purchased the entire company from Medford Financial-and all of 59,730,000 outstanding shares.
The owner of LeMond Capital, Sara Deutsch, became Entertainment Art's new President, Chief Executive Officer, Principal Executive Officer, Treasurer, Chief Financial Officer, Secretary, Treasurer, and Director. On information and belief, Deutsch is a resident of Buenos Aires, Argentina.
From September 2011 to at least October 2012, Deutsch worked as a manager of Magdalena's Party. According to the business' website, Magdalena's Party is a restaurant located in Buenos Aires, Argentina. According to another website describing Magdalena's Party, it is co-owned by Deutsch, defendant Magdalena Tavella, and others.
On March 12, 2013, Entertainment Art filed a Form 8-K with the Commission in which it announced a dramatic change in its business operations from a company that developed fashionable leather bags to a company that was involved in the biomedical industry. In particular, Entertainment Art announced a transaction pursuant to which its newly formed subsidiary, Biozoom Technologies, Inc., acquired certain patents, licenses, and related assets from each of three separate companies; Opsolution Spectroscopic Systems, Opsolution NanoPhotonics, and Opsolution GmBH, (the "Opsolution acquisition") in exchange for cash of $50,000 and 39 million shares of Entertainment Art common stock.
Entertainment Art described that, through Biozoom, it was now in the business of "researching, developing, and licensing technologies relating to the mobile remote collection of biomedical data as well as bilateral diagnostic communication."
Entertainment Art further disclosed that -as of immediately after closing of the Opsolution acquisition and filing of the Form 8-K -Deutsch would step down as CEO and Chief Financial Officer of Entertainment Art, but would stay on as a Director only.
As a result of the transaction, the 59,730,000 outstanding shares of Entertainment .Art were allocated in the following manner. First, Le Mond Capital returned 39,000,000 shares to the company, and then those 39,000,000 shares were allocated -as shares bearing a restrictive legend -to four entities that were associated with the Opsolution entities.
Thus, after these allocations, 20,730,000 shares of Entertainment Art remained. Le Mond Capital retained 600,000 of these shares bearing a restrictive legend. The remaining 20,130,000 shares-which represented the total shares purchased by the Form S-1 Shareholders (and subsequently sold in the Medford Financial transaction on or around May 2009) -were unallocated.
On April 1, 2013, Entertainment Art changed its name to Biozoom, under the trading symbol "BIZM" on the OTC Bulletin Board.
The defendants' shares of Biozoom were deposited into their accounts as shares that purportedly could be freely traded and the defendants sold them even though no registration was in effect and preemptively, no exemption applied.
In addition to the temporary restraining order and asset freeze granted by the court, the SEC is seeking preliminary and permanent injunctions, return of the selling defendants' allegedly ill-gotten sale proceeds, and civil penalties. The SEC also seeks preliminary and permanent injunctions against the non-selling defendants because of the likelihood that both defendants will offer or sell their Biozoom shares to the public in violation of the registration requirements of U.S. securities law.