Feds Say Spongetech Claims Are All Wet

May 5 2010 | 2:26pm ET

Just two weeks after their company sued a former hedge fund manager of conspiring to drive down its stock price, the top executives at Spongetech Delivery Systems find themselves accused—criminally—of a conspiracy of their own.

Michael Metter, president and CEO of the soap-filled sponge company, and Steven Moskowitz, its chief operation and financial officer, have been arrested and charged with defrauding investors and lying about the company’s sales. The two are due in Brooklyn, N.Y., federal court this afternoon.

According to prosecutors, Metter and Moskowitz publicly reported sales to five customers that they allegedly made up. In one nine-month period, those customers accounted for some 99% of Spongetech’s sales, the complaint alleges.

Metter and Moskowitz have been furiously trying to conjure those customers since they were subpoenaed by the Securities and Exchange Commission in September, prosecutors say, creating phony Web sites and virtual offices for the customers and providing bogus purchase orders and other “questionable documentation.”

“The defendants in this case—Spongetech’s highest corporate officers—are charged with executing a bold scheme to portray Spongetech as a company that was performing at a level far above reality,” U.S. Attorney Loretta Lynch said. “As detailed in the complaint, the audacity of their scheme was matched only by their obstructive efforts during the course of the SEC’s investigation.”

Today’s charges are hardly the first legal trouble in which Spongetech has found itself. The company has been sued by a series of companies it advertised with, including CBS Radio, Madison Square Garden and the New York Mets.

Last month, the company sued former hedge fund manager Timothy Sykes, the New York Post, Post reporter Kaja Whitehouse and blogger David Patch, accusing them of working to depress Spongetech’s stock price to benefit short-sellers. Spongetech did not specify who, exactly, had benefitted from the scheme, but said it caused $18 million in damages.

Trading in Spongetech shares was suspended for 11 days in October. The company’s shares now trade over-the-counter.

Both Metter and Moskowitz were charged with conspiracy to commit securities fraud and obstruction of justice. Each face up to five years in prison if convicted.

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