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SEC: Bomb Detector -- Bought by Military -- Was Front for Scam

Last year, while working at The Dallas Morning News, a colleague and I wrote a story about a purported explosives detection device called Sniffex. According to the company, Sniffex could detect explosives up to a football field away by reading the "interference between the magnetic field of the earth, the explosive, the device itself and the human body."

Credit: Homeland Safety International Critics called it a sham. Yet one unit in the U.S. military bought the device -- eight for about $6,000 each -- even though the military’s own tests (PDF) said the Sniffex performed no better than random chance. (The testers concluded that the Sniffex operates according to the same principles as a Ouija board.)

Now, the Securities and Exchange Commission has accused Sniffex of being little more than the front for a $32 million stock fraud scheme that enriched insiders at the expense of unsuspecting investors.

According to the SEC complaint (PDF) filed Tuesday, Sniffex -- which later became Homeland Safety International -- installed a figurehead CEO, named Paul B. Johnson, to hide the involvement of two Bulgarian residents who actually controlled the company.

The company then issued a series of what the SEC alleges were false press releases, including one that touted “impressive” results from tests conducted by the New Mexico Institute of Mining and Technology. In reality, the tests were conducted by Johnson himself and the results were inconclusive, the SEC says.

The SEC’s complaint also alleges that in 2005 one of the Bulgarians coordinated a spam campaign to hype the stock, taking advantage of the London subway bombings to make his pitch.

The stock rocketed from 80 cents a share to $6 a share in less than three months. While the stock price increased, the insiders sold. The stock plummeted and now trades at one tenth of a penny.

The story on Sniffex was part of a series (see sidebar) The Dallas Morning News did on penny stocks and a group of lawyers, stock brokers and financiers whom the SEC suspects were sending out junk faxes and spam to manipulate the prices of several stocks. The SEC dubbed them the "shell creation group."

In a second complaint (PDF) filed earlier this week, the SEC alleges that the "shell creation group" made about $20 million by sending out junk faxes and spam on several penny stocks, including one e-mail (PDF) after Hurricane Katrina that read "Get Filthy Rich as the Recovery Begins."

Mark Lindberg, a businessman named in both the Sniffex and shell creation group complaints, was charged (PDF) Monday by federal prosecutors with conspiracy to commit securities fraud. (Neither Lindberg nor his lawyer returned calls for comment.)

We tried to reach the Bulgarian businessmen through their Web site, but the listed phone number was disconnected. No one we talked to had contact information for them or their lawyers. The attorney for Sniffex CEO Paul Johnson said his client didn’t make money from the stock sales and hasn’t done anything wrong. "From what we understand he was really a pawn in how this happened," said Kip Mendrygal, Johnson's attorney.

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