Oh Barnacles! SpongeBob Licensee Squeezed with SEC Fraud Charge

Shares of SpongeTech Delivery Systems (SPNG), which makes a popular SpongeBob soap-filled bath sponge, have remained under water after the Securities and Exchange Commission on Wednesday charged the company -- along with two of its executives -- with fraud. On Thursday, its over-the-counter shares hit a low of 0.005 cents before closing at 0.009 cents, marking a significant drop from the stock's one-year high of 28 cents per share.

SpongeTech is best-known for its SpongeBob licensing deal, but its relationship with the popular yellow-faced cartoon character only represents the tip of a large -- albeit squishy -- empire. The company also produces sponges for cars, boats, pets and home use. And the company has been embroiled in growing controversy for the past few months after CBS radio, Citi Field and Madison Square Garden sued SpongeTech for failing to pay its advertising bills.

But these lawsuits only hinted at the company's larger problems. Last September, Joel Pensley, a former lawyer for the company, sent a letter to the SEC alleging that SpongeTech had improperly used his name in approximately 100 opinion letters that it had sent to shareholders.

SEC: Biggest Customers Were Nonexistent

In a New York Post article on the alleged forgery, reporter Kaja Whitehouse wrote that SpongeTech had forecast $50 million in revenue for the year, up from $5.6 million the year before, and that industry rivals were skeptical. Earlier in the year, the company had reported approximately 1.2 billion outstanding stock shares, which Whitehouse noted would put it on par with eBay (EBAY).

A week ago, SpongeTech filed a $43 million lawsuit against the Post and hedge fund manager Tommy Sykes, claiming that the two conspired to lower its value through a "short and distort" stock manipulation scheme. On Wednesday, however, prosecutors from the U.S. Attorney's Office arrested CEO Michael Metter and Chief Financial Officer Steve Moskowitz, charging the pair with conspiracy to commit securities fraud.

According to the complaint, the pair publicly reported sales to five nonexistent customers. These sales, which constituted 99% of the company's reported revenue, "portrayed SpongeTech as a company that was performing at a level far above reality," U.S. Attorney Loretta Lynch said in a written statement.

Short and Distort, or Pump and Dump?

The SEC, which filed a civil complaint against the company Wednesday, claims the two executives used the false sales figures to pump up SpongeTech's stock price, then dumped 2.5 billion shares of the company. They then used the proceeds from the share sales to negotiate "highly visible sponsorship deals with professional sports teams to further create the aura that SpongeTech was a well-known and prosperous business," according to the complaint.

In October, the SEC briefly halted trading of the company's stock, but these share sales took place on an unregistered "gray market" for companies that aren't listed on a stock exchange.

Metter and Moskowitz have been released after posting bail of $2 million each. If they're found guilty of the criminal conspiracy charge, both men could face up to five years in prison.