The top executives of Spongetech Delivery Systems Inc. (SPNG) were arrested and charged Wednesday in an alleged scheme to defraud investors by reporting falsely and grossly overstated sales figures.

According to a criminal complaint filed Wednesday, Michael Metter, Spongetech's chief executive and president, and Steven Moskowitz, the New York pre-soaped sponge maker's chief operating officer and chief financial officer, were charged with conspiracy to commit securities fraud and obstruction of justice. They each face up to five years in prison on the conspiracy charge.

"Mr. Metter vigorously denies the charges brought against him today by the government," said Jeffrey Sklaroff, a lawyer for Metter. "He looks forward to his day in court where he is confident he will be fully vindicated."

A lawyer for Moskowitz didn't immediately return a phone call seeking comment Wednesday.

Bail was set at $2 million each for Metter, 58, of Greenwich, Conn., and Moskowitz, 45, of Flushing, N.Y., at a hearing before a U.S. magistrate judge in federal court in Brooklyn Wednesday.

"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 in a statement. "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."

The U.S. Securities and Exchange Commission also has filed civil charges in the matter, calling the case a "pump-and-dump" scheme.

In the complaint, prosecutors from the U.S. Attorney's office in Brooklyn alleged Metter and Moskowitz between January 2007 and May 2010 publicly reported the company had secured purchase orders or made sales to five customers that did not exist.

For the nine months ended Feb. 28, 2009, the purported sales to those five customers accounted for as much as 99% of Spongetech's revenue, prosecutors said.

During that time frame, the men allegedly filed multiple false reports with the U.S. Securities and Exchange Commission and issued numerous press releases touting the false sales figures, typically via the Internet, prosecutors said in the criminal complaint.

In a civil lawsuit, the SEC said the purpose Metter, Moskowitz and others flooded the market with false public information was in order to fraudulently inflate the company's stock price, so they could illegally sell shares through affiliated entities in unregistered transactions.

Through affiliated entity RM Enterprises International, Metter, Moskowitz and the company allegedly illegally distributed about 2.5 billion Spongetech shares at inflated prices, the SEC said.

They allegedly used false and baseless attorney opinion letters to justify the unregistered sales, the SEC said. The men also allegedly regularly understated the number of outstanding shares in press releases and public filings, the SEC said.

Two New York lawyers and a Brooklyn self-employed consultant also have been charged in the SEC's civil case.

Metter, Moskowitz and Spongetech spent portions of their illicit profits to advertise with professional sports teams, including teams in Major League Baseball, the National Football League, the National Basketball Association, the National Hockey League and the U.S. Tennis Association, the SEC said.

Since the SEC issued subpoenas in September as part of a formal probe of Spongetech, Metter and Moskowitz allegedly have tried to fabricate the existence of the five purported customers, according to the complaint.

They allegedly sought to create websites and virtual offices for the companies, have furnished investigators with phony purchase orders and produced "questionable documentation" purportedly constituting proof of payments by the customers, prosecutors said in the complaint.

The SEC suspended trading of the company's stock on Oct. 5, according to the complaint. The suspension expired Oct. 16, and Spongetech has been trading only in the "grey market," a market for securities not listed on any stock exchange, the Over-the-Counter Bulletin Board or the pink sheets, according to the complaint.

A phone call to Spongetech wasn't immediately returned Wednesday.

An automated message on the company's investor relations phone line said the company would make no comment during the SEC investigation and would only make public comments via press releases.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com