The Securities and Exchange Commission today brought fraud charges against 13 individuals allegedly involved in two Long Island-based cold calling scams that bilked more than one hundred victims out of more than $10 million through high-pressure sales tactics and lies about penny stocks.
The SEC alleges that the orchestrators of the scheme used boiler room-style call centers to make hundreds of thousands of cold calls that included the use of threatening and deceitful sales techniques to pressure victims – many of whom were senior citizens – into purchasing penny stocks. For example, as part of one such scam, a boiler room salesman allegedly claimed that the Walt Disney Company was buying into a purported media and internet company and that would cause the penny stock’s price to increase substantially.
During these calls, victims were allegedly harassed and threatened by sales personnel. When one victim complained about his losses, a sales representative allegedly said, “I am tired of hearing from you. Do you have any rope at home? If so tie a knot and hang yourself or get a gun and blow your head off.” According to the SEC’s complaint, in a typical phone call, telemarketers would direct victims to place trades and tell them how many shares to purchase and at what price. With this information about the victims’ trades, the orchestrators and the boiler room sales personnel allegedly placed opposing sell orders to dump their own shares, realizing more than $14 million in illegal proceeds while the victims lost millions of dollars, including retirement savings.
SEC investigators learned of the alleged scheme from investor complaints and used technological tools and innovative investigative approaches to build evidence – within a matter of months from receiving the complaints – against the defendants who went to great lengths to evade detection.
“These kinds of scams cause devastating harm to investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Investors must beware of the sort of conduct alleged in our complaint – things like unsolicited calls, high-pressure sales tactics, and promises that a no-name stock is going to skyrocket.”
Scott W. Friestad, Associate Director of the SEC’s Enforcement Division, added, “The defendants allegedly used boiler rooms and high-pressure sales tactics to swindle seniors into investing their life savings in microcap securities they were secretly manipulating for their own profit. But, through a combination of technology and innovative investigative approaches, we were able to unravel the alleged scheme and prevent further investor harm.”
In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York announced criminal charges.
The SEC’s complaint, filed in federal district court in Brooklyn, N.Y., charges all defendants with fraud and nine with market manipulation. The SEC is seeking permanent injunctions, disgorgement with interest, civil penalties, penny stock bars, and an officer-and-director bar from one of the orchestrators of the scheme. The complaint also names 27 individuals and entities that received proceeds from the fraud, as relief defendants.
The SEC’s complaint also charges certain defendants with acting as unregistered brokers. The SEC encourages investors to check the backgrounds of people selling them investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals.
The SEC’s investigation, which is continuing, has been conducted by Andrew Elliott and Cecilia Connor and assisted by Leigh Barrett. The investigation was supervised by Scott Friestad and Amy Friedman. The SEC’s litigation will be handled by Matthew Scarlato and James Smith and supervised by Jan Folena. The SEC appreciates the assistance of the Financial Industry Regulatory Authority, Federal Bureau of Investigation, U.S. Attorney’s Office for the Eastern District of New York, British Columbia Securities Commission, Ontario Securities Commission, and Oregon Division of Financial Regulation.
The SEC encourages victims of the alleged fraud to contact [email protected] . The SEC’s Office of Investor Education and Advocacy previously issued an alert warning investors that aggressive stock promotion is a red flag of fraud.
“Investors should be skeptical anytime they receive an unsolicited communication promoting a stock – it could be a part of a boiler room scheme,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “If you receive a phone call from a high-pressure salesperson who uses harassment and threats to get your business, hang up.”