The Securities and Exchange Commission brought fraud charges against 13 individuals allegedly involved in two Long Island-based cold calling scams that bilked more than 100 victims out of more than $10 million through high-pressure sales tactics and lies about penny stocks, the regulatory agency said on Wednesday.
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.
“These kinds of scams cause devastating harm to investors,” Stephanie Avakian, co-director of the SEC's Enforcement Division, said in a statement. “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.”
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.
The SEC also details the level of deceit and harassment from these boiler room salesmen.
As part of one such scam, a salesman allegedly claimed that the Walt Disney Co. was buying into a purported media and internet company and that would cause the penny stock’s price to increase substantially. Victims were also allegedly harassed and threatened by sales personnel.
According to the SEC, 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 Scott W. Friestad, associate director of the SEC's Enforcement Division, “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.”
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.
The SEC's complaint 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.
In a parallel action, the U.S. Attorney's Office for the Eastern District of New York announced criminal charges.
--- Check out SEC Halts Lottery Ticket Boiler Room Scheme: Enforcement on ThinkAdvisor.