The SEC filed additional charges in a fooball-related boiler room scheme. It also charged a penny stock company CEO and his business partner with defrauding investors and an investor relations executive with insider trading.

In addition, FINRA took action against ConvergEx Execution Solutions for reporting and other failures, and against Gilford Securities for disclosure and other failures.

SEC Charges More in Football-Related Boiler Room Scheme

Football fans and would-be investors might have thought the game was over back in September, when the SEC charged the operators of a South Florida-based boiler room scheme with defrauding seniors and other investors they pressured into purchasing stock in a company that purportedly developed groundbreaking technology for the National Football League to use in the Super Bowl. But they would have been wrong.

Thought Development Inc. (TDI), a Miami Beach-based company, was touted by the boiler room operators, and claimed that its signature invention is a laser-line system that generates a green line on a football field for a first-down marker visible not only on television but also to players, officials and fans in the stadium. The first group of wrongdoers went down, but there was more yet to come.

In another round of charges, the SEC went after four executives who made the scheme possible, as well as the three companies they operate. Brothers Dean Baker of Coral Springs, Florida, and Daniel Baker of Valley Village, California, were charged, along with Bret Grove of Delray Beach, Florida, and Demosthenes Dritsas of Newhall, California. In addition, the SEC also charged DDBO Consulting, DBBG Consulting and CalPacific Equity Group.

Approximately $1.7 million was raised through these companies from more than 110 investors who were told that an IPO in TDI was imminent and that their money would be used to develop the groundbreaking technology.

The four execs and their companies made deals with Peter Kirschner, the mastermind of the original scheme, to solicit investors and sell stock. They lied to investors about TDI and about where the money was going, and pocketed what they didn’t use to hire sales agents to push the stock further.

The defendants have all agreed to settle the SEC’s charges, while Daniel Baker and Dritsas have also entered into plea agreements in criminal cases relating to this action.

In parallel actions, the U.S. Attorney’s Office for the Central District of California announced criminal charges against Daniel Baker and Dritsas, and the U.S. Attorney’s Office for the Southern District of Florida announced criminal charges against Dean Baker and Grove as well as Kirschner and Stuart Rubens. The latter two were charged by the SEC in the initial complaint filed last year. Dean Baker was previously barred from association with any FINRA member firm in 2006.

Penny Stock CEO, Con Artist Charged with Investor Fraud

The SEC has charged Lex Cowsert, the CEO of penny stock company CytoGenix and his business partner Christopher Plummer with defrauding investors via false press releases.

According to the agency, the pair used those releases to portray CytoGenix as a successful company that developed vaccines, when it was actually on the skids.

The releases touted CytoGenix with extravagant claims about the microcap company’s revenue and other benefits flowing from a “shared revenue agreement” with Franklin Power & Light, an electricity provider supposedly operated by Plummer. But Franklin was a sham, and CytoGenix had actually lost all of its vaccine patents and other intellectual property in a lawsuit.

To make matters worse, Plummer and Cowsert stole proceeds from CytoGenix stock offerings that they told investors would be used for energy production projects and other corporate purposes.

Cowsert took $91,000 in cash, telling investors to make checks out to him personally. He then put the checks into his personal bank account and paid personal expenses with the proceeds. Not to be outdone, Plummer defrauded a shareholder out of more than 6.5 million free-trading shares of CytoGenix stock.

Plummer also ran a similar but separate scheme around the same time in 2010. This one also involved a microcap company that also sent out a flurry of press releases filled with bogus information.

Among the faked claims were another deal with Plummer’s phony power company, this time to own and operate solar energy farms across the country. That microcap issuer was financially in the suds and couldn’t financially or logistically come up with any kind of product, certainly not launch full-scale energy farms. To this day it has no operations, customers or revenues.

Trading in both CytoGenix and the other microcap company was suspended in 2011 as part of a mass suspension. Plummer is already serving a multiyear federal prison term for yet another fraud unrelated to either of these, and has two prior fraud convictions.

The SEC seeks permanent injunctions along with disgorgement, prejudgment interest, financial penalties, and orders barring Plummer and Cowsert from acting as officers or directors of a public company and from participating in a penny stock offering. The investigation is continuing.

Investor Relations Executive Charged with Insider Trading

The SEC has charged Kevin McGrath, a partner at a New York-based investor relations firm, with insider trading on confidential information he learned about two clients while he helped prepare their press releases.

McGrath, who lives in Brooklyn and works at Cameron Associates, had bought shares of Misonix Inc. in April 2009. Not long after, he was working on a press release in which Misonix was set to announce disappointing quarterly results. McGrath found out the target date for the press release, and sold all his shares before the release came out on May 11. The move saved him losses of $5,400 when Misonix’s share price fell 22%.

He also bought stock in Clean Diesel Technologies Inc. after he worked on a press release in which Clean Diesel was announcing approximately $2 million in orders it received for certain products. Minutes after finding out on May 24, 2011, that the release would come out the next day, McGrath purchased 1,000 shares. He sold it all on May 27 after the stock gained 95% on the positive news. He made $6,376 on that trade.

Without admitting or denying the SEC’s charges, McGrath has agreed to settle by paying disgorgement of $11,776, prejudgment interest of $1,492 and a penalty of $11,776, for a total of $25,044. The settlement is subject to court approval.

SEC Charges Florida Transfer Agent for Boiler Room Tactics

The SEC charged a Florida-based transfer agent and its owner with defrauding investors by using aggressive boiler room tactics to peddle worthless securities with promises of high returns or discounted prices. 

Transfer agents are typically used by publicly traded companies to keep track of the individuals and entities that own their stocks and bonds. The SEC alleges that Cecil Franklin Speight, whose firm International Stock Transfer Inc. (IST), was a registered transfer agent, abused the transfer agent function by creating and issuing fake securities certificates to both U.S. and international investors.  While investors collectively sent in millions of dollars thinking they were purchasing high-yield investments and discounted stock, they ended up receiving counterfeit certificates that Speight and IST fooled them into thinking were legitimate.  

In a parallel action the same day, the U.S. Attorney’s Office for the Eastern District of New York announced criminal charges against Speight.

“Speight brazenly misused his transfer agent authority to commit fraud by creating fake certificates and acting as if he was authorized by issuers to do so,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “His promise of high-yield investment returns and his use of attorneys to receive investor money were simply lures to take advantage of unsuspecting investors.”

Speight and IST agreed to settle the SEC’s charges. He will be barred from serving as an officer or director of a public company and from participating in any penny stock offering. The court will determine monetary sanctions at a later date.

FINRA Fines, Censures ConvergEx on Reporting Failures

ConvergEx Execution Solutions LLC was censured by FINRA and fined $425,000 after the agency found that two separate programming errors led to the firm’s submission of inaccurate Regulation NMS Rule 605 reports related to the execution of covered orders in its alternative trading systems. Programming errors also meant that the firm submitted inaccurate Regulation NMS Rule 606 reports and incorrectly reported long sales to the Trade Reporting Facility (TRF) with a short sale indicator. Also, the firm overreported transactions to the TRF as the result of a programming error.

According to the agency, as a rule the firm orally informed subscribers of its indications of interest (IOIs) practices prior to the institution of those practices and during the on-boarding process, and to provide an opportunity to opt out of the IOI process.

However, the firm could not establish through its records that oral or written disclosure of its IOI practices had been provided to every subscriber prior to using IOIs based on subscriber orders as part of the X-Streaming process. As a result, not all subscribers were aware, and the firm could not confirm that they were aware, of X-Streaming.

FINRA also found supervisory system failures regarding the firm’s associated persons in the marketing and management of an alternative trading system.

The firm consented to entry of the findings without admission or denial.

Gilford Securities Fined, Censured on Disclosure, Supervisory Failures

FINRA censured Gilford Securities Incorporated and fined the firm $125,000, after finding that it published research reports that failed to disclose that the research analyst received compensation consisting of commissions on transactions by the analyst’s customers in the securities the analyst covered. The front page of the firm’s research reports, which supposedly referred to the page on which the disclosures were found, were deficient.

Also, the firm authorized a research analyst to post research-related information and recommendations from firm research reports on his blog without including either disclosures required by NASD Rule 2711(h) or links to the research reports containing the disclosures. The firm also failed to provide approvals of research reports.

Other failures included supervisory failures over five producing managers who were responsible for generating 20% or more of the revenue of the business units supervised by the producing managers’ supervisors, and anti-moneylaundering failures.

The firm neither admitted nor denied the findings.

Check out SEC Enforcement: Golf Buddies Charged in Insider Trading Ring on ThinkAdvisor.