Email Pump and Dump Scams Revealed

SEC Cracks Down on Email Pump and Dumps

Seven Actions Against 31 Defendants For Violations in Connection with Email and Website Stock Promotions

By Mark J. Astarita, Esq.


For those of you who are tempted to follow the “investment advice” that you receive in emails, or that you find on the Internet, the SEC has a wake-up call for you. The scammers are still out there.

On October 23, 2003 the SEC announced the filing of 7 different actions against 31 corporations and individuals as part of a crackdown on unregistered stock distribution schemes. While distributions of unregistered stock is a violation of the securities laws, of particular interest is that each of these violations were accompanied by a pump and dump scheme, using email and websites.

The common thread in all of these actions is that a promoter is hired by a public company to promote its securities, and receives as part of its compensation shares of the company’s stock. In each case, the company used circuitous means of delivering the stock to the promoters, in order to avoid registration, and detection of the transfer. And in each case, the email and marketing campaign had the effect of increasing the price of the stock, and the promoter immediately sold the stock that he had received.

The net effect of all of this of course, is that innocent investors purchased the stock that these individuals sold, at grossly inflated prices.

The SEC’s press release, and links to the individual cases follow.

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SEC CHARGES INTERNET STOCK PROMOTERS AND PUBLIC COMPANIES WITH PARTICIPATING IN UNREGISTERED DISTRIBUTIONS OF SECURITIES

The Commission today instituted seven administrative proceedings against 31 public companies, stock promoters, and related individuals in a crackdown on unregistered stock distribution schemes. The actions challenged a common abuse in which small cap companies hire Internet stock promoters, compensating them with supposedly “free trading” stock that the promoters sell after their promotion has pumped up the stock price and trading volume. Rather than registering the shares issued to the promoters, which would provide meaningful information to investors and allow Commission review of the companies’ disclosures, the companies named in the actions found circuitous means of delivering stock to the promoters in order to avoid registration. As a result, the promoters were able to unload hundreds of thousands of shares of stock on the investing public without the disclosures and oversight provided by the federal registration provisions.

Case 1: Issuers Promoted on the EquityAlert.com Website

The Commission instituted administrative proceedings against Vancouver, British Columbia-based Internet stock promoter EquityAlert.com, Inc. and its parent, Innotech Corporation, (collectively “Equity Alert”), Equity Alert’s principals, Harmel S. Rayat (“Rayat”) and Bhupinder (“Bill”) S. Mann (“Mann”), and two public companies, T&G2, Inc. (“T&G”) and Virilitec Industries, Inc. (“Virilitec”). Each of these respondents settled the proceedings without admitting or denying the findings in the Commission’s Order.

The Commission’s Order found that Equity Alert was hired to advertise T&G’s predecessor, International Mercantile Corporation (“International Mercantile”), and Virilitec to subscribers of Equity Alert’s stock promotion website. Equity Alert was paid with stock of the companies, given to Equity Alert by persons directly or indirectly controlling or controlled by the issuers, or under direct or indirect common control with the issuers. Then, after promoting the companies, Equity Alert improperly sold the stock on the open market for $171,370.

According to the Commission’s Order, Equity Alert was hired to promote International Mercantile, the predecessor of T&G (now a Bernardsville, New Jersey developer of fingerprint scanning technology and electronic gaming devices), in exchange for $49,500 in cash and/or unrestricted International Mercantile shares. The individual who hired Equity Alert was also entering into a merger agreement under which a company of which he was president would merge into International Mercantile, and he would assume the title of president of the post-merger company, T&G. The individual arranged for a private company he controlled to provide Equity Alert with a convertible note that was exercisable into International Mercantile stock.

The Commission’s Order finds that Equity Alert e-mailed its subscribers a news alert advertising International Mercantile as the newest of the “red hot” biometric companies whose share prices had risen following September 11, 2001. In the two days that followed the dissemination of the e-mail, International Mercantile’s stock price rose 31 percent, from $1.13 to $1.48, on volume that was 16,000 percent higher than the average daily trading volume of the stock during the preceding six months. The day after Equity Alert sent the e-mail news alert, it sold its International Mercantile stock for $132,500.

The Commission’s Order also finds that Equity Alert was hired to promote another small cap company, Virilitec, a Brooklyn, New York developer of nutritional supplements purportedly designed to enhance human male sperm count and sexual virility. The husband of Virilitec’s president and chairperson hired Equity Alert and arranged for a long-time Virilitec shareholder to transfer 40,000 Virilitec shares to Equity Alert. After Equity Alert disseminated a promotional e-mail regarding Virilitec, the average daily trading volume of Virilitec stock was over 3,000 percent higher than that of the preceding six months. In the days following the Virilitec promotional campaign, Equity Alert began selling the Virilitec shares, ultimately grossing $38,870.

According to the Commission’s Order, Equity Alert obtained the International Mercantile and Virilitec stock with a view to distributing the stock to the public from persons directly or indirectly controlling or controlled by the issuers, or under direct or indirect common control with the issuers. Therefore, the stock was restricted and Equity Alert was prevented from selling the stock to the public for one year. The transactions violated the registration provisions of the federal securities laws, which prohibit the offer or sale of securities unless a registration statement has been filed with the Commission or is in effect as to the securities.

The Commission’s Order found that EquityAlert.com, Inc., Innotech Corporation, Mann, Rayat, T&G, and Virilitec violated Sections 5(a) and 5(c) of the Securities Act of 1933, and ordered them to cease and desist from committing or causing any violations and any future violations of those provisions. The Commission’s Order also ordered EquityAlert.com, Inc. and Innotech Corporation to disgorge $31,555.14, waiving payment of the remainder of its improper trading proceeds, based on the now-defunct entities’ demonstration of its inability to make full payment.

Case 2: Touting by Stock Promoters SmallCap Solutions, Inc., Research Investment Group, Inc., and IR Specialists, Inc.

The Commission instituted administrative proceedings against Research Capital, LLC (“Research Capital”), a Florida venture capital company, and its principals, Craig L. Smith, III (“Smith”) and R. Craig Hall (“Hall”), and Internet stock promoter Wayne H. Jenkins (“Jenkins”) and his company, IR Specialists, Inc. (“IR Specialists), all of whom settled the proceedings without admitting or denying the findings in the Commission’s Order. The Commission also instituted related administrative proceedings naming alleged stock promoters, Tyler T. Fleming (“Fleming”), SmallCap Solutions, Inc. (“SmallCap Solutions”), Complete Financial And Operations, LLC (“Complete Financial”), Scott H. Wilding (“Wilding”), and Research Investment Group, Inc. (“RIG”).

According to the Commission’s Orders, Research Capital hired stock promoters to tout a small cap issuer with which Research Capital was affiliated. Research Capital and its principals, Smith, of Osprey, Florida, and Hall, of Sarasota, Florida, owned approximately 18% of the issuer’s outstanding shares, and had agreed to provide the issuer with $1 million in working capital. Research Capital hired stock promoter Wilding of Pembroke Pines, Florida, and his company, RIG, to promote the issuer on the Internet. In exchange, RIG received an option to purchase up to 4 million of the issuer’s shares at one-third of the market price. Smith and Hall transferred 3,300,000 shares to Wilding pursuant to this option.

The Commission’s Orders allege that RIG subcontracted with two other stock promoters. The first, Fleming, a Las Vegas resident who promoted small cap companies through two corporate entities he heads, SmallCap Solutions and Complete Financial. The second promoter, Jenkins, of Hope, Rhode Island, promoted small cap companies through his company, IR Specialists. Fleming and Jenkins were paid with stock transferred from Smith.

The Commission’s Orders further allege that Fleming’s and Jenkins’ promotional campaigns coincided with several days of increased trading volume in the issuers stock, some days as much as 600% higher than the stock’s historical trading volume. After the start of the campaign, the three stock promoters, Wilding, Fleming, and Jenkins sold the stock they received for over $130,000.

According to the Commission’s Orders, Wilding, Fleming, and Jenkins obtained the issuer’s shares with a view to distributing the stock to the public, from persons directly or indirectly controlling or controlled by the issuer, or under direct or indirect common control with the issuer. Therefore, the stock was not exempt from registration, and the transactions violated the registration provisions of the federal securities laws, which prohibit the offer or sale of securities unless a registration statement has been filed with the Commission or is in effect as to the securities.

According to one of the Commission’s Orders, SmallCap Solutions and Fleming were hired by another publicly traded company to promote it in exchange for 30,000 of its unrestricted shares. The company’s president directed a shareholder to transfer 30,000 shares to SmallCap Solutions to pay for the promotion. The company reimbursed the shareholder with 60,000 restricted shares of the company. Three days after SmallCap Solutions first touted the company on its website, the company’s stock price rose 18 percent, from $1.0625 to $1.25, on volume that was 255 percent higher than the stock’s historical average volume. SmallCap Solutions should the shares it received for $15,955.

The Commission’s Order alleges that SmallCap Solutions obtained the shares with a view to distributing them to the public from a person directly or indirectly controlling or controlled by the issuer, or under direct or indirect common control with the issuer. As a result, the shares were restricted and could not be sold to the public within a year after they were acquired by SmallCap Solutions. The transactions constituted an illegal distribution of securities. One of the Commission’s Orders finds that Research Capital, Smith, Hall, IR Specialists, and Jenkins violated Sections 5(a) and 5(c) of the Securities Act, and orders them to cease and desist from committing or causing any violations and any future violations of those provisions. The Order also orders Jenkins and IR Specialists to disgorge $6,337.22, representing the amount they made from the illegal stock sales plus prejudgment interest.

The other Order of the Commission alleges that RIG, Wilding, Fleming, SmallCap Solutions, and Complete Financial violated Sections 5(a) and 5(c) of the Securities Act. A hearing will be scheduled before an administrative law judge to determine whether the allegations in the Order are true and, if so, whether RIG, Wilding, Fleming, SmallCap Solutions, and Complete Financial should be ordered to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act, and whether they should be ordered to disgorge the proceeds of their conduct.

Case 3: Promoters That Touted First Capital International, Inc.

The Commission instituted another set of related administrative proceedings, one proceeding against a Houston-based public company, First Capital International, Inc. (“First Capital”), its president, Alexander Genin (“Genin”), and a former stock promoter, Edwin M. Koziol (“Koziol”). Each of these respondents settled the proceeding without admitting or denying the findings in the Order. In the related matter, the Commission instituted proceedings against OTC Live, Inc. (“OTC Live”) and Mark A. Suleymanov (“Suleymanov”).

According to the Commission’s Orders, Genin hired a now-defunct stock promotion company (of which Orlando, Florida resident Koziol was president) and another promoter, OTC Live, based in Rego Park, New York, to promote First Capital on the Internet. To pay these promoters, Genin transferred to them a total of 64,500 First Capital shares from a brokerage account over which he held power of attorney.

The Commission’s Orders allege that OTC Live (whose president and founder, Suleymanov, also uses the surname “Suleman”) began its promotional campaign by posting a research report recommending that investors purchase First Capital stock. In the four days that followed, First Capital’s stock price rose 92 percent, from $0.13 to $0.25 per shares. OTC Live later sold the stock it had received from First Capital’s president, Genin, for $3,285.

About a month later, Koziol’s company began its First Capital promotion. Koziol’s company then sold the stock it had received from Genin. Koziol received approximately $3,300 as a result.

One of the Commission’s Order finds that Koziol’s company obtained the First Capital stock with a view to distributing the stock to the public from a person directly or indirectly controlling or controlled by First Capital, or under direct or indirect common control with First Capital. Therefore, the stock was restricted and could not be sold to the public for one year.

The Commission’s Order found that First Capital, Genin, and Koziol violated Sections 5(a) and 5(c) of the Securities Act and orders them to cease and desist from committing or causing any violations and any future violations of those provisions. The Order also orders Koziol to disgorge $3,692.85, representing the amount he made from the illegal stock sales plus prejudgment interest.

The other Order of the Commission alleges that OTC Live and Suleymanov also violated Sections 5(a) and 5(c) of the Securities Act. A hearing will be scheduled before an administrative law judge to determine whether the allegations in the Order are true and, if so, whether OTC Live and Suleymanov should be ordered to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act, and whether they should be ordered to disgorge the proceeds of their conduct.

Case 4: Companies Touted by MicroCap Marketing, Inc., Lorsin, Inc., Russell Management, Inc. and Harold Engel, Jr.

Finally, the Commission instituted two more related administrative proceedings, one proceeding against two publicly traded companies, Energy & Engine Technology Corporation (“Energy & Engine”) of Plano, Texas and Houston-based ProActive Computer Services, Inc. (“Proactive”). Both of these respondents settled the proceeding without admitting or denying the findings in the Commission’s Order.

In the related matter, the Commission instituted proceedings against Lorsin, Inc., Loretta M. Lockhart (“Lockhart”), Craig K. Hjalmarson (“Hjalmarson”), Russell Management, Inc. (“Russell Management”), George R. Siembida (“Siembida”), Harold Engel, Jr. (“Engel”). MicroCap Marketing, Inc. (“MicroCap Marketing”), and Shane M. Nelson (“Nelson”).

According to the Commission’s Orders, Energy & Engine, which maintains a natural gas gathering system, hired former stock promoter Siembida, of Depew, New York, and his company, Russell Management, to promote Energy & Engine on the Internet. Energy & Engine paid Siembida in stock that was improperly registered pursuant to a Form S-8 Registration Statement. (Form S-8 registration is not available for stock issued as compensation for stock promotion services.) Siembida subcontracted with Engel, who operates a small cap stock promotion website, WillyWizard.com, to promote Energy & Engine. To compensate Engel, Siembida transferred some of the shares he received from Energy & Engine to Engel.

The Commission’s Orders allege that Engel, in turn, subcontracted with two other promoters, Hjalmarson and Nelson, to profile Energy & Engine on the Internet. Hjalmarson, of Kill Devil Hills, North Carolina, operates a website, GreedOrFear.com, through a corporation named Lorsin, which is headed by Lockhart, also of Kill Devil Hills. Nelson, of Bethany, Illinois, heads MicroCap Marketing, which promotes small cap companies on the Internet. Engel paid Hjalmarson and Nelson with a portion of the Energy & Engine shares he received from Siembida.

The Commission’s Orders further allege that Engel and Nelson touted Energy & Engine on their websites, and that Hjalmarson distributed Energy & Engine press releases over the Internet. The promotion coincided with a 68 percent rise in the price of Energy & Engine’s stock, from $0.29 to $0.49 per share, and average daily trading volume that was over 600% higher that the stock’s historical daily volume. Siembida, Engel, Hjalmarson, and Nelson sold the stock that they had received for a combined total of over $14,000.

According to the Commission’s Orders, Siembida obtained the Energy & Engine shares in an unregistered offering with a view to distributing the stock to the public, making him an underwriter in a distribution of Energy & Engine stock. By participating in this distribution, Energy & Engine, Russell Management, Siembida, Engel, Lorsin, Hjalmarson, Lockhart, MicroCap Marketing, and Nelson violated Sections 5(a) and 5(c) of the Securities Act.

The Commission’s Orders also allege that Nelson and MicroCap Marketing participated in a second illegal stock distribution with another small cap issuer, ProActive. ProActive, a computer services provider, hired Nelson and MicroCap Marketing to promote ProActive in exchange for a combination of restricted and purportedly unrestricted ProActive shares. ProActive arranged for a third-party shareholder to transfer 300,000 ProActive shares to Nelson’s brokerage account. Nelson posted ProActive profiles on his websites and touted ProActive in his electronic newsletter. Nelson sold the ProActive shares he received from the third- party shortly after receiving them for $1,340.50.

The Commission’s Orders allege that Nelson obtained the ProActive shares with a view to distributing them to the public from a person directly or indirectly controlling or controlled by ProActive, or under direct or indirect common control with ProActive. Therefore, the stock was restricted and could not be sold to the public for one year. In the proceeding against Lorsin, Lockhart, Hjalmarson, Russell Management, Siembida, Engel, MicroCap Marketing, and Nelson, the Commission’s Order alleges that another issuer, whose stock was traded on the OTC Bulletin Board, hired Lorsin to promote it on the Internet. To pay for the promotion, the issuer directed two shareholders to transfer a total of 30,000 of its shares to Lorsin. Following the launch of Lorsin’s promotional campaign, Lorsin sold a portion of the stock it had received from the issuer for $1,249.

According to the allegations in the Commission’s Order, Lorsin obtained the issuer’s shares with a view to distributing them to the public from a person directly or indirectly controlling or controlled by the issuer, or under direct or indirect common control with the issuer. Therefore, the stock was restricted and could not be sold to the public for one year.

One of the Commission’s Orders finds that Energy & Engine and ProActive violated Sections 5(a) and 5(c) of the Securities Act and orders them to cease and desist from committing or causing any violations and any future violations of those provisions. The other Order of the Commission alleges that Lorsin, Lockhart, Hjalmarson, Russell Management, Siembida, Engel, MicroCap Marketing, and Nelson violated Sections 5(a) and 5(c) of the Securities Act. A hearing will be scheduled before an administrative law judge to determine whether the allegations in the Order are true and, if so, whether Lorsin, Lockhart, Hjalmarson, Russell Management, Siembida, Engel, MicroCap Marketing, and Nelson should be ordered to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act, and whether they should be ordered to disgorge the proceeds of their conduct.

(Rel. 33-8311, File No. 3-11313 – Energy & Engine Technology Corporation and ProActive Computer Services; Rel. 33-8309, File No. 3-11311 – Research Capital, LLC, Carl L. Smith, III, Richard Craig Hall, IR Specialists, Inc. and Wayne H. Jenkins; File No. 3-11310 – Lorsin, Inc., Loretta M. Lockhart, Craig K. Hjalmarson, Russell Management, Inc., George R. Siembida, Harold Engel, Jr., MicroCap Marketing, Inc. and Shane M. Nelson; File No. 3-11309 – OTC Live, Inc. and Mark A. Suleymanov; Rel. 33-8306, File No. 3-11308 – EquityAlert.com, Inc., Innotech Corporation, Bhupinder S. Mann, Harmel S. Rayat, T & G2, Inc. and Virilitec Industries, Inc.; Rel. 33-8310, File No. 3-11312 – First Capital International, Inc., Alexander Genin and Edwin M. Koziol; Rel. 33-8305; File No. 3-11307 – SmallCap Solutions, Inc., Complete Financial And Operations, LLC, Tyler T. Fleming, Research Investment Group, Inc., and Scott H. Wilding)

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.   Quantcast