SEC Charges Two Florida-Based Attorneys for Roles in Offering Fraud by Transfer Agent
The Securities and Exchange Commission today charged two Florida-based attorneys for their roles in an offering fraud conducted by a transfer agent that was the subject of an SEC enforcement action two months ago.
The SEC alleges that Jonathan P. Flom and James L. Schmidt II were designated to receive wire transfers of funds from investors who were solicited by cold callers using boiler room tactics to convince them their investments would yield high rates of return. Wiring the money to a licensed attorney bolstered the appearance of safety in the investment opportunity and concealed from investors how the money was really being spent after Flom or Schmidt received the funds. Flom and Schmidt merely kept 2 percent of the funds they received from investors and transferred the remaining amounts to Cecil Franklin Speight, who promptly used it for personal expenses or to make Ponzi-like payments instead of investing in the high-yield investments or discounted stock promised to investors. The SEC charged Speight and his firm International Stock Transfer Inc. (IST) with fraud in July.
Flom and Schmidt were arrested earlier today in parallel criminal actions brought by the U.S. Attorney’s Office for the Eastern District of New York.
“Attorneys are critical gatekeepers in our securities markets, and Flom and Schmidt enabled a scheme to occur by using their legal credentials to add the appearance of legitimacy as they collected investor funds,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “We will continue to aggressively seek out and prosecute lawyers who abuse their positions of trust and serve as conduits to fraud in our markets.”
According to the SEC’s complaints filed in federal court in Brooklyn, Flom and Schmidt enabled Speight and IST to steal more than $3.3 million from at least 70 investors. Approximately $2.7 million of scheme proceeds flowed through Schmidt’s account and more than $580,000 passed through an account controlled by Flom. Cold callers told investors to wire their money to either Schmidt or Flom in order to purchase purported securities that included fake foreign bond certificates and stock certificates for a publicly-traded microcap company with no connection to IST.
The SEC alleges that Schmidt and Flom knowingly participated with Speight in the sale of fraudulent securities. Flom received e-mails from Speight that explicitly discussed the misappropriation of investor funds. Schmidt collaborated with Speight to craft misleading responses to numerous investors who complained about the absence of promised coupon payments as well as the counterfeit appearance of the stock certificates they received and the inability to contact the cold callers who solicited them.
The SEC’s complaints charge Schmidt and Flom with violating the antifraud provisions of the securities laws, including Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
The SEC’s investigation was conducted by Sharon Binger, Adam Grace, Justin Alfano, John Lehmann, Elzbieta Wraga, and Jordan Baker. The SEC’s litigation will be handled by Alexander Vasilescu, Mr. Alfano, and Mr. Lehmann. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation.