SEC Charges Boiler Room Operators in Florida-Based Penny Stock Manipulation Scheme
The Securities and Exchange Commission today charged a Fort Lauderdale-based firm and its founder with conducting a fraudulent boiler room scheme in which they hyped stock in two thinly-traded penny stock companies while behind the scenes they sold the same stock themselves for illegal profits.
The SEC alleges that First Resource Group LLC and its principal David H. Stern employed telemarketers who fraudulently solicited brokers to purchase stock in TrinityCare Senior Living Inc. and Cytta Corporation. While recommending the securities in these two microcap companies, Stern sold First Resource’s shares of TrinityCare and Cytta stock unbeknownst to investors who were purchasing them – a practice known as scalping. As Stern was selling the stocks, he also purchased small amounts in order to create the false appearance of legitimate trading activity and induce investors to purchase shares in both companies.
“First Resource and Stern used a telephone sales boiler room to make inflated claims and defraud investors while simultaneously manipulating the price of the stocks and making profits for themselves,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “The SEC will continue to aggressively pursue perpetrators of microcap stock fraud schemes that hound potential investors to buy stock.”
Since the beginning of fiscal year 2011, the SEC has filed more than 50 enforcement actions for misconduct related to microcap stocks, and issued 63 orders suspending the trading of suspicious microcap issuers. Microcap stocks are issued by the smallest of companies and tend to be low priced and trade in low volumes. Many microcap companies do not file financial reports with the SEC, so investing in microcap stocks entails many risks. The SEC has published a microcap stock guide for investors and an Investor Alert about avoiding microcap fraud perpetrated through social media.
According to the SEC’s complaint filed against Stern and First Resource in U.S. District Court for the Southern District of Florida, they violated federal securities laws by acting as unregistered broker-dealers. Stern hired and trained First Resource’s salespeople and gave them information about TrinityCare to prepare sales scripts and pitch the stock to potential investors. Stern reviewed the draft scripts, made edits, and approved the scripts before the salespeople were allowed to use them.
The SEC alleges that Stern gave the salespeople a list of potential investors to cold call and pitch the stocks. First Resource’s salespeople falsely claimed TrinityCare stock “is going to be $5-7 in 6-12 months” and the company “is going to be a half-a-billion dollar company in five years or roughly a $40 stock.” Stern also disseminated a research report on Cytta to investors and falsely touted: “Sales projections for 2010-2014 should exceed $500 million with a pre-tax net of over $400 million.”
The SEC’s complaint alleges that First Resource Group and Stern violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and financial penalties as well as a penny stock bar against Stern.
The SEC’s investigation was conducted by Jorge L. Riera under the supervision of Elisha L. Frank in the SEC’s Miami Regional Office in coordination with an examination of First Resource conducted by Anson Kwong, Michael J. Nakis, George Franceschini, and Nicholas A. Monaco of the SEC’s Miami office. Edward D. McCutcheon will lead the SEC’s litigation efforts.
The SEC’s investigation is continuing.