U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21892 / March 22, 2011
Securities and Exchange Commission v. Spyglass Equity Systems, Inc., Richard L. Carter, Preston L. Sjoblom, Tyson D. Elliott, Flatiron Capital Partners, LLC, Flatiron Systems, LLC and David E. Howard II, Civil Action No. CV 11-2371 RGK (MANx) (C.D. Cal., March 21, 2011).
SEC CHARGES THREE FIRMS AND FOUR INDIVIDUALS IN LOS ANGELES-BASED BOILER ROOM OPERATION
The Securities and Exchange Commission today charged three firms and four individuals involved in a boiler room scheme operating out of Los Angeles that defrauded investors who they persuaded to buy purportedly profitable trading systems.
The SEC alleges that representatives of Spyglass Equity Systems Inc. cold-called investors and made false and misleading statements to help raise more than $2.15 million from nearly 200 investors nationwide for two related investment companies – Flatiron Capital Partners LLC (FCP) and Flatiron Systems LLC (FS). However, only a little more than half of that money was actually used for the advertised trading purposes, and much of the trading that did occur failed to use the purported trading systems. FCP and FS wound up losing about $1 million in investor funds. The managing member of the two firms – David E. Howard II – misused almost $500,000 of investor money for unauthorized business expenses as well as personal expenses including travel, entertainment, and gifts for his girlfriend.
Along with FCP, FS and Howard, Spyglass and its owners – Richard L. Carter, Preston L. Sjoblom and Tyson D. Elliott – also are charged with fraud in connection with the unregistered securities offerings.
According to the SEC’s complaint filed in federal court in the Central District of California, Howard conspired with Spyglass to sell the securities, and Spyglass earned an estimated $1 million in the deal. The trading systems pitched to investors by Spyglass representatives could only be used if the investor also funded a brokerage account at FCP. However, FCP was not a broker-dealer and thus could not offer brokerage services to customers.
The SEC alleges that Spyglass representatives falsely touted a successful performance history and level of automation of the trading systems, and misled investors to believe that FCP had a positive reputation and solid affiliations in the brokerage industry. To seal the deal, Spyglass offered investors a money-back guarantee if the system did not generate a profit within the first 180 days of trading. However it was only after an investor paid Spyglass a license fee of about $6,000 that Spyglass put the investor in contact with Flatiron, ostensibly to open a brokerage account.
The SEC’s complaint alleges that Howard and FCP provided each investor with instructions on how to fund their “account” with FCP, but included in the instruction packet a copy of the FCP Operating Agreement that indicated the investor was actually purchasing a membership interest in FCP. Many of the investors recruited by Spyglass were elderly and unsophisticated investors who did not understand that they were purchasing a security interest in FCP.
According to the SEC’s complaint, FCP pooled investor funds so Howard and others could trade the funds using various trading techniques. When the trading was not successful and it became clear that Spyglass would have to pay refunds to its clients, Howard provided Spyglass with another trading system and organized FS to purportedly operate the new system. Using false and misleading claims of prior success of this new trading system and Spyglass’s relationship with FS and Howard, FCP investors were persuaded to transfer their investments from FCP to FS. Under the direction of Sjoblom and Carter, Spyglass then began selling the FS trading system to new investors using a sales pitch similar to the one it used to sell the FCP. Investors were again misled to believe they would be opening brokerage accounts, this time with FS. They were later provided with an FS Operating Agreement indicating they were actually purchasing a membership interest in FS. Howard used FS investor funds to trade in equities, futures and off-market securities.
When FS ran out of funds in December 2008, the SEC alleges that Howard took steps to conceal the fraudulent scheme by telling members that he had ceased all trading in order to conduct an audit of the trading accounts. However, Flatiron never hired an auditor and no audit was ever performed.
The SEC's complaint charges Spyglass, Sjoblom, Carter, Elliott, FS, FCP and Howard with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; FS, FCP and Howard with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933; Spyglass, Sjoblom, Carter and Elliott with violation of Section 15(a) of the Exchange Act; FS and FCP of violations of Section 7(a) of the Investment Company Act of 1940; Howard with violations of Section 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder; and Spyglass, Carter, Sjoblom and Elliott with aiding abetting Howard’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC seeks permanent injunctions, disgorgement plus prejudgment and post-judgment interest, and financial penalties.
The SEC acknowledges the assistance of the Commodity Futures Trading Commission (CFTC), which charged Carter and his company The Trade Tech Institute Inc. in a related enforcement action filed in federal court in the Central District of California.