LITIGATION RELEASE NO. 17311 / January 15, 2002

Securities and Exchange Commission v. James E. Franklin, Dieter Raabe, Samuel Wolanyk, Vector Keel Ltd., Initial Public Offering Consultants, Inc., Net Income and Avalon Trust, Civil Action No. 02CV0084 IEG (RBB) (S.D. Cal.)


The Securities and Exchange Commission yesterday filed an injunctive action in the United States District Court for the Southern District of California against three individuals and four related entities arising from their alleged involvement in a "pump and dump" scheme that produced more than $4 million in profits.

The Complaint alleges that defendant James E. Franklin devised a fraudulent scheme that began in January 1997 and continued into 1998 to use Red Hot Stocks ("Red Hot "), an Internet website, as a vehicle to tout stocks that he and others had acquired cheaply through private offerings and open market purchases so that they could sell their shares at a profit following Red Hot's buy recommendations. The Complaint alleges that defendant Samuel Wolanyk operated the Red Hot website, interviewed certain of the issuers, and drafted and disseminated some or all of the on-line recommendations. The Complaint also alleges that defendant Dieter Raabe participated in the fraudulent scheme by issuing trading instructions for stocks profiled on Red Hot that were held in a Canadian brokerage account of defendant Vector Keel Ltd. The Complaint alleges that both Raabe and Franklin had a beneficial interest in the Vector Keel account and that illegal trading profits from that account were wired to various entities affiliated with Franklin or Raabe, and that a portion of these illegal trading profits were received by defendant Net Income, a nominee corporation that Franklin set up to operate the Red Hot website. The Complaint alleges that Franklin also sold stock of a company profiled on Red Hot through brokerage accounts of defendants Initial Public Offering Consultants, Inc. ("IPO") and Avalon Trust. Further, according to the Complaint, certain of defendants' sales were part of an illegal unregistered distribution.

The Complaint alleges that statements in Red Hot's profiles were materially false or misleading because, among other things, they contained unreasonable price predictions, they failed adequately to disclose that defendants owned stock in profiled companies or expected to be compensated for promoting companies profiled on Red Hot and because defendants were engaged in a pattern of acquiring stocks profiled on Red Hot with the intent to sell in coordination with the touts, while Red Hot recommended that others purchase the stock, a fraudulent practice called "scalping."

The Complaint charges all of the defendants with violations of the antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933 ("Securities Act"); Section 10(b) of the Securities Exchange Act of 1934; and Rule 10b-5 thereunder. The Complaint also alleges that Franklin, Wolanyk and Net Income violated the antitouting provision of Section 17(b) of the Securities Act. The Complaint further charges Franklin, Raabe, Vector Keel, Avalon Trust and IPO with violating the registration provisions of Section 5 of the Securities Act. The Commission seeks permanent injunctions, disgorgement, prejudgment interest, an accounting and civil money penalties against the defendants.

The Commission acknowledges the assistance provided by NASD Regulation, Inc. in this matter.

In two related settled matters, Art H. Beroff, without admitting or denying the findings in the Commission's administrative order or the allegations in its Complaint, consented to an administrative order requiring him to cease and desist from committing or causing violations of Section 5 of the Securities Act and agreed to pay $50,000 civil penalty. In the Matter of Art H. Beroff, Administrative Proceeding File No. 3-0677; SEC v. Art H. Beroff, Civil Action No. 1:02CV00067 (LR-17312) (January 15, 2002).

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*  SEC Complaint in this matter.