Litigation Release No. 19466 / November 16, 2005

Securities and Exchange Commission v. James E. Franklin, et al., Civil Action No. 02CV0084 IEG (RBB) (S.D. Cal.)


On November 10, 2005, a federal jury in the Southern District of California found James E. Franklin and Samuel Wolanyk liable for securities fraud. The SEC had charged Franklin, Wolanyk, Dieter Raabe, and four entity defendants under their control, with operating a "pump and dump" scheme beginning in 1997 and continuing into 1998 that produced more than $4 million in profits. The SEC's complaint, filed January 14, 2002, alleged that Franklin set up an internet website, "Red Hot Stocks," to tout stocks that he would acquire cheaply (through private offerings, open market purchases and consulting fees). According to the complaint, Franklin then sold those shares after their price increased following overly optimistic and misleading "profiles" on the companies which appeared on the Red Hot Stocks website. The SEC's complaint alleged that Wolanyk operated Red Hot Stocks, authored and distributed the "profiles" and also owned and sold some of the stocks that were touted.

After a three-week trial presided over by U.S. District Judge Dana M. Sabraw, the jury found that Franklin violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder with respect to seven stocks and Wolanyk violated these provisions with respect to 13 stocks. The jury also found that Franklin and Wolanyk violated the antitouting provision of Section 17(b) of the Securities Act. The jury further found Franklin liable for violations of the registration provisions of Section 5 of the Securities Act, and as a control person of two of the entity defendants.

Previously, on November 13, 2002, a final judgment of permanent injunction was entered against Raabe, who consented to the injunction, without admitting or denying the SEC's allegations. The court will determine the amount of Raabe's disgorgement and any civil money penalty following the resolution of the SEC's action against Franklin and Wolanyk. On March 13, 2003, a final default judgment was entered against one of the entity defendants, Vector Keel Ltd. On June 20, 2003, final default judgments were entered against the other three entity defendants, Avalon Trust, Initial Public Offering Consultants, Inc. and Net Income. In two related matters, Art H. Beroff, without admitting or denying the findings in the SEC's administrative order or the allegations in its complaint, consented to an 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. For further information, please see Litigation Release No. 17311 (January 15, 2002), Litigation Release No. 17312 (January 15, 2002) and Administrative Proceeding File No. 33-8054 (January 14, 2002).