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SEC Charges 41 People in 13 Actions Involving More Than $25 Million in Microcap Fraud



Fight Against Microcap Fraud “Paying Dividends”

Washington, D.C., September 24, 1998 – The Securities and Exchange Commission announced today the filing of thirteen enforcement actions against forty-one defendants across the country for their involvement in fraudulent microcap schemes that bilked investors of more than $25 million. Some of the fraudulent schemes involved bogus medical "breakthroughs," sham hotel renovations, phony stock certificates and the stock manipulation of on-line department store Shopping.com.

In nine injunctive actions and two administrative proceedings the SEC alleges that the defendants violated the antifraud provisions of the federal securities laws by manipulating thirteen microcap stocks. In many of these cases the defendants engaged in "pump and dump" schemes and manipulated the stock price of microcap companies by disseminating materially false and misleading information about the financial condition, business relationships and future stock price of those companies, among other things.

SEC Director of Enforcement Richard H. Walker said, "We are dedicated to ferreting out and prosecuting those who prey on innocent investors. Our actions against the scam artists charged in today's actions, who issue and sell these phony investments, demonstrate that the Commission's coordinated attack against microcap fraud is paying dividends."

The defendants in these cases profited from the fraud, often by selling cheap insider stock after pumping up the stock price, receiving a total of approximately $25 million in ill-gotten gains. Among the schemes:

  • A Florida company allegedly in the business of building golf practice facilities instead taught its investors an expensive lesson. The company was really running a Ponzi scheme, cheating more than 350 investors in 16 states out of approximately $15 million. (SEC v. James T. Staples, et al.)

  • A Utah company claimed to have developed a new data transmission technology called "Digital Wave Modulation," and the company's stock soared from $3.50 to more than $40 a share. Prices collapsed when the company failed to produce a promised prototype, but not before the company's chairman and his children sold approximately $3 million worth of their shares in this classic "pump and dump" scheme. (SEC v. International Automated Systems, Inc., et al.)

  • A biotech firm in Las Vegas falsely claimed the company had an exclusive license to market "breakthrough" medical devices. The company also lied about its efforts to market a new line of nutritional supplements. (SEC v. Bio-Tech Industries, Inc., et al.)

  • Con artists in South Florida sold unregistered shares in bogus hotel renovation and condominium projects. In fact, they printed the certificates themselves and kept the money from their sale. (SEC v. VII Visionary Investments, Inc., et al.)

  • A Los Angeles area broker-dealer racked up more than $4 million for itself by rigging the market for shares of an on- line retailer, Shopping.com. (SEC v. Waldron & Co., Inc.)

  • The Commission charged three defendants with publishing purportedly "independent" news reports about 50 microcap companies that paid the defendants almost $400,000 in stock and cash to promote them. The newsletter was sent to approximately 60,000 readers each month. (SEC v. Hall, et al.)

SEC Chairman Arthur Levitt said, "Putting microcap fraudsters out of business is a top priority of this Commission, and I am pleased with the progress we've made. Investors can help this effort and protect themselves by asking tough questions, not giving their money to strangers and reporting suspicious behavior. While securities fraud may never become extinct, we are working to put microcap fraudsters on the endangered species list."

Prior to charging the defendants in these actions, the Commission had suspended trading in the stock of eight of the issuers involved in the pump and dump schemes for a single, ten-day period based on the dissemination of false and misleading information about the companies. The Commission's suspension of trading stopped the ongoing manipulations and placed an additional burden on broker- dealers to update their files with accurate information about the companies, pursuant to Rule 15c2-11 under the Securities Exchange Act of 1934, before they resumed or began quoting the securities.

Preventing Microcap Fraud

The SEC encourages investors to get the facts before they invest. They should call the SEC or their state's securities regulator to find out whether the investment is registered. They should also ask their state's securities regulator whether the broker and the firm are licensed to do business in the state and whether either has a history of complaints.

Investors should avoid being swept away by a sales pitch, especially one that promises spectacular returns or emphasizes unproven products in development. They should learn as much as they can about the company, including how long it has been in business, what its products or services are, and whether it has made money for investors in the past. If the investment is touted by broadcast or print media or on the Internet, investors should ask whether payments have been made to promote the investment.

For more tips on how to invest wisely and protect against investment fraud, investors should call the SEC toll- free at (800) SEC-0330 or visit the SEC's website at www.sec.gov.

These enforcement actions are part of the Commission's four-pronged approach to attacking microcap fraud: enforcement, inspections, investor education and regulation. For more information about the SEC's response to Microcap fraud and the litigation releases for each of these cases, visit the SEC's Microcap Fraud Information Center at http://www.sec.gov/news/extra/microcap.htm.

The SEC acknowledges the valuable assistance of the staff of the National Association of Securities Dealers Regulation, Inc. in referring a number of these matters.

For information about the individual cases, you may select from the following: