SEC Charges 81 Defendants in Telemarketing Stock Fraud Schemes


Schemes Took in Approximately $30 Million

The Commission alleges that the offerings were fraudulent because the issuers employed nationwide networks of telemarketers, called Independent Sales Offices or ISOs, to sell the offerings and paid them undisclosed cash commissions ranging from 20% to as high as half of the offering proceeds. According to the SEC's complaints, these excessive commissions violated express representations contained in offering materials, which falsely stated that the issuers would use most of the offering proceeds for business purposes. When the offering materials did mention sales commissions, they significantly understated the portion of offering proceeds that issuers agreed to pay broker-dealers. The Commission's complaints charge the issuers and their principals, the individuals and entities who managed the offerings by recruiting and organizing the networks of ISOs, the ISO operators, and two attorneys.

Simultaneously, in related criminal prosecutions, the U.S. Attorney for the Eastern District of New York announced the unsealing of indictments containing criminal charges against 46 defendants for the same fraudulent schemes.

"These cases demonstrate the need for investors to be extremely skeptical when they are solicited to invest over the phone by an unfamiliar caller," said Wayne M. Carlin, Regional Director of the Commission's Northeast Regional Office. "Skepticism should be greater when the investment is not registered with the Commission. Here, the investors were deceived into believing that their money would go to the development of various business enterprises when, in fact, a quarter to a half of each investor's funds went to enrich telemarketers."

Each of the SEC's four complaints charges a separate group of related schemes. These four groups are as follows:

  • Motion Picture Schemes. Three schemes involved offerings of securities in motion picture development companies: Heritage Film Group LLC, Little Giant LLC, and Out of the Black Partners LLC. These issuers retained "offering managers" Russell Finnegan, in the case of Little Giant and Heritage Film, and Michael Gonzales, in the case of Out of the Black, who recruited and coordinated over 42 telemarketer ISOs. Between 1997 and 2001, the defendants raised approximately $13.1 million, of which about half went to telemarketers and other unregistered brokers as sales commissions. SEC v. Heritage Film Group, LLC, 02 Civ. 4364 (LDW) (E.D.N.Y.) / Litigation Release No. 17658.
  • Medical Technology Ventures. Three other schemes involved companies that develop medical devices and software for health care professionals: Intracom Corp., Hyperbaric Systems Inc., and Surgica Corp. These offerings took place between 1997 and 2000, were coordinated through Larry Bryant, an unregistered securities broker, and raised over $13 million. Between about 20% to 30% of the offering proceeds went to pay sales commissions even though the offering memoranda represented that only 12% would be used for that purpose. SEC v. Intracom Corporation, 02 Civ. 4367 (LDW) (E.D.N.Y.)/ Litigation Release No. 17659.
  • Internet-Telecommunications Ventures. Three further schemes involved entities purportedly formed to establish long distance telephone service through the Internet: Ephone Inc., Webphone LLP, Newera Communications LLP. These offerings occurred between July 1999 and December 2000 and raised about $2.9 million. About $1.2 million of that amount - or 42% - went to unregistered broker-dealers Donald Plain, Christopher Plain, Peter Bertorelli, and the ISO telemarketers they coordinated. SEC v. Ephone, Inc., 02 Civ. 4365 (LDW) (E.D.N.Y.)/ Litigation Release No. 17660.
  • In Line Hockey Rink Venture. Between 1996 and 2000, the defendants raised over $650,000 from approximately 52 investors by offering stock in America In Line Corp. and its subsidiary, America In Line of Mount Sinai Corp., purportedly for building and operating in line roller hockey rinks. Almost 30% of the offering proceeds went to telemarketers as sales commissions. SEC v. America In Line Corporation, 02 CIV. 4362 (LDW) (E.D.N.Y.)/ Litigation Release No. 17661.

The Commission alleges that the defendants violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, the provisions of the Securities Act that require registration of non-exempt securities offerings, and the provisions of the Exchange Act that require registration of broker-dealers. The Commission seeks injunctions, disgorgement of illegal commissions and other ill-gotten gains plus prejudgment interest, and civil penalties. The complaints also seek orders barring the principals of the issuers from serving as officers or directors of public companies. The cases are pending.

Wayne M. Carlin, Regional Director, Northeast Regional Office, 646-428-1510
Barry W. Rashkover, Associate Regional Director, Northeast Regional Office, 646-428-1856

Last modified: 8/6/2002