A BOILER ROOM FRAUD

Investment fraud cases with consumers losing their hard earned cash keep on surfacing. On Monday, the SEC brought two of these cases. On Tuesday, the Commission and the U.S. Attorney’s Office for the Southern District of Florida filed cases involving what the SEC labeled as “boiler room fraud” that began as early as 1998. Whether it is the turbulent economic times and the market crisis, the opening of the flood gates with the giant Ponzi schemes or that regulators have figured out how to find these cases, they just keep coming.

SEC v. 3001 AD, LLC, Case No. 09-Civ-81453 (S.D. Fla. Filed Sept. 29, 2009) names as defendants the company and Jimmy Barker, Robert Landrach, Marc Rifkin, Ronald Bowsky, Jack Maddock and Michael Weidgans. The parallel criminal case adds two individuals. Both cases center on the fraudulent sale of shares in 3001 AD and its related entities. The company, which ceased operations in 2008, purportedly developed and sold virtual reality products mainly for video game systems. From the late 1990s, the defendants raised about $20 million by selling interests in the company and its related entities. Those interests, sold for $5,000 each, were treated as interchangeable.

From a boiler room in Delray Beach, Florida, defendants marketed the interests primarily through telemarketer using a variety of misrepresentations to separate unsuspecting investors from their cash. These included:

• IPO: Investors were told that 3001 AD would soon be conducting an IPO. At one point, a press release titled to this effect was posed on their website. Preparations for the offering never went forward.

• Commissions: The documents given to investors said the commissions were 8%. Investors were never told that frequently from 10% to 40% of their investment went for commissions to the defendants.

• Business relationships: A press release told the public that Microsoft was negotiating a contract to license certain rights from the company. Another release claimed Apple had interest. Investors were also told that Disney was negotiating with the company. All of these claims were false

The criminal cases also allege that investors were promised $29,000 profit annually on each $5,000 investment.

The Commission’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). See also Litig. Rel. 21227 (Sept. 29, 2009).

The criminal charges include securities fraud, wire and mail fraud, conspiracy and making a false statement to the SEC. See also http://www.usdoj.gov/usao/fls/PressReleases/090929-03.html. Both cases are in litigation.

A STREAM OF INVESTMENT SCHEME FRAUD CASES

Once, it was thought that various kinds of investment frauds and Ponzi schemes were difficult to detect. Market regulators such as the SEC were hard pressed to find them. The market crisis, Madoff and now Stanford seem to have changed all that. Now, these schemes seem to be a staple of SEC enforcement.

Two more of these cases were brought on Monday by the SEC. SEC v. Bluestein, Case No. 2:09-CV-13809 (E.D. Mich. Filed Sept. 28, 2009); and SEC v. K&L International Enterprises, Inc., Case No. 6:09-CV-1638 (M.D. Fla. Filed Sept. 28, 2009).

Bluestein is an action against Detroit area stock broker Frank Bluestein. Mr. Bluestein, according to the complaint, served as a feeder for Edward May and his Ponzi scheme E-M Management LLC. Mr. Bluestein targeted elderly investors, sometimes inducing them to refinance their homes to secure funds for the scheme. To lure the investors, Mr. Bluestein conducted investment seminars where he discussed various investment topics. After winning their confidence, Mr. Bluestein used a variety of misrepresentations to obtain their investment. Typically, he assured potential investors that the fund was low risk and that he had carefully investigated its operations without telling them about his large fees. In fact, Mr. Bluestein had done little to investigate the fund which was actually a Ponzi scheme. Using this approach Mr. Bluestein raised about $74 million from more than 800 investors over a five-year period.

The Commission’s complaint alleges violation of the antifraud and registration provisions of the securities laws. The case is in litigation.

In K&L International, the SEC obtained emergency relief against defendants Stephen Carnes, Lawrence Powalisz and their related companies. This scheme focuses on dumping unregistered shares on the market. It involves two groups of companies, the “Stock Distributor Defendants” and the “Issuer Companies.” According to the complaint, the defendants used these companies to dump billions of shares of microcap company shares onto the market. The shares were quoted in the Pink Sheets or the Over-the-Counter Bulletin Board.

The scheme to distribute the shares contained four key steps: 1) the Stock Distributor Defendant either claimed to lend money to an Issuer Company or the Issuer Company identified a debt to its officer that it assigned to the Stock Distributor Defendant; 2) the Stock Distributor Defendant paid the Issuer Company or an affiliate; 3) the loan or assigned debt was reduced or eliminated by the Issuer Company issuing shares of its stock to the Stock Distributor defendant; and 4) the Stock Distributor Defendant dumped the shares onto the public market.

Over a two year period the defendants raised about $7 million through this scheme. The complaint alleges violations of Section 5 of the Securities Act. The case is in litigation.