SEC Moves to Crack Down
On Internet Securities Deals
By MICHAEL SCHROEDER and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
In its latest assault against online stock-market fraud, the U.S. Securities
and Exchange Commission accused 26 companies and individuals in a civil
action of illegally offering securities over the Internet.
The SEC alleged Wednesday that the defendants violated securities laws
by offering unregistered securities, promising outrageously large returns
of
as much as 2,000% within two years, and selling investments without being
a registered broker. The enforcement actions, which include restraining
orders, administrative actions and cease-and-desist orders, cited a full
range of investments in "prime bank" notes, software companies,
prefabricated hospitals in Turkey and a "revolutionary" gold-processing
technique. The SEC said it believes investors may have been bilked out
of
several million dollars by the schemes.
Sweeping the Internet
Recent SEC Internet-fraud sweeps. Some cases have settled; others are pending.
October 1998: In its largest crackdown, SEC accuses 44
companies and individuals of illegally touting more than 235
small-company stocks online. Commission focuses on whether
promoters-who received about $6.3 million for their
efforts-disclosed financial links to the touted companies.
(SEC Targets Stock Promoters in a Sweep of Internet Fraud, Oct.
28, 1998)
February 1999: In a follow-up to the October sweep, SEC files
four enforcement actions charging 13 companies and individuals
with misrepresenting the (prospects of 56 companies.
SEC Charges 13 in Ongoing Sweep Against Illegal Online Stock
Touting, Feb. 27, 1999)
May 1999: Shifting its focus, SEC files 14 actions against 25
companies and individuals for illegally offering securities over the
Internet. Cases stem from Web surfing by the commission's
"cyberforce," which went looking for bogus offerings.
The 14 separate civil cases are the culmination of an investigation that
targeted the growing number of illegal online securities offerings. In
October, another sweep focused on illegal touting of small stocks on the
Internet. Each of Wednesday's cases grew out of SEC surveillance begun
months ago both in Washington and at regional offices; the SEC said it
believes it was able to shut down some of the offending Web sites before
they had bilked any customers.
Internet fraud is posing a major challenge to the SEC enforcement staff.
Illegal online offerings have become rampant with the advent of thousands
of Web sites and chat rooms devoted to investing. The latest cases, filed
in
federal courts nationwide this week, are meant to put cyber offerers on
notice that the SEC is increasing surveillance and will continue bringing
more cases. While Wednesday's cases mostly involve small players,
announcing the actions simultaneously gives maximum publicity to the
SEC's enforcement efforts.
Still, the agency doesn't expect to stamp out Internet fraud. "People
shouldn't be stunned and shocked if it continues to occur," said Richard
Walker, director of the SEC's enforcement division. "We're never going
to
stop hard-core people who are bent on defrauding people."
The latest batch of cases offers further proof that a
number of old schemes have migrated to the
Internet from high-pressure telephone boiler
rooms. Eight cases allege illegal prime-bank
investments, a generic term that is meant to
connote respectability but that involves fictitious
government and bank securities, and two cases
involve ageless pyramid schemes.
"Prime bank" securities usually are peddled as
low-risk, high-return investments available only to
very wealthy investors, says Mark Schonfeld, the
assistant regional director for the SEC's New
York office. Although the scam has been around for years, "what the
Internet has enabled these people to do is reach a lot more people at
once," he added.
A case was brought against three people who allegedly offered to pool
investors' money in secret, offshore "trading programs" that would yield
returns of 10% to 400% a month, with little or no risk, according to the
complaint filed in U.S. District Court in New York. One such program,
promoted on a still-operating Web site by Ronald Templin of Kokomo,
Ind., touted loans that would return $20 for every $1 invested, according
to the complaint.
Mr. Templin, 58 years old, also used the Internet to promote a similar
scheme called Oxford Savings Club, the complaint alleges. Investments in
this "club" also were allegedly offered through Web sites run by Peter
Roor, 46, a Dutch citizen living in Amsterdam, and Laurie Elizabeth Weiss,
45, of Waynesville, Mo. The program's claims of 214% yearly returns
were false and misleading, the SEC alleged, and the foreign "money
markets" where Oxford said it pooled small investors' money never
existed.
Since November, the three Web operators have allegedly bilked investors
out of $1.25 million, although Ms. Weiss never asked that any money be
sent to her, according to the SEC. The commission on Monday filed a
temporary restraining order to freeze assets held by Mr. Templin and Mr.
Roor, including $170,000 the SEC alleges that Mr. Templin diverted to
himself and his family. Mr. Templin and Mr. Roor each didn't return a
phone message requesting comment. Ms. Weiss said she was "just a
member of a program," adding that "I've never taken any money and they
have no reason to file this against me."
Another defendant sued by the SEC, Theodore Pollard, actually posted
the SEC's official warning about prime-bank scams on his Web site before
he allegedly started hawking his own "currency leasing" program, which
regulators say is a form of prime-bank fraud. "It was a little incongruous,"
says Helane Morrison, head of enforcement for the SEC's San Francisco
office.
Mr. Pollard, of Palo Alto, Calif., put up a Web site offering to "lease"
$1
million for a $35,000 investment, the SEC alleged. He allegedly said the
leased funds would yield 40% returns every 15 days for 10 months,
translating into an 800% return in less than a year, for profit of nearly
$3
million. His site was called World Investment Network Ltd. and Winsell
Exchange.
The securities Mr. Pollard offered were bogus and their returns
unattainable, according to the SEC, which also accused him of acting as
an
unregistered broker. The SEC alleges that at least one investor gave Mr.
Pollard money.
When Mr. Pollard didn't respond to an SEC subpoena, the agency
successfully appealed to a federal judge to issue a bench warrant for Mr.
Pollard's arrest and to institute daily fines for not complying with the
subpoena. Mr. Pollard said in a telephone interview that he can't comment
on his case, or his Web site's offer of such astronomical returns. But
he
said he doesn't think he falls under the SEC's jurisdiction because the
products he sold weren't securities. "I think we'll negotiate a settlement,"
he
added.
In another case, a federal judge ordered defendants to immediately stop
solicitations in an international pyramid scheme that promised outsize
gains
and to submit a detailed accounting of all funds collected from investors,
the SEC said. Future Strategies, an Italian company, allegedly operated
a
world-wide pyramid scheme known as "Pentagono," which it promoted
over the Internet, the SEC said. The company's Web site reportedly told
investors they could turn a $120 investment into $116,400. At least 400
U.S. investors participated in the scheme, the SEC said, although it was
unclear how many lost money.
Future Strategies of Carpi, Modena, Italy, couldn't be reached to
comment.
"While the Internet can make it easier for thieves to commit securities
fraud, the Internet also puts the fraud in plain view, making it easier
for the
SEC to catch it," noted Mr. Walker, the agency's enforcement director.
In the past seven months, the SEC cracked down twice on another area of
online fraud: illegally touting small-company stocks. Stock promoters were
accused of not fully disclosing that they were being paid by companies
to
tout their stocks over the Internet. Mr. Walker said the SEC also has
investigations under way that target other fraudulent areas, including
companies that offer free registered stock.
He says the SEC is trying to keep up with Internet fraud by intensifying
enforcement efforts. The agency has doubled to eight its full-time Internet
office staff and trained more than 200 enforcement staffers in Washington
and the regional offices in Internet fraud-fighting techniques. The SEC's
budget is tentatively slated for an $11 million increase, which will be
used
to bolster staff and invest in new fraud-fighting technology.
Other civil complaints unveiled by the SEC Wednesday included:
SEC vs. David Abramson; SEC vs. Abacus International Holding Corp.
and Arthur Agustin; SEC vs. Richard Briden, Empowerment Funding
Group LLC and Infopro Group Ltd; SEC vs. Future Strategies Srl; SEC
vs. HDG Investment Corp. and Paul Edwards; and SEC vs. Jason
Rosenthal.
The SEC announced the following administrative cease-and-desist
proceedings: SEC vs. Lawrence M. Artz, Neurotech Corp., Enhance
Resources Inc., and Bruce W. Lynch; SEC vs. Derrick C. Johnson; SEC
vs. Lila Keith; SEC vs. Gary J. Pierce and C.S.I AG.; SEC vs. Robert J.
Stahl, Elizabeth A. Boyd, and Bobby L. Rodgers. In a related proceeding,
David V. Francis settled with the SEC without admitting or denying
allegations.
Mr. Abramson's attorney didn't return a phone call. Mr. Agustin's attorney
declined to comment.
Mr. Briden denied he violated securities laws. He said he didn't promote
or advertise his Web site.
Mr. Edwards said the SEC's claims are "totally false." While he obtained
about $300,000 from three investors, he said the funds were used for a
private financial transaction.
Mr. Rosenthal couldn't be reached.
Mr. Artz's attorney, Stanley Moskowitz, didn't return a phone call.
In denying the allegations, Mr. Lynch said, "I think there's a big
misunderstanding by the SEC." He said he was soliciting investments only
from a small group of large institutions, not individuals. He said he was
careful to make proper disclosures in his offering documents.
Mr. Johnson's attorney, Laura Woodward, said she hadn't seen the order
and didn't have a comment.
Ms. Keith couldn't be reached for comment.
Mr. Pierce was out of the country and unavailable to comment.
Mr. Stahl's attorney, Michael Missal, said "the commission's action against
Mr. Stahl is unfortunate." He said he expects the case to be resolved in
a
satisfactory manner.
Ms. Boyd's attorney had no comment.
Mr. Rodgers said, "Internet? Oh my goodness, 'no.' That's crazy." He said
he doesn't use the Internet.