Deceitful 'pump and dump' promoters abound on Internet
By GEORGE CHAMBERLIN, Executive Editor
Friday, April 7, 2006
Technology -- in particular, the Internet -- has opened the doors for many consumers and investors to have instant access to important information. However, it also has created a breeding ground for investment fraud.
The Securities and Exchange Commission last week filed an emergency enforcement action against two men who the commission says were operating an ongoing securities fraud over the Internet.
The SEC alleges that Faisal Zafar and Sameer Thawani have engaged in a "pump and dump" scheme to manipulate at least 24 thinly traded smallcap stocks, including Dickie Walker Marine (Nasdaq: DWMAC), a one time Oceanside-based company that designed and manufactured nautically inspired clothing and gift items.
The company, like all of the others used in this alleged scheme, was in no way involved with the fraudulent transactions.
"The defendants preyed on innocent investors by using the relative anonymity of the Internet to manipulate the market. We have acted to stop a brazen fraud and hold the perpetrators responsible for the harm they caused investors," said David Rosenfeld, associate regional director for the SEC.
The SEC claims the two men made more than $873,000 as the result of illegal stock trades.
The complaint alleges that Zafar and Thawani would purchase shares of the various companies at prevailing market prices and "used online aliases to post messages touting the stock and containing phony press release excerpts or other fake 'news' about the issuer to deceive investors."
In November 2004, Zafar reportedly purchased 7,000 shares of Dickie Walker stock at an average price of $1.06 per share. He then immediately posted at least 20 messages on certain Internet message boards touting the stock as a great buying opportunity.
Zafar then distributed a message suggesting that Dickie Walker was working on a contract worth more than $20 million from the Coast Guard. However, the SEC claims the messages were materially false and misleading.
"Dickie Walker has never had discussions with the United States Coast Guard or taken any steps to enter into a contract or other business relationship of any size with the United States Coast Guard," reported the SEC.
But the bogus Internet broadcast had the desired effect. Zafar reportedly sold his shares three days later and pocketed a profit of $2,027.
A month later, Zafar and Thawani were back at it. The SEC claims they again used the Internet in January to broadcast messages that Dickie Walker stock is "blowing up on expectations of a merger" with Sirius (Nasdaq: SIRI), the satellite radio company.
Once again, the SEC said, "These statements were materially false and misleading because, among other things, Dickie Walker and Sirius have never discussed merging or even taken any steps to enter into a merger or other business combination, and no such merger ever occurred."
But the messages had their desired impact. The two men had bought 27,350 shares of Dickie Walker stock at average prices of $1.02 and 93 cents. After the messages were posted, the stock increased to $2 a share, an increase of 135 percent in one day. They sold their shares the same day and netted a profit of $17,840. By the end of the day the stock price was back to $1.03.
In this day and age of corporate fraud (Enron, WorldCom and others), chasing Internet scammers is not a high priority for many investigators at the SEC. That attitude has caught the ire of at least one commissioner.
"Junior staff members think that spending time pursuing pump-and-dump promoters is a poor career investment," said SEC commissioner Paul Atkins.
"If the junior staff believe that only big-dollar penalties against corporations will bring a promotion, and managers believe that only these cases will distinguish them from their peers, then is it a surprise that individual staff members avoid spending time pursuing pumps-and-dumps?" asked Atkins.
However, at least one staff member disagrees.
"Investors who participate in this segment of our capital markets are entitled to know that the securities laws will be vigorously enforced against all violators," said Mark Schonfeld, director of the Commission's northeast regional office.
If convicted, Kafar and Thawani could be permanently barred from the securities industry. And the SEC will seek a return of all illegal profits and the imposition of civil monetary penalties.
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