Re: 7/20/07 - [MTEI] SEC cracks down on stock spammers, sues Texas duo
SEC cracks down on stock spammers, sues Texas duo
2007-07-20 15:16 ET - Street Wire
Also Street Wire (C-*BCSC) BC Securities Commission
Also Street Wire (U-IGTP) Intelligent Sports Inc
by Lee M. Webb
The U.S. Securities and Exchange Commission (SEC) is suing Texas-based repeat securities violators Darrel T. Uselton and his uncle Jack E. Uselton as part of its continuing crackdown on penny stock e-mail spammers.
The Useltons, who allegedly pocketed more than $4.6-million in the fraudulent pump-and-dump scheme involving spamming at least 13 pink sheet companies, face related criminal charges in Texas. (All amounts are in U.S. dollars.)
As previously reported by Stockwatch, a Texas grand jury indicted Darrel and Jack Uselton for engaging in organized criminal activities and money laundering on July 3.
The indictments were unsealed on July 6 and 40-year-old Darrel Uselton was arrested at his home by special investigators from Texas Attorney-General Greg Abbot's office on the same day.
An arrest warrant was also issued for 69-year-old Jack Uselton, who turned himself in to authorities on July 11.
As part of the investigation by the attorney-general's office, investigators seized more than $4.2-million from bank accounts associated with the Useltons.
Bail was originally set at $8-million each, but it was reduced to $500,000 and both Useltons bonded out of the Harris County jail on July 13.
Darrel and Jack Uselton enjoy the presumption of innocence pending trial of the first-degree felony charges, which carry the possibility of a life sentence in Texas.
On July 9, the SEC chimed in by filing a securities fraud lawsuit against the Useltons in the U.S. District Court for the Southern District of Texas.
According to the U.S. regulator, as part of their pump-and-dump serial scalping and market manipulation scheme, the Useltons used computer "botnets" to distribute hundreds of millions of e-mails touting at least 13 near-worthless pink sheet stocks while the alleged fraudsters dumped their shares on unsuspecting investors.
The SEC is seeking court orders forcing the Useltons to disgorge their ill-gotten gains and effectively booting them out of the markets for good.
Neither Uselton has yet filed an answer to the SEC lawsuit and the allegations in the 31-page complaint have not been proven.
Spam bane
While spam has been around since pretty much the advent of e-mail, the volume of spam clogging inboxes has exploded in recent years.
The proliferation of stock-touting e-mail spam, which now seems to rival the Viagra, penis enlargement, discount drugs, knock-off watches and pornography spam, has been of public concern to both Canadian and U.S. regulators.
Canada does not have a national securities regulator, so combating stock spam north of the border turns upon the individual efforts of the provincial and territorial regulators that make up this country's porous patchwork of securities watchdogs.
In May of this year, the British Columbia Securities Commission (BCSC) launched SpamWatch, an anti-spam initiative that chairman Doug Hyndman evidently believes has been remarkably successful.
As part of a June 25 speech to the Vancouver Board of Trade, Mr. Hyndman touted the regulator's SpamWatch program, which focuses on B.C.-connected OTC Bulletin Board and pink sheet issuers that are part of a spam campaign.
"In some cases, we are imposing three-day trading halts," Mr. Hyndman told his audience. "To date, we have imposed five halt trading orders, and surprise, surprise, the volume of spam has dropped dramatically."
The suggestion that a handful of three-day trading halts, which apply only in B.C. and have no effect on OTC-BB and pink sheet trading, caused a dramatic drop in the volume of spam has some market followers wondering about the colour of the sky in Mr. Hyndman's world.
While the BCSC chairman has been talking the talk and making twilight zone claims, the SEC has arguably been far more effective in walking the walk when it comes to tackling stock spam.
Two months before the BCSC launched SpamWatch, the U.S. regulator unveiled Operation Spamalot and suspended trading in 35 pink sheet stocks on March 8. The SEC has since suspended several more spam stocks.
Unlike a three-day BCSC trading halt that has no effect outside of the province, when the SEC issues a 10-day suspension, the targeted stock does not trade anywhere.
Moreover, in the wake of an SEC suspension, OTC-BB and pink sheet issuers are invariably booted down to the grey market, a trading abyss avoided by most investors where quotes cannot be published.
The U.S. regulator has also been investigating and suing individuals behind spam campaigns, with little concern over which side of the 49th parallel the spammers inhabit.
Last November, for example, the SEC obtained a final judgment against Montreal-resident Bryan Kos for his role in the junk fax and e-mail spam pump-and-dump schemes involving Concorde America Inc. and Absolute Health and Fitness Inc., a pair of pink sheet promotions.
The spamming Mr. Kos was ordered to disgorge approximately $500,000 in ill-gotten gains, pay prejudgment interest of approximately $30,000 and cough up a civil penalty of $120,000.
The securities fraud lawsuit against the Useltons is just the most recent manifestation of the SEC's continuing effort to crack down on the fraudulent activities of shady stock spammers.
Texas spammers
As noted in an earlier Stockwatch article, the Useltons already have some regulatory baggage.
The elder Mr. Uselton was affectionately known by some back in the day as "Jack the Honest Oilman," a moniker that was derisively embraced by critics as he ran afoul of the SEC for his role in the 1998 rig-job of Mountain Energy Inc., an overblown OTC-BB oil promotion with ties to Canada.
According to the SEC, Jack Uselton's oral representations to gullible investors and the claims he made in embroidered Mountain Energy news releases were anything but honest.
In fact, in a 2001 lawsuit against several Mountain Energy players, the U.S. regulator said that Jack Uselton's fluffy promotional claims were false and misleading rubbish.
While the elder Mr. Uselton was busy pumping the stock, which ran from four cents to $1.75 in three weeks before quickly collapsing, insiders were furiously dumping their shares.
At least $3.6-million worth of those shares were unloaded through Toronto-based Merit Investment Corp. and its scandal-plagued successor, now-defunct Rampart Securities.
In October of 2002, Jack Uselton, who reportedly did not have enough money for the regulator to be bothered seeking a civil fine, settled with the SEC. He was banned from serving as an officer or director of any public company and enjoined from future violations of securities laws.
While Darrel Uselton has a long history of ties to smelly promotions, his previous regulatory troubles involve sanctions by the National Association of Securities Dealers (NASD) for transgressions related to the operation of his former brokerage firm.
NASD regulatory actions against Darrel Uselton in March of 2004 and again in April of 2005 resulted in multiple fines, censures and suspensions against the repeat securities violator.
By May of 2005, according to the SEC, Darrel and Jack Uselton had teamed up in shared offices in Houston where, using a number of corporate entities and more than 30 brokerage accounts, they directed their serial scalping and market manipulation scheme involving a baker's dozen of pink sheet stocks.
According to the U.S. regulator, each of the spamming market manipulations orchestrated by the Useltons followed a similar pattern. Evidently their pump-and-dump recipe was quite successful, at least until the SEC and the Texas attorney-general got into their kitchen.
Stockwatch provided a general overview of the allegedly fraudulent scheme in the first article in this series and will now begin an examination of the individual spam campaigns, fleshing out the details and adding some context.
Oretech
Oretech Inc., a former Georgia-based operation, leads off the SEC's list of Uselton-spammed stocks. The company also underpins the criminal charges against the Useltons and, in fact, is the only stock mentioned in the grand jury indictments against them for organized criminal activity and money laundering.
By a coincidence, Stockwatch previously mentioned Oretech in a Feb. 11, 2005, review of another dubious promotion, Juina Mining Corp., which signed a letter of intent to be acquired by Oretech in April of 2003.
That acquisition never materialized and Juina went on to ink other deals with a subsequently suspended OTC-BB promotion, U.S. Canadian Minerals Inc., and a closely associated company, Saskatchewan-native Urban Casavant's subsequently revoked pink sheet woofer, CMKM Diamonds Inc.
While many investors took a beating with Juina, U.S. Canadian Minerals and CMKM, things arguably turned out at least as a badly for Oretech stuckholders rooked by the Useltons' spamming pump-and-dump scheme.
Using language that would raise concerns among most experienced investors, the SEC describes Oretech as a "company that purported to be in the business of processing ore and mine tailings to extract precious metals and processing tar sands to extract oil."
According to the U.S. regulator, Oretech hired the Useltons to promote and sell its stock in April of 2005.
The SEC claims that Oretech transferred 1.25 million free trading shares to the Useltons in an apparently illegal transaction commonly known as a "gypsy swap" south of the border.
In Canada, a gypsy swap often has a slightly different meaning and is not illegal, but in the U.S. it is an arrangement whereby a friendly shareholder provides unrestricted shares to a third party and, in return, the issuer peels off an equivalent or increased number of restricted replacement shares for the helpful shareholder.
In May of 2005, the Useltons transferred the 1.25 million Oretech shares they received in the gypsy swap into two brokerage accounts and then set about orchestrating a series of spam e-mail campaigns consisting of baseless price projections and unsupported recommendations.
The SEC allegations indicate that Oretech was far from an innocent bystander unwittingly sideswiped by the spam promotion.
"The Useltons provided Oretech with records of the volume and prices of the shares they sold on a daily basis, as well as e-mail and direct mailing expenses and other relevant data," the regulator claims.
Darrel Uselton was quite chatty about the scheme in a Sept. 1, 2005, e-mail to Oretech.
"Frankly, I never dreamed the price would go this high, or that fast, and it almost put me in a horrible pickle with the e-mail group hired that did the job," Darrel Uselton wrote, adding that the fee for the e-mail spammers was 10 per cent of the gross dollar volume per day.
"It is very expensive, but obviously effective," he remarked.
The U.S. regulator says that the Useltons paid their unidentified principal spammer approximately $90,000 for spamming Oretech.
According to the SEC, Darrel Uselton admitted in the e-mail to Oretech that he engaged in "in-and-out trading" to hold the price of the stock while he simultaneously used "two primary selling accounts" to dump shares.
Evidently the scheme worked so well that Darrel Uselton had unloaded the original 1.25 million shares by the end of August of 2005 and needed more stock to dump.
"Hopefully with new shares coming in, we can liquidate some at MUCH higher prices, without any expense at all next week," he wrote in his Sept. 1 e-mail to Oretech. "Please be prompt in getting those delivered so we can take advantage of the much higher price range!!"
All told, the U.S. regulator claims that the Useltons accounted for approximately one-third of all the trading in Oretech stock between April 1, 2005, and Aug. 31, 2005.
During the pump-and-dump campaign, the spamming duo unloaded the 1.25 million shares obtained through the gypsy swap, realizing proceeds of approximately $805,000.
As previously remarked, things did not end well for Oretech stockholders left holding shares after the spam campaign ended and the price, which had reached a high of $2.35, collapsed.
The share price tanked to less than a dime by the time the SEC brought Oretech's trading to an end by yanking the company's stock registration on Dec. 21, 2005.
Intelligent Sports
According to the SEC, Intelligent Sports Inc. "is a California-based company that purports to be in the youth 'sports and fitness' business."
From January through March of 2005, the U.S. regulator says that the Useltons accumulated more than 28 million shares of Intelligent Sports, most of them purchased for one-10th of a penny or less from an unidentified individual who received the shares directly from the company pursuant to a purported Texas 504 offering.
Rule 504 of Regulation D of federal securities laws provides an exemption from registration requirements under certain circumstances for some companies to offer up to $1-million worth of stock within a 12-month period.
Regulation D shares are often issued without restrictions and, while the exempt offerings serve a legitimate purpose for many small companies, unscrupulous players use them to further their shady schemes with disturbing frequency.
In August of 2005, Intelligent Sports reportedly topped up the Useltons' holdings by issuing them 12 million free trading shares as part of another purported Texas 504 offering. The Useltons transferred those shares into three brokerage accounts they controlled.
While the SEC complaint does not indicate that Intelligent Sports was a knowing participant in the Useltons' scheme, the company was far from a paragon of public disclosure.
For example, while issuers using a Rule 504 exemption are not required to register the securities, they are supposed to file a Form D, a document that provides some basic information regarding the company including the names and addresses of its owners and promoters as well as the amount of the offering.
Stockwatch's review of Intelligent Sports's handful of SEC filings, including notices regarding Regulation D paper filings, gives no indication that the company submitted a Form D related to the purported 504 issuance of 12 million shares to the Useltons, which would make it rather difficult for investors to find out anything about that deal.
Moreover, in a 17-page Oct. 2, 2006, information and disclosure statement in which Intelligent Sports should have disclosed any share issuances between Dec. 31, 2003, and Dec. 31, 2005, the company explicitly denied having made any 504 offerings or any offerings at all during that two-year period.
In any event, with 40 million shares allegedly in hand, the SEC says that the Useltons orchestrated a series of at least four separate spam campaigns consisting of baseless recommendations and price projections touting Intelligent Sports between May and October of 2005.
While not mentioned in the SEC complaint, even before launching the spam campaign, Darrel Uselton was touting Intelligent Sports on more than 25 websites with names like PinkSheetStockTrader.com, PennyStockTip.com and RagingDeals.com owned by Ablaze Technologies Inc., a company that he and his uncle controlled.
Somewhat ironically, the Useltons' Ablaze trades on the pink sheets where it is still racking up a few transactions at two cents per share.
After "profiling" Intelligent Sports on their collection of stock-touting Internet sites in April, the Useltons rolled out the spam campaign in May of 2005.
In a typical e-mail spam, the Useltons urged investors to pile into Intelligent Sports to enjoy "a great payday."
"This Friday coming up the company will be launching a massive marking (sic) campaign with more great news to be released and next week should be over 15 to 25 cents so get in now at one cent and have a great return," one of the touting e-mails proclaimed.
The SEC claims that the Useltons' principal spammer charged the pair at least $83,631 for the lowbrow Intelligent Sports spam.
The share price fluctuated between a paltry six-10ths of a penny and 3.2 cents during the spam campaign, but the Useltons evidently made out quite well. According to the SEC, the pair unloaded almost all of their 40 million shares between May 2, 2005, and Nov. 23, 2005, pocketing approximately $650,000 in the process.
Intelligent Sports's investor relations activities are currently provided by Big Apple Consulting USA Inc., a Florida-based operation that has received at least 40 million shares as compensation.
Big Apple has previously provided boiler-room style touting services for skunky outfits like Vancouver-connected E-Rex Inc. and Alberta-headquartered Medical Services International Inc., which have both been the subject of extensive Stockwatch coverage.
The SEC revoked E-Rex's stock registration two years ago, but Medical Services still ekes out some grey market trades at one-100th of a penny.
Robert Talbot's Medical Services offers another example of the short reach of Canadian regulators.
As noted in a number of Stockwatch articles, Medical Services was the subject of an Ontario Securities Commission (OSC) investigation, but with more pressing issues on the regulator's plate, the file gathered dust for years.
When Medical Services became delinquent in filing required audited financial statements, however, the OSC finally issued a cease trading order against the company on Nov. 25, 2003.
The 2003 OSC cease trade order is still outstanding, but it has no effect beyond Ontario's borders and does not hinder U.S. trading in the company's shares by Mr. Talbot or anyone else with a brokerage account outside of the province.
Returning to Intelligent Sports, in one of the rather remarkable coincidences encountered with peculiar regularity in the world of penny stocks, Carl Dilley, who has also been the subject of some Stockwatch reports, heads the company's Florida-based transfer agent, Island Stock Transfer.
Mr. Dilley, a former Canadian broker who claims to have been a branch manager and qualified control and compliance officer with RBC Dominion Securities, went on to flog ill-fated investments in a flaky Costa Rican teak plantation before becoming chief financial officer for the fraud-ridden Marc Harris Organization based in Panama.
Mr. Dilley's associate, Don Mitchell, served a stint as president of the Panamanian outfit before they both pulled the plug after a falling-out with the Harris Organization that led to allegations of embezzlement against the former senior officers on the one hand and accusations of massive fraud against Marc Harris on the other.
Mr. Dilley subsequently became a key source of information for veteran journalist and offshore scam follower David Marchant's devastating series of articles exposing Marc Harris's fraudulent Panamanian operation.
After severing their ties with the Marc Harris Organization, Mr. Dilley and Mr. Mitchell teamed up to head E-Rex.
By another coincidence, while with E-Rex, Mr. Mitchell also served a stint as the highly touted and supposedly immensely qualified chief executive officer of Mr. Talbot's Medical Services. Amid Stockwatch's coverage, however, Mr. Mitchell quietly disappeared from the overblown promotion.
As E-Rex unravelled, Mr. Mitchell also bailed out from that promotion, leaving Mr. Dilley to continue with his futile efforts to salvage the remains of the play, which was finally laid to rest by the SEC in 2005.
After the E-Rex debacle, the versatile Mr. Dilley found a new vocation as a transfer agent and has apparently been doing a reasonably brisk trade with companies like Intelligent Sports.
Intelligent Sports, which had close to 500 million shares outstanding at one point, is still limping along in unsolicited and unquoted trading, but many investors have taken a drubbing in the stock.
After another recent Regulation D offering, the company executed a 1-for-100 reverse split and changed its trading symbol from IGTS to IGTP on June 14.
With approximately 72,000 shares changing hands in five trades, Intelligent Sports last traded flat at a penny on July 18.
Stockwatch will continue its review of the Useltons' spam stocks in a following article.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding the SEC action against Darrel and Jack Uselton is available in a Stockwatch article under the symbol *SEC published on July 16, 2007.)
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