THE DISSENT

[shortsinthesand]

SEC subpoenas, obtained by The Dallas Morning News, list more than 100 people and companies, and corporate records show that many of those companies tie back to a common group of Dallas-area business people. One person who comes up again and again is a former SEC attorney who used to enforce the nation's securities laws.

Exclusive: SEC investigating possible 'pump-and-dump' scam

Inquiry looks into whether network victimized stock buyers

03:16 AM CDT on Sunday, March 25, 2007

http://www.dallasnews.com/sharedcontent/dws/bus/stories/032507dnmetsecinvestigate.40477d8.html#

By BRENDAN M. CASE and MICHAEL GRABELL / The Dallas Morning News
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The stock tips hit millions of fax machines and e-mail accounts.

"Get filthy rich as the recovery begins," said one message after Hurricane Katrina. "Double profit opportunities from America's energy crisis," said another.

With spam stocks, in for a penny, in for a pounding

Investors bought into an Illinois roofing business, an Oklahoma company advertising a cancer-treating nose spray and an Addison producer of a video series, Racetrack Girls Go Nutz.

At first, the shares soared on the penny stock market, a loosely regulated bazaar of small-time companies where some investors seek to buy a piece of the next big thing.

Then, after sell-offs by some lucky or well-informed investors, the stocks plunged, taking millions from the pockets of recent buyers.

The losers in such cases often blame bad fortune. But the U.S. Securities and Exchange Commission is investigating whether they were victims of fax and e-mail stock scams orchestrated by a group of lawyers, accountants, brokers and consultants – many in the Dallas area.

The group "may have manipulated or attempted to manipulate the share price of certain companies by making false or misleading statements to the public," said SEC enforcement lawyer Kevin Muhlendorf, in an affidavit filed in federal court in Washington, D.C.

The SEC won't discuss particulars of its investigation, but such classic "pump-and-dump" scams are a high priority for the agency because e-mail spam and instant online stock trading make small investors more vulnerable than ever.

"With the Internet technology, there is so much more ability to get to the retail investors through their computers," said Kit Addleman, associate director of enforcement for the SEC's regional office in Fort Worth.

SEC inquiry

The two-year investigation into what officials call the "shell creation group" is being handled from SEC headquarters in Washington, D.C.

SEC subpoenas, obtained by The Dallas Morning News, list more than 100 people and companies, and corporate records show that many of those companies tie back to a common group of Dallas-area business people. One person who comes up again and again is a former SEC attorney who used to enforce the nation's securities laws.

SEC officials cautioned that inquiries don't always lead to legal proceedings and that subpoenas don't mean that the people named in them have broken the law. The SEC hasn't publicly said which individuals may be under scrutiny, or identified everyone who profited from the stock trades.

But two civil lawsuits filed in Dallas allege that specific people profited from manipulating stock in companies that are part of the SEC investigation.

National Storm Management Inc., the roofing firm whose stock soared and plunged after Katrina, makes such allegations against David Gordon, a Tulsa, Okla., securities lawyer. He was once sued unsuccessfully by his brother, accused of orchestrating a stock fraud on the family jewelry business in Conroe, Texas.

The company with the racetrack video, Consolidated Sports Media Group Inc., sued Dallas lawyer Phillip Offill. He spent 15 years in the SEC's Fort Worth office and until recently was a partner in the law firm Godwin Pappas Langley Ronquillo LLP.

Mr. Gordon and Mr. Offill deny any wrongdoing. They say they are the victims of the companies' own mismanagement and misdeeds. And the business people accused of stock manipulation in the civil lawsuits contend that they lost money as company managers profited.

"This is a big, huge investigation the SEC is doing that involves well over 100 companies," said Jules Slim, an Irving lawyer representing people accused of stock fraud in both lawsuits. "We're not really sure who they're going after. The plaintiffs are simply capitalizing on the fact that those people have been subpoenaed."

So far, the SEC investigation has resulted in only one penalty.

On Jan. 17, the SEC announced an agreement with John Shrewder, an Oklahoma stock promoter accused of sending out 87 million faxes in 2004 and 2005 to manipulate the stock price of Artec Inc., the business with the anti-cancer drug, and other companies.

Mr. Shrewder did not admit or deny wrongdoing, but he acknowledged liability for $1,031,000 in improper trading profits and interest. But he will have to pay back only $150,000 to the U.S. government under a settlement with the SEC that considered his financial condition.

And this month, as part of a crackdown on e-mail stock fraud called Operation Spamalot, the SEC suspended trading in four companies that listed Mr. Offill as corporate counsel in disclosure reports. He also had ties to four others, including one that listed a company he controlled, Supreme City Holdings, as a major shareholder.

Mr. Offill denied ownership interest in the Spamalot companies and said he formed Supreme City Holdings on behalf of a client, whom he wouldn't identify. When asked about another company in which a firm he controlled owned stock, Mr. Offill said he couldn't discuss client matters.

Two of the Spamalot companies also showed up on SEC subpoenas related to the investigation into the shell creation group.

Taking a risk

Why would anyone send out 87 million faxes, or tens of millions of e-mails?

Because, experts say, in some cases, they're a good way to separate investors from their money.

Researchers at Purdue University and Oxford University recently found that electronically pumped stocks show "a significantly positive return" at first and then tend to collapse, leaving unsuspecting investors with big losses that they often attribute to the gamble of the stock market.

"What are you going to do? It was a risk and I took it," said Jon Browar, a Consolidated Sports shareholder who owns a screen-printing business outside Kansas City. "My kids aren't going to go without because of this, but in the same respect, there's a lot more I can do with $3,000."

Federal and state laws prohibit the distribution of unsolicited faxes to hype a stock. Both junk faxes and spam e-mails may violate securities laws if they contain falsehoods about a company or if promoters don't disclose that they have been paid to tout a stock.

For example, the SEC alleged that the Artec faxes understated Artec's debt and the number of shares available to make each share appear more valuable.

Moreover, while Mr. Shrewder's faxes urged other investors to buy shares, he was selling them.

"Shrewder was actively selling Artec shares for less than $.50 while he was recommending that others buy them until the price reaches between $2 and $4," the SEC said in its complaint.

Mr. Shrewder said in a court filing that he was unaware of any misrepresentations in the faxes. He also said he had disclosed in the faxes that he might trade in the shares. In an interview, he said his faxes only went to people who asked to receive them.

Expanded inquiry

The SEC opened its Artec investigation in December 2004 after officials noticed suspicious trading and price movements. By June 2005, the investigation had expanded to reflect interest in the larger circle of people who appeared to be involved in what the SEC came to call the "shell creation group."

After Katrina, e-mails and faxes enticed investors to buy shares in National Storm and in Deep Rock Oil & Gas Inc., an Oklahoma energy company. National Storm's stock price rose from 51 cents to $2.41. Deep Rock's price increased tenfold, to $1.11. Within months, both fell to less than a quarter a share.

Phone records of a Florida investor – who the SEC alleges played a role in producing and disseminating the faxes – showed several calls to numbers associated with the Dallas-based shell group, the SEC said.

Some of those phone calls, listed in SEC court documents, trace back to Mr. Gordon, the Tulsa lawyer for Deep Rock who also helped take National Storm public.

National Storm has sued Mr. Gordon, accusing him of masterminding stock manipulation schemes.

"The Shell Creation Group's activities frequently prove ruinous to the legitimate private companies they deceive," National Storm said in court documents.

Mr. Slim, who is representing Mr. Gordon and others in the lawsuit, said the company's counterclaim is a distraction from the original complaint. The lawsuit was filed against National Storm by Trucolor Inc., which is partly owned by Mr. Gordon.

Trucolor alleged in the lawsuit that National Storm cheated it by breaching a loan that had been induced through fraud.

In an interview, Mr. Gordon said that he had followed all securities laws and that he believed the information released by Deep Rock and National Storm was accurate. He said he didn't know who distributed the blast faxes.

"Believe me, I do not do pump-and-dumps," he said.

Consolidated Sports

The Consolidated Sports lawsuit alleges Mr. Offill and others made millions of dollars by perpetrating a pump-and-dump scam on the company's stock.

The company says Mr. Offill arranged for a merger with an inactive corporation to use a legal loophole that gave investors millions of freely tradable shares that didn't have to be registered with the SEC. Mr. Offill brought investors into Consolidated Sports, including companies that he controlled, the lawsuit says.

In November 2004, a junk fax went out touting the stock. Consolidated Sports lawyers say the fax was approved by Mr. Offill and drafted by one of his associates.

"The specific intent behind the blast fax was to cause the price of the stock in CSMG to spike upward, after which Offill's friends, clients and business associates, and entities controlled by Offill, would sell their stock, leaving the other shareholders and the innocent purchasers to bear the losses," Consolidated Sports' lawsuit says.

Mr. Offill, who has also been a lawyer for Artec, declined to be interviewed, referring questions to his lawyer, Richard Sayles. In January, Mr. Offill left Godwin Pappas to pursue his own practice, Mr. Sayles said. Mr. Offill said in a deposition that he didn't know about the blast fax until after it was sent.

"A fax of this nature – that appears oriented towards providing investor awareness on a public basis – is something that an issuer should never send," he said.

A trial in the Consolidated Sports lawsuit is expected this year.

A WEB OF LAWSUITS AND SUBPOENAS

Corporate records and lawsuits indicate the following people have ties to the Securities and Exchange Commission's investigation of the "shell creation group." SEC inquiries do not necessarily lead to legal proceedings or indicate that people named in subpoenas have broken any law.

DAVID GORDON
A Tulsa, Okla., securities lawyer, Mr. Gordon, 45, has been accused of stock fraud in several lawsuits, including one from Consolidated Sports Media Group Inc. and another brought unsuccessfully by his brother. He was the lawyer for Deep Rock Oil & Gas Inc. and helped take National Storm Management Inc. public. In a lawsuit, National Storm called him a mastermind of pump-and-dump schemes. More than a half-dozen companies on a subpoena issued to a Dallas brokerage have ties to him. He and his associates have denied wrongdoing.

PHILLIP OFFILL
A former SEC enforcement attorney in Fort Worth, Mr. Offill, 48, was a partner until recently at Godwin Pappas Langley Ronquillo LLP in Dallas. He was a corporate lawyer for Artec and Consolidated Sports. Consolidated Sports says that he helped orchestrate a pump-and-dump scheme on its stock using a junk fax and that two companies he controlled profited. He says he never saw the blast fax before it went out. Some three dozen companies mentioned in the SEC subpoenas list him as an officer, corporate counsel, or in some other capacity. In other cases, one of his companies is listed as a major shareholder. He denies any wrongdoing.

MARK LINDBERG
An amateur golfer, Mr. Lindberg, 39, of Coppell, helped take Consolidated Sports and National Storm public, according to Consolidated Sports court documents and National Storm annual reports. Consolidated Sports said in its lawsuit that Mr. Lindberg paid investor Doyle Mark White for arranging a junk fax touting its stock. Nearly 20 companies on the SEC subpoenas list Mr. Lindberg as an officer or consultant, or one of his companies as a major shareholder. And he received several calls from a Florida investor the SEC says played a role in the junk faxes after Hurricane Katrina. Mr. Lindberg declined an interview but denied the allegations in court documents. In a deposition, he said that he's never been involved in a pump-and-dump scheme and that he transferred the money to Mr. White's firm on behalf of another company.

DOYLE MARK WHITE
Consolidated Sports said in its lawsuit that Mr. White, 49, of Colleyville, sent a junk fax touting its stock behind the company's back. Mr. White, a former Irving stockbroker, was barred from the U.S. securities industry last year, accused of manipulating a separate penny stock. In the settlement, he did not admit or deny wrongdoing. Mr. White did not respond to requests for an interview. In a deposition, he said he sent the fax to a distribution service after Consolidated Sports approved it. The company denies that.

GARY ZINN
Described as an international businessman with ties to Bulgaria, Mr. Zinn, of Rancho Cucamonga, Calif., was sued by the SEC for not answering a subpoena related to the stocks of National Storm and Deep Rock, which were allegedly manipulated after Katrina. A judge ordered him to comply, and the case was dismissed. The SEC said in court documents that Mr. Zinn has ties to two companies managed in London, High Charm Ltd. and Putnam International Consulting, which each made more than $50,000 trading in the stocks. Putnam had paid a marketing company to distribute the junk faxes, according to a disclaimer on the faxes. High Charm and Putnam were also top shareholders in Consolidated Sports. Mr. Zinn and his lawyer did not return phone calls seeking comment.

JOSHUA LANKFORD
An entrepreneur who once sold neckties in downtown skyscrapers, Mr. Lankford, 33, became one of the most successful stockbrokers at Dallas brokerage Barron Moore Inc., even becoming part owner before leaving. In its lawsuit, Consolidated Sports says he participated in a pump-and-dump on its stock. He denied the allegations in a deposition, saying he warned company executives that he couldn't raise money for them until they had revenue.

CHASITY THOMPSON AND JASON FREEMAN
As a business consultant, Ms. Thompson, 28, helped incorporate Artec, Consolidated Sports and National Storm. Plano-based Routh Stock Transfer Inc., which she ran with Mr. Freeman, 31, served as a transfer agent for National Storm, Deep Rock and about 10 other companies listed on SEC subpoenas. Ms. Thompson and Mr. Freeman were consultants for several other companies on the subpoenas. Consolidated Sports alleges that Ms. Thompson falsified corporate records to help commit fraud on its stock. Her attorney said she has done nothing wrong. Earlier this month, Mr. Freeman filed a shareholder lawsuit against Consolidated Sports, saying the company fraudulently funneled money to a consultant who used it to repay investors in past failed ventures. Consolidated Sports lawyers said that hundreds of hours of video footage show the money was spent legitimately.

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