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http://www.stockwatch.com/swnet/newsit/newsit_newsit.aspx?bid=U-s0125079-U:*SEC-20070716&symbol=*SEC&news_region=U

SEC sues pair of pump and dump penny stock spammers

2007-07-16 13:59 ET - Street Wire

Also Street Wire (C-*BCSC) BC Securities Commission

by Lee M. Webb

The U.S. Securities and Exchange Commission (SEC) is suing a pair of Texas-based securities law recidivists, Darrel T. Uselton and his uncle Jack E. Uselton, for an alleged pump-and-dump scheme involving spamming 13 companies quoted on the wild and wooly pink sheets.

In the lawsuit filed in the U.S. District Court for the Southern District of Texas on July 9, the SEC claims that from May of 2005 through December of 2006 the Useltons obtained cheap stock from at least 13 pink sheet companies and then scalped those shares into an artificial market they created through manipulative trading, direct mailers, Internet-based promotional activities and spam e-mail campaigns.

According to the U.S. regulator, the spamming duo pocketed more than $4.6-million in the serial scalping and market manipulation scheme. (All amounts are in U.S. dollars.)

Neither of the Useltons has yet filed an answer to the SEC complaint and the allegations have not been proven.

The SEC securities fraud case is not the only legal difficulty facing the Useltons.

On the same day the U.S. regulator filed its lawsuit, Texas Attorney General Greg Abbott announced that the pair face criminal charges in connection with their allegedly fraudulent scheme.

A Harris County grand jury indicted 40-year-old Darrel Uselton and 69-year-old Jack Uselton on money laundering and organized criminal activity charges on July 3.

"Investors will not tolerate scam artists who use the Internet to illegally manipulate stock prices," Mr. Abbott declared in a July 9 news release. "Together with several states and the SEC, we have uncovered an elaborate scheme to defraud unwitting investors.

"The Office of the Attorney General will aggressively prosecute market manipulators, spammers and con artists whose illegal schemes defraud unsuspecting citizens."

Investigators from Mr. Abbott's office have seized more than $4.2-million from bank accounts associated with the defendants.

The grand jury indictment was unsealed on July 6 and Darrel Uselton was arrested at his residence without incident on the same day.

Wearing sandals and dressed in shorts and a tee shirt that gave full effect to his rather large belly, the rotund promoter was in his garage when approached by investigators from the attorney general's office. He quickly placed his hands behind his back where his wrists were fitted with metal handcuffs.

Accompanied by four police officers, Mr. Uselton seemingly calmly flip-flopped a short distance down the street to the awaiting state-supplied transportation for the ride to the Harris County jail where he is still being held in lieu of an $8-million bond.

An arrest warrant was issued for Jack Uselton, who turned himself in on July 11. The elder Mr. Uselton is now also a guest at the Harris County jail pending $8-million bail.

Engaging in organized crime and money laundering are first-degree felonies in Texas and carry punishment of five to 99 years in state prison, as well as fines of up to $10,000, upon conviction.

Darrel and Jack Uselton, of course, enjoy the presumption of innocence with respect to the criminal charges.

North and south

The explosive proliferation of e-mail spam touting penny stocks, primarily skunky OTC Bulletin Board and pink sheet promotions, has been of concern to regulators on both sides of the border for some time now.

Canada does not have a national securities regulator, so responsibility for efforts to combat stock spam falls upon the individual provincial and territorial jurisdictions that make up this country's pastiche of regulatory regimes.

Recently, the chairman of the British Columbia Securities Commission (BCSC), Doug Hyndman, has been touting the perceived success of the regulator's SpamWatch initiative, which was launched in May.

As part of the effort to combat spam, the BCSC has issued a few trading halts that last only three days and have absolutely no effect outside of the province.

In a June 25 speech to the Vancouver Board of Trade, however, Mr. Hyndman served up a rather grandiose assessment of SpamWatch.

"To date, we have imposed five halt trading orders, and surprise, surprise, the volume of spam has dropped dramatically," Mr. Hyndman told the Board of Trade listeners. "What this told us is that the people responsible for the spam are well aware that we are now watching and acting."

As noted by Stockwatch, the real surprise for some market followers is that Mr. Hyndman seems to believe, or at least claimed, that the few relatively inconsequential three-day trading halts, which are effective only within B.C. and have no impact on OTC-BB or pink sheet trading, have dramatically reduced the amount of stock-touting e-mail spam.

If there has in fact been a dramatic drop in the amount of spam, it seems likely that the SEC's Operation Spamalot and subsequent investigative actions deserve a significant portion of the credit.

In unveiling Operation Spamalot in March, two months before the BCSC chimed in with its initiative, the SEC immediately suspended trading in 35 companies and has since suspended a number of other spam stocks.

Unlike a provincial three-day BCSC trading halt, when the SEC issues a 10-day suspension the targeted stock does not trade anywhere.

Moreover, it has been clear for some time that the U.S. regulator has been investigating the people behind spam campaigns, something undoubtedly of more concern to spammers than the possibility of falling under the baleful eye of B.C.'s comparatively toothless securities regulator.

The securities fraud suit against the Useltons and the related criminal charges brought by the state of Texas represent at least some of the fruits of the SEC's investigation of stock spamming.

The cast

According to the SEC, stock promoter, former broker and repeat securities violator Darrel Uselton "was the mastermind of the scheme."

The younger Mr. Uselton's previous regulatory woes, resulting in multiple fines, censures and suspensions, trace back to at least early 2004.

In March of 2004, he was sanctioned by the National Association of Securities Dealers (NASD) for violating minimum net capital requirements, failing to provide required financial information and acting as a general securities principal without being registered.

In that action, Darrel Uselton was fined $15,000, suspended from acting as a general securities principal for one year and suspended from association with any NASD member for six months.

(Darrel's brother, Mark Uselton, was also sanctioned in that particular NASD disciplinary proceeding. As it happens, that was not Mark Uselton's first brush with NASD. In 2003, he was fined $7,500 suspended for six months.)

In April of 2005, NASD sanctioned Darrel Uselton again, this time for selling a member firm without seeking prior approval. He was fined $10,000 and suspended for six months.

That evidently marked the end of Darrel Uselton's career as a broker, but he clearly kept his hand in the securities business. According to the U.S. regulator, however, his subsequent participation in the industry was as a serial fraudster.

While the SEC tags Darrel Uselton as being the principal architect of the alleged fraud, the regulator claims that his uncle, Jack Uselton, "was a full partner with his nephew."

Interestingly, Jack Uselton reportedly helped to raise his nephew after Darrel's father died 20 years ago. It is not clear whether that help included teaching Darrel Uselton the ropes regarding the stock business.

In any event, Jack Uselton ran afoul of the SEC for a 1998 pump-and-dump scheme involving Mountain Energy Inc., an OTC-BB promotion that ran from four cents per share to a high of $1.75 per share in a matter of approximately three weeks based on false and misleading press releases and oral misrepresentations made by the elder Mr. Uselton.

While the short-lived pump was under way, insiders dumped millions of unregistered shares on unsuspecting investors before the price collapsed.

As it happens, at least $3.6-million worth of those shares were dumped through controversial Toronto-based brokerage Merit Investment Corp. and its equally troubled successor, now-defunct Rampart Securities.

The SEC suspended trading in Mountain Energy in July of 1998 and the company ceased operations the following month.

In September of 2001, the U.S. regulator filed a securities fraud lawsuit against Jack Uselton and several other Mountain Energy players.

On Oct. 10, 2002, Mr. Uselton settled with the SEC, agreeing to a permanent ban from acting as an officer or director of any public company and consenting to being enjoined from future violations of the anti-fraud provisions of securities laws.

Based on Jack Uselton's sworn financial statements demonstrating that he was essentially broke, the U.S. regulator did not seek a civil penalty.

Apparently the elder Mr. Uselton's financial position improved considerably, though perhaps only temporarily, as a result of his more recent participation in the allegedly fraudulent scheme he ran with his nephew.

According to the U.S. regulator, the Useltons conducted their affairs through a number of Texas-based corporate entities that they controlled.

Among other companies, the defendants controlled Ablaze Technologies Inc., Firemark Capital LLC, IBIS Energy LLC, OTC Services Inc., Protrading.com, the Valores Fund LLC and Warrior Capital LLC.

By a coincidence, Warrior Capital may be familiar to readers following Stockwatch's coverage of another smelly promotion, Conversion Solutions Holdings Corp., headed by semi-literate Georgia promoter Rufus Paul Harris.

As reported in a Nov. 7, 2006, Stockwatch article, Warrior Capital picked up 400,000 unrestricted shares of Conversion for consulting services under a Regulation D exemption on March 5, 2005.

While Conversion has a large contingent of Texas shareholders, it is not clear whether the Useltons managed to acquire any more shares before the promotion orchestrated by Mr. Harris ramped up last year.

In a case unrelated to the action against the Useltons, the SEC filed a securities fraud lawsuit against Conversion and Mr. Harris last October. That case is still working its way through the court.

Among the relevant players in the serial scalping and market manipulation scheme attributed to the Useltons, is "a principal spammer" who remains unidentified in the 31-page SEC complaint.

Presumably the unnamed principal spammer was responsible for operating the "botnets" or proxy bot networks typically comprised of personal computers connected to the Internet that have been infected with malicious viruses or malware that forward the stock spam.

While the SEC does not name the principal spammer in its lawsuit, it is clear that his identity is known to the regulator.

According to the SEC, in return for disseminating massive amounts of spam e-mail touting the penny stocks, the Useltons paid the spammer approximately $1.5-million.

It is likely that the spammer's name will surface at some point during the proceedings.

In order to run a pump-and-dump scheme, of course, the operators must use one or more brokerage accounts to unload their shares.

Darrel and Jack Uselton reportedly controlled more than 30 separate brokerage accounts that were cleared through various firms around the U.S.

Among others, the Useltons controlled accounts at TD Ameritrade; Scottrade Financial Services; Penson Financial Services; Leeb/Pershing Securities; E*Trade Securities; Fidelity Investments; Barron Moore/Computer Clearing Services Inc.; and Basic Investors/NF Clearing Inc.

The SEC does not provide any breakdown of just how many shares the Useltons dumped through each of those brokerage firms, but as is the case with Vancouver firms, say, some brokers are more accommodating than others when it comes to unloading rather large amounts of shares of penny stocks.

By another coincidence, Basic Investors and Computer Clearing Services are probably familiar to readers who followed Stockwatch's extensive coverage of Saskatchewan native Urban Casavant's now-revoked pink sheet woofer, CMKM Diamonds Inc.

Long before the SEC finally revoked CMKM's registration in October of 2005, Mr. Casavant had his company peel off a staggering 703.5 billion shares, many of which were issued to family, friends and business associates.

In the subpenny promotion's heyday, a Basic broker actively touted CMKM and an associated company, U.S. Canadian Minerals Inc., to gullible investors and his firm executed a rather hefty number of CMKM trades.

While perhaps just an unwitting conduit, CMKM's master shareholder list indicates that a whopping 165 billion shares of the pink sheet dog of dogs passed through Computer Clearing Services before the promotion was shut down.

Returning to the Useltons, the SEC claims that their pump-and-dump scheme involved spamming 13 pink sheet stocks.

Those stocks allegedly include Oretech Inc., Intelligent Sports Inc., Advanced Powerline Technologies Inc., Notch Novelty Corp., Avondale Resources Corp., Spooz Inc., ESPRE Solutions Inc., Grifco International Inc., Leatt Corp., Adrenaline Nation Entertainment Inc., Equipment and Systems Engineering Inc., Gulf Petroleum Exchange Inc. and Wentworth Energy Inc.

The scheme

According to the SEC, each of the market manipulations orchestrated by Darrel and Jack Uselton followed a similar pattern, which may be testament to the fact that the spamming scheme was effective.

Typically, after locating a penny stock outfit desperate for cash, the Useltons negotiated to obtain unrestricted shares from the company for little or no money in return for providing purported financing or promotional activities.

Almost immediately, the free trading stock was transferred into various brokerage accounts controlled by Darrel and Jack Uselton.

In the next step, known as "lighting up" a company, the Useltons allegedly created the appearance of an active market through "in and out trading," buying and selling their shares from one account to another at baseless and inflated prices.

With the market primed, the schemers encouraged the pink sheet outfits to issue fluffy press releases and then launched their spam e-mail campaigns using an array of botnets.

"Hundreds of millions of spam e-mails flooded the inboxes of American investors touting the Useltons' near-worthless penny stocks with bases price projections and other grandiose claims," the SEC alleges.

According to the regulator, the Useltons paid their principal spammer a fee based upon a percentage of the gross dollar trading volume of the stock for each day of the spamming campaign.

The SEC says that the principal spammer often subcontracted the actual e-mailing out to spammers in Russia and Israel, sometimes enlisting additional support from spammers in California and Arizona.

The crafty Useltons generally tried to avoid large price spikes during the pump-and-dump spamming campaigns in attempt to avoid drawing the attention of the SEC.

The e-mail spam dragged in gullible investors while Darrel and Jack Uselton dumped their shares through the various entities they controlled.

"Once the e-mail campaigns ended, the small business owners of the penny stock companies were left with the hardship of erasing the negative stigma of being the subject of spam campaigns and several were inundated with angry calls, letters and e-mails," the SEC says.

"The Useltons and their principal spammer simply moved on to spam other companies," the regulator continues. "Meanwhile, investors were left with virtually worthless securities."

The SEC wants the court to order Darrel Uselton and Jack Uselton to provide an accounting and disgorge the ill-gotten gains from their fraudulent scheme.

The regulator is also seeking a civil money penalty and wants the spamming duo effectively booted out of the market for good.

If the Texas attorney general has his way, Darrel and Jack Uselton will be spending a considerable amount of time in prison.

In a following article, Stockwatch will examine the 13 spam campaigns allegedly orchestrated by the Useltons in more detail.

Comments regarding this article may be sent to [e-mail].




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Reader Comments - Comments are open and unmoderated, although libelous remarks may be deleted. Opinions expressed do not necessarily reflect the views of Stockwatch.



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Mr Webb,

I love the way you have to include CMKM Diamonds in just about everything you write. Is that the only way you can get people to read your stuff? You have only reported on half of this story so I won't keep you. Get back to digging..... more to be divulged here. Finish this story. Dig. chop chop.


Posted by HndtoHnd @ 2007-07-16 15:52



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Seams the market regulators are just starting to do something about the pump and dumps as they switch to " Short, bash and cover"

This has become epidemic on the Canadian stocks, the Annon trading providing the cover for such activity. If the exchange was to preform random audits, via Halting a stock for a week then the failure to delivers would be obvious as would the naked short sells... I for one would welcome this kind of hunting technique to return credability and integrety back into the market.

They could start with FNI which has been under attack for the last couple months, has emassed a multi million share declared short, but I would bet that the actual short position is many multiples of that... JMHO


Posted by Dave @ 2007-07-16 17:36



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Barry:

I love the way you have to include CMKM Diamonds in just about everything you write.

If your history with Urban Casavant's pink sheet woofer is any indication, I doubt that you will let facts get in the way of another of your fantasies, but the truth is that I do not include CMKM in just about everything I write.

In fact, I mention CMKM in very little of what I write. When I do, it has some relevance.

Is that the only way you can get people to read your stuff?

Getting people to read my "stuff" is not something I spend any time thinking about.

You have only reported on half of this story so I won't keep you.

You give me too much credit. So far, I have barely scratched the surface of this story.

Get back to digging..... more to be divulged here.

Indeed there is more to be divulged; some of it tied to the CMKM-spawned Owners Group.

Lee


Posted by Lee M. Webb @ 2007-07-17 02:04



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Well done Lee, in exposing yet another portly tout. I wonder if he is an urban Negotiator....


Posted by goLEEgo @ 2007-07-17 07:25



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LOL. Portly? Now that is hitting below the belt. And yes, there is a belt under all that portiness. lololol

I would be more than happy, and capable, to negoiate a meeting with Mr Casavant. But no one has asked me to yet!


Posted by HndtoHnd @ 2007-07-17 11:37



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Having been on the annoying "receiving end" of many such spams, I truly was fascinated by your article, and the discovery that something is being done about these scams. I went as far as blaming my net-provider for passing around (read: selling) my e-mail address--I was so annoyed. With installing some filters, the spaming has subsided but I can't tell now if it is gone. Anyway, thanks for an entertaining coverage. I am looking forward to read the rest. If possible, can you supply the e-mails where one can complain about this spaming?


Posted by peter braun @ 2007-07-17 11:41



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Well done Lee. I get these spams and it is good to see that at least the SEC is doing something. Although I believe this should be handled as criminal issues at all times. I have OTC stocks and wonder if these will become targeted. You always wonder that when these stocks rise substantually, is it for real?


Posted by Dave the Rave @ 2007-07-17 15:24



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Wow good article, another prolific spammer by the name of Brian i'm sure is about to go down, he ruined National Capital back in the day and the Useltons have a hard on for him, i'm sure they will use lots of names as chip's to bargain their way out...he also worked for Urban Casavant, Sherman Masur, Regis Possino... small world...good to see the SEC is slamming these spammers they bring nothing but bad into the micro cap world..


Posted by Bob Sled Fred @ 2007-07-17 20:28



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Having met Jack back in 1998 and subsequently been involved with trying to get Jack and family to pay for his sins (I testified in front of the SEC back in 1998/1999 regarding Mountain Energy), it gives me great pleasure to see the video of Darrel being arrested along with Jack's mug shot!! (see Texas Attorney General Web site under news releases for video)

One of the latest companies to fall prey to their scheme is Gulf Ethanol Corporation (OTC GFET.pk). Apparently the company was not too enthusiastic about Darrel's relationship and removed him from the company earlier in the year...although it apparently has not stopped the fluffy press releases (reference company web site at gulfethanolcorp dot com)

and the company still has an advertising link on the Houston Chronicle web site. The company's stock price fell off the cliff coincidentally at the news release of Jack and Darrel's arrest...interesting to note that according to company Pink Sheet financials, Jack and Darrel control approximately 44% of the stock via their control of IBIS and Firemark entities.


Posted by Steven in Houston @ 2007-07-25 12:40



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Interesting also to note....William Carmichael appears to be a name that keeps surfacing in Houston for various OTC companies and may be the "unnammed" link - this guy seems to have a knack for having a very wide breadth of expertise in all of the "hot" markets:

Gulf Ethanol Corp - VP of Operations Oxford Funding - Investor Relations LipidLabs - Director and VP Marketing (note: LipidLabs president, Mr. Cloud, may also be an officer of Gulf Ethanol) A Time to Grow - Chairman and Chief Executive Officer American Song and Book Company - Founder iExalt - Director of Marketing Mannabeach - Founder American Enterprise Development Corp - Director Cyber Law Reporter, Inc. - Director


Posted by Steven in Houston @ 2007-07-25 14:01