PROFIT TAKER'S & MONEY MAKER'S

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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

By BRENDAN M. CASE and MICHAEL GRABELL / The Dallas Morning News

http://www.dallasnews.com/sharedcont...7d8.html#[

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.

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.

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