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SEC Charges Two Texas Swindlers In Penny Stock Spam Scam Involving Computer Botnets
09/07/07
The Securities and Exchange Commission has filed securities fraud charges against two Texas individuals in a high-tech scam that hijacked personal computers nationwide to disseminate millions of spam emails and cheat investors out of more than $4.6 million. The scheme involved the use of so-called computer "botnets" or "proxy bot networks," which are networks comprised of personal computers that, unbeknownst to their owners, are infected with malicious viruses that forward spam or viruses to other computers on the Internet. The scheme began to unravel, however, when a Commission enforcement attorney received one of the spam emails at work.
The Commission alleges that Darrel Uselton and his uncle, Jack Uselton, both recidivist securities law violators, illegally profited during a 20-month "scalping" scam by obtaining shares from at least 13 penny stock companies and selling those shares into an artificially active market they created through manipulative trading, spam email campaigns, direct mailers, and Internet-based promotional activities. Scalping refers to recommending that others purchase a security while secretly selling the same security in the market.
In related enforcement actions, the Attorney General's Office for Texas and the Harris County District Attorney's Office indicted the Useltons for engaging in organized criminal activity and money laundering. The Texas criminal authorities also have seized more than $4.2 million from bank accounts associated with the Useltons.
"This latest step in the Commission's anti-spam initiative is intended to protect investors from fraud artists who would treat the investing public as their personal ATM machines," said SEC Chairman Christopher Cox. "The use of bots to spread investment spam at exponentially higher rates is making this type of fraud an even more virulent threat to ordinary investors. Not only are victims getting hit with get-rich-quick spam, but by turning the victims' computers into zombies, these fraudsters are sending out still more spam to others. Given estimates that up to one-quarter of all personal computers connected to the Internet are part of a botnet, and the thriving market in selling lists of compromised computers to hackers and spammers, the SEC is taking this very seriously. We remain aggressively committed to tracking down anyone attempting to use bots to prey on investors with false or misleading spam about securities."
Linda Chatman Thomsen, SEC Director of Enforcement, said, "The scheme executed by the Useltons reflects a widespread contempt for investors and the marketplace. We will track down the swindlers engaged in these fraudulent schemes and hold them accountable."
The Commission's complaint, filed in U.S. District Court in Houston, alleges that the Useltons orchestrated a series of spam email campaigns using an array of computer botnets to anonymously flood the inboxes of American investors with millions of spam emails touting near-worthless penny stocks with baseless price projections and other unfounded claims. Each campaign, which featured a single company, lasted anywhere from several days to several weeks.
The Commission alleges that between May 2005 and December 2006, the Useltons obtained more than $4.6 million through their fraudulent scheme. According to the complaint, the Useltons and the companies they controlled typically received unrestricted shares from penny stock companies for little or no money, in return for purported financing or promotional activities.
The Commission's complaint alleges that the Useltons violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each of the individual defendants, as well as penny stock bars against the Useltons.
Darrel Uselton was disciplined by the National Association of Securities Dealers (NASD) in 2004 and 2005. Jack Uselton was permanently enjoined by the Commission from violating the anti-fraud provision in a 2002 settled action.
The company stocks that were the subject of the Useltons’ spam campaign, according to the SEC’s complaint, included Oretech, Inc.; Intelligent Sports, Inc.; Advanced Powerline Technologies; Notch Novelty Corporation; Avondale Resources Corporation; Spooz, Inc.; ESPRE Solutions, Inc.; Grifco International, Inc.; Leatt Corporation; Adrenaline Nation Entertainment, Inc.; Equipment and Systems Engineering, Inc.; Gulf Petroleum Exchange, Inc. (currently Software Effective Solutions Corp.); and Wentworth Energy, Inc.
The SEC in March 2007 suspended trading in the securities of three of the companies (Advanced Powerline Technologies, Leatt Corporation, and Software Effective Solutions Corp.) as part of its anti-spam initiative. The SEC revoked the registration of the securities of Oretech, Inc. in December 2005.
The Commission acknowledges the assistance of the Attorney General's offices for New York and Texas, The Harris County (Houston, Texas) District Attorney's Office, the Federal Bureau of Investigation, the Texas State Securities Board, the State of Oklahoma Department of Securities, the National Association of Securities Dealers and the National Cyber-Forensics and Training Alliance.
The Commission's investigation is continuing.
Additional materials: Litigation Release No. LR-20187
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