In its third sweep of the Internet for securities fraud, the
Securities and Exchange Commission
Wednesday announced 14 enforcement actions against 26 companies and individuals who allegedly used the Internet to scam investors looking for business opportunities.
The SEC has twice coordinated a 200-member squad of SEC regulators, which the agency calls its CyberForce, to troll the Internet looking for potential fraud. In October, the SEC's
first sweep resulted in 23 enforcement actions against 44 people and firms. Most were charged with paid stock touting without proper disclosure. In February, the
second sweep brought proceedings against 13 people in four separate enforcement actions involving various pump-and-dump schemes.
The SEC brings these enforcement actions, which can be civil suits or administrative proceedings, against alleged frauds. The suits, argued in federal court, seek injunctions to prohibit future securities violations. A person violating the injunction can face fines or imprisonment. The SEC also can use the suits to seek monetary penalties and force the surrender of illegally gained profits.
Like the previous sweeps, Wednesday's announcement had a single theme: The enforcement cases were brought against people or firms accused of selling fraudulent and worthless securities on the Internet. None of the enforcement actions Wednesday involved public companies.
"I think this sends a big message that the SEC is able to use the Internet to actually stop frauds before people get swindled," says John Stark, head of the Internet unit in the SEC's division of enforcement. In five of the 14 enforcement actions brought Wednesday, the SEC caught alleged fraud before investors lost money, says Stark, adding that it was the first time an SEC sweep accomplished that. "And if they weren't using the Internet, and we weren't patrolling the Net, how would have we caught them?"
Many of the new cases had similar components, mostly in the area of dubious business plans and promises of incredible returns on invested money. For example, the SEC filed an enforcement action against David Abramson, of New York, who raised $50,000 from investors by selling interests in
, a mining company that claimed it had a way of extracting gold out of magnetite ore, according to the SEC. Abramson promised investors an annual return of 2,600% over 10 years, the SEC says. Reached at his residence, Abramson declined to comment.
In another action, the SEC accused Jason Rosenthal, of Gloucester, Mass., of soliciting $50,000 via the Internet from three people to invest in franchise operations that would sell software to operate commercial Web sites. Rosenthal told investors that they would be investing alongside the same venture capitalists that initially funded
and promised them returns of up to 2,000% within two years, the SEC alleges. Rosenthal also promised investors the franchise they were investing in was planning an IPO. A phone number for Rosenthal in Gloucester had been disconnected.
Several of the other enforcement actions announced Wednesday involved "prime-bank" schemes, in which people would allegedly sell complex-sounding bank-linked securities along with promises of huge returns. In all the cases, the SEC alleges, the prime-bank securities and the banks involved never existed.
It helps when the SEC brings these "message cases" because it raises the profile of other regulators who are attempting to fight securities fraud on the Net, says Bill McDonald, assistant commissioner of enforcement in California's
Department of Corporations
"I'm all for the SEC bringing these package cases out," McDonald says. "We, in the state regulators' offices, have to start doing it too."
When the SEC took action in past sweeps that was centered around a single theme, such as stock touting or disclosure issues, regulators saw an overflow benefit in which offenders not involved in the sweep quickly changed their ways, too.
"I hope we have the same impact with the offerings," says the SEC's Stark. "I mean, if we can alert the world to these, that's a start."