Two Texas Individuals Settle SEC Charges in Spam Scam Case

Washington, D.C., March 18, 2009 (LAWFUEL) – The Securities and Exchange Commission today announced that two Texas men have settled SEC charges that they perpetrated a massive e-mail spam campaign to drive up the demand for low value stocks they owned.

Under the settlement, which was entered today in the form of two final judgments by Judge Kenneth Hoyt of the U.S District Court in Houston, Darrel T. Uselton and his uncle Jack E. Uselton will no longer be able to trade penny stocks, and Darrel Uselton will pay more than $2.8 million in disgorgement and prejudgment interest and a $1 million financial penalty. In July 2007, the SEC charged the Useltons for the high-tech scam that hijacked personal computers nationwide.

“Spam scams come in all forms,” said SEC Chairman Mary Schapiro. “If an e-mail campaign seeks to corrupt the securities market and defraud investors, we’ll pursue it.”

Cheryl Scarboro, Associate Director of the SEC’s Division of Enforcement, added, “This settlement holds the Useltons accountable for flooding the inboxes of American investors with hundreds of millions of spam e-mails touting these near-worthless penny stocks with baseless price projections and other grandiose claims.”

The SEC’s enforcement action stems from a spam e-mail that a staff attorney at the SEC received in August 2005. The e-mail had the subject line: “Experts are jumping all over this stock …” and seemed to be a scam. Shortly thereafter, the attorney received several more e-mails.

In an ensuing investigation, the SEC was able to identify the Useltons as the driving force behind the e-mails, determining that from May 2005 through December 2006, the Useltons generated proceeds of more than $4 million through a scheme in which they would obtain cheap stock from at least 13 penny stock companies. The duo would then, according to the SEC’s complaint, sell those shares into an artificially active, and often-times rising, market that they created through manipulative trading, spam e-mails, direct mailers, and internet-based promotional activities.

By matching various spam e-mails against the Useltons’ brokerage records and transfer agent records, the SEC determined that each of the market manipulations followed a similar pattern. Specifically, the Useltons and the companies they controlled received unrestricted shares from the penny stock companies for little or no money in return for purported financing or promotional activities.

According to the SEC’s complaint, the Useltons then transferred those unrestricted shares into brokerage accounts they controlled. They then encouraged many of the penny stock companies to issue positive press releases. At the same time, the Useltons orchestrated spam e-mail campaigns using technology that would enable them to essentially instruct millions of computers to distribute their email so that it would appear as though the email was coming from a person whom the recipient might have known.

Each campaign, which featured a single company, lasted from between several days to several weeks. The scams lasted a total of 20 months.

Darrel Uselton and Jack Uselton, without admitting or denying the allegations, settled the action by consenting to entry of a court order that: (i) permanently bars them from Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; and (ii) prohibits them from participating in an offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act.

In addition, Darrel Uselton consented to entry of a court order that orders him to pay disgorgement and prejudgment interest in the amount of $2,838,866.72, which will be deemed satisfied upon entry of an order requiring him to pay that amount in restitution to the State of Texas. It also requires him to pay a penalty of $1 million.

The evidence gathered in this investigation has aided other investigative agencies. For instance, in a related enforcement action, the Useltons are in the process of settling criminal charges originally filed by the Attorney General’s Office for Texas and the Harris County District Attorney’s Office (Houston, Texas) in July 2007 and have agreed to forego any right to $2,838,866.72 that previously was seized by the Texas criminal authorities from bank and brokerage accounts controlled by Darrel Uselton.

Although some investigations are still ongoing, the evidence already has resulted in:

Criminal indictments against four individuals from Texas and Colorado for securities-related criminal activity, including the Useltons.
Suspensions, fines, other disciplinary action and/or voluntary broker-dealer resignations by at least three broker-dealers and their firms.
Trading suspensions or trading revocations for the securities of at least five companies, including four of the 13 penny stock companies identified in the Commission’s complaint against the Useltons.

The Commission acknowledges the assistance of the Attorney General’s Office for Texas and New York, The Harris County (Houston, Texas) District Attorney’s Office, the Federal Bureau of Investigation, the Texas State Securities Board, the United States Attorney’s Office District of Colorado, the Financial Industry Regulatory Authority, the State of Oklahoma Department of Securities, and the National Cyber-Forensics & Training Alliance.

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