A couple of Texas men forgot that handy tip and it cost them big. Darrrel and Jack Uselton were big time spammers in 2007, running a botnet that sent out millions of penny stock spams and raking in more than $4 million in the process. The SEC calls their particular pump and dump scheme “scalping.” That is, buying stock for yourself, recommending it others while posing as an expert, and then immediately selling the stock when the price rises as a result of your recommendation. That’s a big no no.
They might have actually gotten away with it had their spam not found its way into the inbox of a man who happened to be a lawyer for the SEC. The Useltons flooded this lawyer with their spam. Things went downhill from there. The SEC contacted the FBI and authorities in several states including Texas.
In another example of their lack of brightness, the SEC was able to easily match the spam with the pair’s brokerage accounts. Can you say busted? The end result was a lawsuit against the Useltons, disciplinary action against 3 brokerages and suspension of trading privileges for four penny stock companies.
Without admitting or denying the SEC’s allegations, the Useltons agreed to be permanently banned from selling penny stock in the future. Out of $4.2m seized by authorities, Darrell Uselton will pay more than $2.8m in disgorgement and prejudgement interest. The SEC will also collect a $1m penalty.
The moral of the story? If you’re determined to be a spammer, don’t spam the people running the system you’re trying to game!
Read [InformationWeek]
Pump and dump schemes have long been a problem in the penny stock arena. I am concerned because I do promote a penny stock newsletter. I warn my readers to stay away from the free newsletters, but it puts a damper on the whole industry.