Enforcement News: SEC Brings Enforcement Action Against Boiler Room Operators

• Posted on: Mar 21 2022

By: Jeffrey M. Haber

“A boiler room is a place or operation—usually a call center—where high-pressure salespeople call lists of potential investors (‘sucker lists’) to peddle speculative, sometimes fraudulent, securities. Sucker lists identify victims of previous scams.”¹

The term “boiler room” originates from the practice of running high-pressure sales operations in the basement or boiler room of a building.² A broker using boiler-room tactics provides only upbeat, positive information about the issuer and discourages the potential investor from performing any research on their own.³ As noted by the Securities and Exchange Commission (“SEC”), boiler room operators typically use aggressive sales tactics or threats to coerce the potential investor to buy the security being offered (e.g., threatening to file a lien against the potential investor’s property), require the potential investor to buy the security while on the call, and/or promise high returns with little or no risk.⁴

As noted, a boiler room operation may peddle fraudulent securities on unsuspecting investors. One type of fraudulent scheme involves “penny” stocks. Penny stocks are securities that trade for less than $5 per share. Most penny stocks are too small for trading on the national securities exchanges and, therefore, are only quoted on “over-the-counter” (“OTC”) systems (e.g., by alternative trading systems, such as Delaware Board of Trade ATS, Global OTC ATS (part of NYSE Group, Inc.), and OTC Link ATS (operated by OTC Markets)), among other venues.⁵ It is, therefore, often easier for fraudsters to manipulate the price of a penny stock because it is less liquid than the stock of larger companies that trade on a national securities exchange. 

In a typical penny stock scam, a fraudster will accumulate a small-cap stock at a low price, and then use boiler-room tactics to find buyers for the security at an inflated price. In such a scam, victims may think that they are buying on the open market when they are effectively buying their shares directly from the operators.

[Ed. Note: This Blog wrote about an enforcement action against boiler room operators here.]

Today, we examine SEC v. Biller, et al., an enforcement action brought by the SEC against alleged foreign boiler room operators who perpetuated a fraud on retail investors to convince them to buy the stocks of small companies trading in the U.S. markets.

According to the SEC’s complaint (here), defendants operated a call center in Medellin, Colombia through which they used high pressure sales tactics to fraudulently sell the stocks of numerous small United States-based public companies to United States investors. Defendants’ sales tactics allegedly included, among other things, making false or misleading statements about their roles in promoting the stock they were touting, and the companies whose stock they were promoting. 

According to the SEC, defendants were hired by groups of people who controlled the stock of the issuers whose stock they were touting. These groups of people, also known as control groups, allegedly owned a significant percentage of the issuers’ stock that had been deposited with a broker-dealer and was available to be traded in the public markets (i.e., the float). The SEC claimed that defendants catered to control groups that controlled the float of the issuers, so that both defendants and their clients would profit to the greatest extent from the boiler room’s efforts. The SEC alleged that the control groups unlawfully concealed their control of the float, by breaking up their stock into small blocks owned by foreign nominee companies they directed and failing to file disclosures that would have revealed that all of those smaller blocks were under their common control. The SEC maintained that the control groups wanted to sell the stock they owned to make a significant profit. The control groups allegedly used defendants’ boiler room both to create demand from investors so they would have buyers for their shares, and to increase the price of the stock, thereby increasing their profits.

From at least January 2016 through at least July 2018, defendants allegedly promoted the stock of at least 18 issuers, in coordination with control groups who were dumping their shares of those issuers. As a result of defendants’ efforts, alleged the SEC, the control groups were able to sell millions of shares of stock, which generated over $58 million in trading proceeds for the control groups. According to the SEC, the stock of many of these issuers was thinly traded in the market when it was not being touted in one of defendants’ promotional campaigns, so investors who purchased these shares at defendants’ urging often had difficulty finding buyers when trying to sell their shares once defendants’ promotions were over.

The stocks that defendants allegedly promoted included, among others, Oroplata Resources, Inc. (“Oroplata”), Garmatex Holdings Ltd. (“Garmatex”) and PureSnax International, Inc. (“PureSnax”). To promote these stocks, said the SEC, defendants pretended to be affiliated with various non-existent financial advisory firms. Defendants purportedly made up legitimate-sounding names for these phony financial advisory firms and created legitimate-looking websites for them. According to the SEC complaint, when making telephone calls, defendants routinely used spoofed phone numbers to show area codes that made it appear as if they were calling from the United States rather than Colombia. When calling and emailing unsuspecting investors, said the SEC, defendants used false names, made false or misleading statements about the prospects of the companies whose stock they were touting, and failed to disclose that they were acting in coordination with control groups that were dumping their securities into the market.

The SEC claimed that defendants aggressively touted Oroplata, Garmatex, PureSnax, and other issuers’ stock to prospective investors, including elderly retail investors who invested their retirement savings, using high-pressure sales tactics during telephone calls. Defendants allegedly made misleading statements about the issuers’ prospects as investments and about defendants’ own claimed stock-picking successes. In actuality, explained the SEC, defendants called investors to persuade them to purchase these stocks so defendants’ control group clients could sell their holdings of these stocks for a profit and so defendants could collect a share (often more than half) of the sales proceeds. Defendants also allegedly sent email and text messages that attempted to convince the investors to hold the stocks even when their prices were declining. Then, after selling several issuers’ stocks, said the SEC, defendants routinely shut down whatever financial advisory firm name they had been using, and started over with new names, phone numbers, and websites, touting a new group of issuers’ stocks to a different group of investors.

Commenting on the complaint, Paul Levenson, Director of the SEC’s Boston Regional Office, said: “These scam artists went to great lengths – using bogus companies, aliases, and spoofing their phone numbers – to defraud and mislead investors into a pump-and-dump scheme.” Director Levenson “urge[d] investors to read the investor education materials about fraud in the ‘penny stock’ market, which are available at Investor.gov.”

The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, charges all defendants with violations of antifraud provisions of the securities laws and charges one of the defendants with violating market manipulation provisions of the securities laws. The SEC seeks injunctive relief, disgorgement plus prejudgment interest, civil penalties, and a prohibition on participating in any offerings of penny stocks by all defendants.

The press release announcing the filing of the complaint can be found here.

The complaint filed in SEC v. Biller, Case No. 1:22-cv-01406 (E.D.N.Y. Mar. 14, 2022), can be found here.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

1. Chen, James, Boiler Room, Investopedia (July 15, 2021) (here).
2. Id.
3. Id.
4. See SEC, Boiler Room Schemes, Investor.gov.
5.  Id.