Enforcement News: SEC Charges Entertainment Company and Affiliated Individuals with Illegal Boiler Room Tactics in Connection With $14 Million OfferingPrint Article
- Posted on: Feb 1 2021
“Boiler room” brokerage firms are investment houses in which a broker uses high-pressure sales tactics to sell speculative and risky securities. A broker using boiler-room tactics provides customers – usually persons who received a cold call from the broker – with only positive information about the company and its stock. Boiler-room brokers typically tell customers that a stock is “a sure thing” or a “can’t miss, once in a lifetime” opportunity. Boiler-room brokers pressure customers to buy a security on the spot and discourage the customer from doing any research before they buy.
Brokers using high pressure sales tactics do so to convince investors to pay more for a security than its actual worth. Sometimes, the securities are even worthless or nonexistent.
On January 27, 2021, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that it charged Vuuzle Media Corporation (“Vuuzle”), a purported online live streaming and entertainment company, and its founder Ronald Shane Flynn (a.k.a. Ronnie Shane) with fraudulently offering over $14 million in securities to investors across the United States using an aggressive boiler room sales scheme.
According to the SEC’s complaint (here), from approximately September 2016 through at least May 2020, Vuuzle and Flynn offered and sold more than $14 million of Vuuzle common stock and warrants to investors throughout the United States. The SEC claimed that Flynn secretly diverted approximately $5 million to support his aggressive fund-raising operations and pay commissions to stock promoters. The SEC alleged that Flynn misappropriated another $5 million or so in direct transfers to his personal bank accounts overseas and by using corporate credit and debit cards for personal items, such as dating and gambling applications, gold bars, and luxury travel. Approximately $2 million in additional funds, said the SEC, was used for other expenses in furtherance of the alleged fraud, including, but not limited to, Ponzi-like payments to a limited number of investors, Fed Ex charges, rent for a New York office, and attorney fees.
To raise money, Vuuzle and Flynn allegedly represented to investors that Vuuzle was a legitimate, successful, and growing company in the business of providing online live streaming and entertainment services. In fact, claimed the SEC, Vuuzle was little more than a front for a boiler room operation Flynn controlled.
According to the SEC, Flynn operated primarily out of the Philippines under a series of different corporate entities. In that connection, he allegedly acted directly and through marketing teams that were engaged in aggressive and high-pressure sales campaigns. Among other tactics, said the SEC, Flynn and his boiler room employees cold-called potential investors and, through relentless and deceptive phone and email communication, convinced them to buy Vuuzle securities. In return for bringing investor funds to Vuuzle, Flynn purportedly paid substantial commissions to himself and others.
The securities offered were common stock. The price per share ranged from $1.00 to $5.00, with most investors paying $5.00 per share. Many investors were also allegedly granted warrants that gave the investor the purported right to purchase additional shares for a limited time at a discounted price. The SEC said that none of the securities were registered with the Commission.
The SEC alleged that Vuuzle and Flynn made materially false and misleading statements in their communications with investors, filings with the Commission, and in offering documents, including Vuuzle’s Private Placement Memoranda (“PPMs”). For example, said the SEC, Vuuzle and Flynn told investors that their funds would be used to operate and build Vuuzle’s online streaming business, which would earn millions of dollars in revenue from service fees and advertising. In fact, alleged the SEC, of the $14 million raised in investor funds, Vuuzle and Flynn used only approximately $2 million to build the streaming applications, which served as props to raise more investor funds.
In addition, said the SEC, Vuuzle and Flynn falsely portrayed Vuuzle as a “pre-IPO” investment opportunity that would provide returns to investors in the form of dividends and increased post-IPO stock values. Yet, Vuuzle has never made a profit, never paid dividends to any investor, and never made a public offering on any stock exchange, alleged the Commission. From its inception in October 2016 through May 2020, Vuuzle’s U.S. bank account reflected total business revenue of less than $1,670, noted the SEC.
Moreover, claimed the SEC, Vuuzle’s public filings and offering documents falsely suggested Flynn had only a peripheral relationship with the company, if any. For example, said the SEC, in the PPMs, Vuuzle described Flynn as merely a “non-voting beneficial owner” of a Vuuzle corporate shareholder. And Vuuzle’s Forms D, filed with the Commission in 2017 and 2019, did not name Flynn as a related party at all. In fact, said the SEC, Flynn exercised ultimate control over every part of Vuuzle’s business for the primary purpose of enriching himself.
The SEC said that Vuuzle and Flynn were aided and abetted by Richard Marchitto (“Marchitto”), a former dentist who had lost money investing in one of Flynn’s previous business ventures. According to the complaint, Marchitto provided substantial assistance to Vuuzle and Flynn by acting as their U.S. corporate and financial presence and maintaining a U.S. bank account, corporate credit cards, and a New York office address for Vuuzle, which enhanced Vuuzle’s aura of legitimacy as a U.S.-based company. The Commission claimed that because Flynn avoided U.S. jurisdiction, Marchitto was instrumental to the fraud.
“We are committed to taking action to protect investors and pursuing relief for those who have been harmed,” said Melissa Hodgman, Acting Director of the SEC’s Division of Enforcement. “We will vigorously pursue fraudsters who enrich themselves at investors’ expense.”
“The defendants allegedly raised millions of dollars from investors through aggressive and deceptive sales techniques, and misappropriated the majority of those funds for personal use and to fund the boiler room operation,” said Jennifer S. Leete, Associate Director in the SEC’s Division of Enforcement. “Investors should be on alert for red flags of investor fraud such as unsolicited calls and high pressure sales tactics.”
The SEC filed the complaint in federal court in the District of New Jersey. In the complaint, the Commission charged Vuuzle and Flynn with violating the antifraud and registration provisions of the federal securities laws, and Marchitto with aiding and abetting Vuuzle and Flynn’s violations. The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties against each defendant.