SEC accuses seven individuals of acting as unregistered brokers in boiler room scheme
The United States Securities and Exchange Commission (SEC) has charged Alex Forester, Michael Hicks, Yarden Krampf, Christopher Lee, Sean O’Neal, Michael Raynor, and Lee Sobel for acting as unregistered brokers in connection with widespread boiler room activity.
According to the SEC’s complaint, submitted at the federal district court for the Central District of California on October 26, 2020, the defendants worked as investor solicitors in several boiler-room operations engaged in a matched-trading scheme. This activity lasted from October 2015 to November 2019.
The matched-trading scheme operated in a rather complex manner.
Certain individuals (“selling shareholders”), through various means obtained large blocks of at least nominally unrestricted shares of small capitalization securities (“microcap”) issuers and sought to profit quickly from them by selling the shares into the market. The selling shareholders sought out and entered into arrangements with individuals who operated boiler room enterprises employing telephone “solicitors” such as the defendants. Pursuant to these arrangements, the boiler room operators, through the solicitors they hired, such as the defendants, undertook to cold call and solicit investors to purchase the selling shareholders’ shares at prices set by the selling shareholders or their agents.
The solicitors cold called prospective investors and inquired if the prospective investor had an active brokerage account with online order-entry functionality and, if so, advised the prospective investor about the attractiveness of the security.
If the prospective investor decided to purchase the promoted shares, the solicitor inquired of the prospective investor how much money he or she would like to invest. The solicitor then alerted the boiler room operator as to the prospective investor’s interest, and the boiler room operator then contacted the selling shareholder or his or her agent and communicated the total dollar amount that the investor wanted to invest.
The selling shareholder or his or her agent then checked the then current level II quotation for the subject security and provided the boiler room operator with a limit order price at or below the then current share price, which was then communicated, through the solicitor, to the prospective investor.
The prospective investor then entered a purchase limit order online in his or her brokerage account at the price provided by the solicitor. Nearly simultaneously, the selling shareholder or his or her agent entered a sale limit order for the same amount of shares at the same price.
This way, the investor’s order and the selling shareholder’s order were likely, at least in part, to match with the effect that the selling shareholder was able to liquidate his or her position in the subject security, piecemeal, into a market with ready purchasers while concomitantly increasing the trading volume in the security, which may attract other purchasers.
The selling shareholder and the boiler room operator then communicated about how many shares were matched between the investor and the selling shareholder, and the selling shareholder then paid the boiler room operator a commission payment that was generally between 25% and 50% of the invested funds. The boiler room operator then paid a portion of these commissions to the solicitor responsible for producing the transaction, such as the defendants.
The complaint alleges that the defendants received over $2.8 million in commissions through their sales. According to the complaint, none of the defendants were registered as a broker-dealer or associated with a registered broker-dealer at the time.
The SEC’s complaint charges all of the defendants with violating the broker-dealer registration provision of Section 15(a)(1) of the Securities Exchange Act of 1934. Forester, Hicks, and Krampf have consented, on a neither-admit-nor-deny basis, to the entry of judgments that impose permanent injunctions, conduct-based injunctions from soliciting purchases or sales of securities, and that reserve the issue of a civil penalty for determination by the court.
The settlements are subject to court approval.