SEC Prosecutes $4.6M Spam Scam By Matthew Dublin

The SEC has charged two Texas men with running a sophisticated scheme that used computer viruses to spread spam emails and cheat investors across the country out of over $4.6 million.

The scam took advantage of unguarded personal computers called “botnets” or “proxy bot networks.” Using the computers, they forwarded spam and malicious software viruses to a virtually limitless number of weakly defended computers on the internet.

“Botnets” are groups or networks of “zombie” computers that have become infected with software “robots” which can run autonomously or be controlled by a single operator, sometimes called a “bot herder.” “Spambots” can send spam without detection while the unsuspecting user goes about his or her normal computing tasks.

The Commission alleges that Darrell Uselton and his uncle, Jack Uselton, profited from a 20-month scam by selling their shares of 13 separate penny stocks in a market they artificially pumped-up using spam emails. But the Useltons’ scheme backfired when an SEC enforcement attorney received one of the spam emails in his inbox at work.

The regulator is seeking permanent injunctions, disgorgement with prejudgment interest, as well as civil penalties against each of the individual defendants and penny stock bars against both men.

"The scheme executed by the Useltons reflects a widespread contempt for investors and the marketplace,” said Linda Chatman Thomsen, SEC Director of Enforcement. “We will track down the swindlers engaged in these fraudulent schemes and hold them accountable."

According to the complaint filed in the U.S. District Court in Houston, the Useltons used the botnets to orchestrate a series of spam email campaigns from May 2005 through December 2006. Their spam emails promoting virtually worthless penny stocks went out to millions of investors, charged the complaint.

Each campaign was focused on separate but equally valueless penny stocks and contained baseless price projections and other unfounded claims. The campaigns lasted anywhere from a few days to several weeks, stated the regulator. The defendants and the companies they controlled usually received unrestricted shares from penny stock companies, often for little or no money, in exchange for their stock-promotion efforst .

In a related action, the Attorney General’s Office for Texas and the Harris County District Attorney’s Office indicted the Useltons for allegedly engaging in organized criminal activity and money laundering. The Texas authorities seized more than $4.2 million bilked from investors, which was deposited in Uselton-controlled bank accounts.

Darrell Uselton is no stranger to being caught on the wrong side of securities laws. The NASD disciplined him in 2004 and again in 2005. Jack Uselton is also no babe in the woods; the Commission permanently enjoined him for violating the anti-fraud provisions in a 2002 settled action, stated the regulator.

In March of this year, the SEC stepped up efforts against fraudulent spam during its “Operation Spamalot.” The regulator suspended some 35 companies, including Advanced Powerline, Leatt Corp, and Software Effective Solutions, as part of its “anti-spam initiative.”

In April, the Commission nabbed several individuals charged with running a spam campaign involving penny stock companies. The defendants had netted $6.5 million through their fraudulent efforts.

In early June, the Federal Bureau of Investigation announced that its successful sting operation called “Operation Bot Roast” had uncovered a “botnet” made up of 1 million computers worldwide.

Commission Chairman Christopher Cox also made it clear that the regulator is fully prepared to fight this form of 21st century fraud.

"This latest step in the Commission's anti-spam initiative is intended to protect investors from fraud artists who would treat the investing public as their personal ATM machines," said Cox. “Given estimates that up to one-quarter of all personal computers connected to the Internet are part of a botnet, and the thriving market in selling lists of compromised computers to hackers and spammers, the SEC is taking this very seriously. We remain aggressively committed to tracking down anyone attempting to use bots to prey on investors with false or misleading spam about securities."

In its latest case, the SEC acknowledged the help of the Attorney General’s offices in both New York and Texas and the FBI. Several other regulators, including the Texas State Securities Board, the State of Oklahoma Department of Securities, the National Association of Securities Dealers and the National Cyber-Forensics and Training Alliance, also aided in the investigation, which is still ongoing.