Review & Outlook

The Wolves of Long Island

The SEC does its job in taking down a pump-and-dump stock scheme.

By The Editorial Board






















Photo: Getty Images


Government prosecutors love to hunt for big cases on Wall Street, which are great for publicity, but an often-neglected duty is to protect small investors on Main Street. So it’s noteworthy that the Securities and Exchange Commission recently blew up a Long Island-based boiler-room scheme.

Last week the SEC charged 13 individuals with using high-pressure sales tactics to bilk more than 100 small investors—including many senior citizens—out of some $10 million in savings. The U.S. Attorney for the Eastern District of New York followed with criminal charges.

According to the SEC, the alleged swindlers—many of whom had been banned from the brokerage industry—set up a sham financial-services company on Long Island. They used this “boiler room” to buy, trade and inflate the price of penny stocks in microcap companies. Penny stocks trade over the counter at less than $5 a share and are often thinly traded, which makes them easier to manipulate than blue-chip securities on the big exchanges.

The alleged scammers purchased large blocks of shares and then “pumped” them to potential investors with harassing emails and phone calls. One conspirator emailed: “We are not brokers but a financial RESEARCH firm who continues to produce winner after winner in an UP or DOWN market! I need to speak with you about how this program will impact your portfolio in a POSITIVE way. BUT I cant help you if I cant speak with you.” Another said the stocks were “guaranteed winners” and the “buy of a lifetime.”

The boiler boys also used “washes”—e.g., buying 100 shares of a stock at $5 a share with one co-conspirator while selling the same number of shares for the same price to another. This drove up the stock price and created the impression that shares were actively being traded though ownership wasn’t changing hands. Once prices hit a certain level, they dumped the stocks, realizing $14 million in gains while costing victims millions.

When a victim complained about his losses, one con artist allegedly told him: “I am tired of hearing from you. Do you have any rope at home? If so tie a knot and hang yourself or get a gun and blow your head off.”

The SEC was established during the New Deal to protect mom-and-shop investors from fraudsters. But the agency has lately become better known for its headline-making prosecutions of Wall Street barons for white-collar crimes like insider trading, though their alleged victims are often other well-heeled and sophisticated investors. The agency also won plaudits from progressives for rules requiring disclosures on executive pay. But the SEC was asleep when Bernie Madoff and Allen Stanford were bilking investors out of their life savings.

New SEC Chairman Jay Clayton told us last week that he plans to make protecting small investors from scams like the Long Island boiler room a priority, and the agency deserves credit for bringing these cases back to the center of SEC enforcement.

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