U.S. federal authorities announced last week that members of a "pump-and-dump" spam group that bilked more than US$20 million from naïve, overeager investors have all pleaded guilty.
Although four men admitted to the scam in July and August, the U.S. Department of Justice only disclosed the pleas last Thursday. All four face prison terms of between five and 10 years each on one or more counts of fraud. Two of the men have also pleaded guilty to civil charges filed by the U.S. Securities and Exchange Commission (SEC).
Starting in 2004, Michael Saquella, a.k.a. Michael Paloma, 47, of Mesa, Arizona.; Lawrence Kaplan, 63, of Scottsdale, Arizona.; Henry Zemla, 38, of Harris Township, Michigan.; and Justin Medlin, 26, of Paris, France, hustled investors by convincing owners of 15 small corporations to turn over large chunks of those firms' penny stocks after promising that they could take the companies public. They then emailed fraudulent press releases to drive interest in the companies' stocks, create artificial demand and drive up share prices. Medlin was one of several spammers hired by Saquella, Kaplan, and Zemla to push the stocks.
Once the stock price had been pumped up, the men dumped the shares they controlled, leaving duped investors holding the bag. The scams netted more than $20 million in profits, said Alice Fisher, assistant attorney general of the Justice Department's criminal division. The men kept the bulk of the proceeds, but some were turned over to the companies in question.
Saquella, Kaplan, Zemla and Medlin face five years in jail on each fraud charge and will be sentenced between November 2007 and February 2008. Saquella, for example, pleaded guilty to two charges -- conspiracy to commit securities fraud and mail fraud -- and will face up to 10 years when he is sentenced November 30. Three other defendants who pleaded guilty earlier this year have already been given jail terms of between one and five years.
Also last Thursday, Saquella and Kaplan admitted to multiple SEC violations. As part of that plea, the two must give up the nearly $3 million they made in duping investors of seven of the 15 companies eventually victimised.
"What makes this case stand out is the intricacy of the scheme," said Cheryl Scarboro, associate director of the SEC's enforcement division, in a statement. "These defendants were not only able to sneak these companies onto the public markets through the back door, they were able to manipulate those markets with old-fashioned pump-and-dump techniques."
Law enforcement and security regulators have cracked down on pump-and-dump schemes -- in March, the SEC froze $3 million in assets held by a Eastern European gang suspected of using hacked online brokerage accounts to fuel a stock-manipulation plan -- but the practice shows little sign of abating. Several large spam campaigns this summer, in fact, including one that security experts said was of unprecedented size, have hit consumers' in-boxes.
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