An irreverent Wall Street Blog
by Bill Singer
Join BrokeAndBroker blog on Facebook  Follow the BrokeAndBroker blog on Twitter  Connect with BrokeAndBroker on LinkedIn  Join Bill Singer on Google+  Subscribe to RSS Feed

Wall Street Eugenics : SEC Charges Microcap Fraud . . . again
Written: January 27, 2012

After some three decades lawyering on Wall Street, I ask your pardon if, at times, I come off as overly cynical, hardboiled, and curmudgeonly.  I mean, you know, seriously, if you’ve seen even a tenth of the garbage and nonsense that I have during my career, you would likely have the same grumpy demeanor.

Too much of what presently passes for securities regulation strikes me as thwarting natural selection.  Permit me the observation that some folks are just too stupid to be allowed to invest in the stock market, and it may be best for the rest of us to let them get fleeced and bankrupted — you know, take their dollars out of our genetic pool.

Harsh?  Sure. Honest? Absolutely.  As if decades of earnest securities regulation has enhanced the integrity of the stock markets and prevented generation after generation of Ponzis and Madoffs.

Fraudsters prey upon the gullible and feast upon the foolhardy. Eliminate the protections for those investors who refuse to do their own due diligence, for those who override our human instinct to disbelieve what’s too good to be true, and maybe the con artists will find it all that more difficult to scam the remaining population.  The eugenics of Wall Street.  Alas, the worst sin is to lie to one’s self — so, yeah, I understand that there’s no way such benign neglect will become the regulatory policy for the securities markets.  Still — a guy can dream, no?

An Investment For Morons

Take microcap stocks.  Please, take them – take them out to the middle of the ocean and dump them.  All of them. As if what??? Serious investors are diving into most of this pennystock crap and making a profit? Fact is, about the only folks making money on this low-priced garbage are the paid touts and the brokerage firms dumping their inventory.  No one has had to re-invent the wheel or alter the now time-tested scripts.

Someone you never met cold calls you with a wild and fancy tale about a cancer cure or the next Apple. It’s all too-good-to-be-true but, yet, you run for your checkbook and can’t wait to get into this opportunity.

Sometimes you send your dollars to the broker that you never met from the brokerage firm you never heard of for investment in a stock you didn’t research.  Other times, you think you’re smarter than everyone else.  You sort of cheat — instead of giving the order to the fast-talking salesman that first called you, you go on to your discount account at Schwab, TD Ameritrade, E*Trade. Then, months later, when the tout no longer answers his telephone or your broker’s firm has shuttered, then you cry and go running to a lawyer or a regulator.  Gimme a break!

Another Case In Point

In a January 26, 2012, press release titled: SEC Charges Boiler Room Operators in Florida-Based Penny Stock Manipulation Scheme, we learn that the Securities and Exchange Commission (“SEC”) charged a Fort Lauderdale-based firm and its founder with conducting a fraudulent boiler room scheme. Boiler room scheme? My. . . is it still the 1980s?

SEC v. First Resource Group LLC and David H. Stern (Complaint, SDFL, 12-cv-60137-XXXX, January 26, 2012) asserts four counts alleging violations of Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  The Complaint alleges that from December 2008 through at least May 2010, defendants First Resource Group LLC and its principal David H. Stern engaged in a scheme in which they:

  • fraudulently touted the stock of TrinityCare Senior Living, Inc. and Cytta Corporation (two thinly-traded microcap companies);
  • sold each company’s stock at the same time they were touting it; and
  • manipulated the market for each stock.

NOTE: The charges contained in the Complaint are merely allegations, and the defendants are presumed innocent unless and until proven guilty in a court of law.

Cast of Characters

  • First Resource Group of Fort Lauderdale, FL, is a Florida limited liability company organized in September 2008 by Stern. First Resource has never been registered with the SEC and has not registered any offering of securities under the Securities Act. The SEC alleges that the firm’s sole business was promoting penny stocks.
  • Stern, 48, Tamarac, FL, was First Resource’s sole manager and not associated with a registered broker, or dealer during the relevant period.
  • Cytta Corporation‘s website offers the following explanation of its business:

We are the first Medical Health Services Provider to coordinate and verify data transmission and medical device connectivity. Our system supports Payors & Providers efforts to provide better and faster care to their patient members.

TrinityCare is a rapidly emerging growth company formed to meet the needs of senior adults, through the development and management of senior living community. These facilities will typically be in association with a local, host church, which has contributed land in exchange for ownership in the facility. In addition to the local host church, TrinityCare develops positive ministry relationships with all segments of the community, including as a significant relationship with the broad Christian community.

Also, watch this 2010 Fox Business News interview with the company’s CEO Donald M. Saupaugh:


The Complaint alleges that defendant First Resource signed agreements to promote TrinityCare and Cytta’s stock, for which the firm received 150,000 shares of TrinityCare stock and 200,000 shares of Cytta stock.  From December 2008 through at least May 2010, Stern and First Resource allegedly paid telemarketers to cold-call investors and solicit them to purchase shares in the two penny stocks. These telemarketers were allegedly hired and trained by Stern, and the operation was purportedly conducted out of First Resource’s sole office (in Fort Lauderdale).

Armed with information provided to them by Stern, the telemarketers allegedly prepared sales scripts to pitch the stock to potential investors. According to the Complaint, Stern reviewed the draft versions of the scripts, made edits, and approved the final drafts before the telemarketers were allowed to use them, which were supposed to be used verbatim.

Stern gave the telemarketers a computer database list of registered representatives at broker-dealers, who were targeted for the cold calling and stock pitches.  Once an investor agreed to purchase one of the stocks, the telemarketer who solicited that investor gave Stern the investor’s name, the brokerage firm where the investor’s account was held, and the number of shares to be purchased. Telemarketers earned a modest salary and 6% sales commission on all verified purchases.


From June 2009 through at least May 2010, First Resource’s telemarketers allegedly made material misrepresentations about TrinityCare’s rapid revenue growth and a projected increase in the company’s stock price; for example, that the company’s stock “is going to be $5-7 in 6-12 months” and the company “is going to be a half-a-billion dollar company in five years or roughly a $40 stock.”

Also, the Complaint alleges that Stern disseminated a research report on TrinityCare stating that, for the year ending December 31, 2009, TrinityCare would show a profit on revenues exceeding $7.2 million. First Resource’s telemarketers and the research report also claimed TrinityCare expected to add at least four newly constructed senior living facilities. It was further alleged that misrepresentations were made that TrinityCare had secured $50 million in financing commitments to construct these new facilities and that the financing was “90% backed by HUD,” (The U.S. Department of Housing and Urban Development).

In fact, the Complaint alleges that the defendants knew or should have known (or were severely reckless in not knowing}that there was no reasonable basis for their claims.  Among the facts cited by the SEC on this point were that TrinityCare had:

  • lost money for the previous two years;
  • had no realistic prospects of revenues;
  • had not obtained financing for the new senior living facilities, which were the source of the company’s projected revenue growth; and
  • was only at the “pre-application” stage to obtain HUD financing for the new facilities.

In light of the above factors, TrinityCare’s stock traded at between $0.41 and $1.95; however, the defendants allegedly projected that the share price would rise to between $5 and $7 a share in the following year.  The Complaintalleged that there was no reasonable basis for such a projection.


The Complaint alleges a similar pattern of misconduct concerning Cytta.  From December 2008 through April 2009. Stern allegedly disseminated to investors a research report on Cytta touting Cytta’s “[s]ales projections for 2010-2014 should exceed $500 million with a pre-tax net of over $400 million.” The SEC argues against such projections by asserting that according to Cytta’s Form 10-Q filed on February 23, 2009, the company’s auditors’ expressed doubts the company could continue as a going concern.  Moreover, the Complaint asserts that Cytta:

  • had had no profits since its inception in 1997;
  • had revenues for the year ending December 31, 2008, of only $35,000; and
  • had net losses for the year ending December 31, 2008 of $70,000.


The Complaint alleged that concurrent with the telemarketers’ recommendations, the defendants were actually selling their shares that they had received from the stock promoters, but did so without disclosing that circumstance.  This “scalping” resulted in alleged profits to the defendants.

SIDE BAR: The SEC deems it a fraudulent practice to purchase a security in anticipation of recommending a long-term investment in that same security, but then embarking upon profitable sales following the issuance of the buy recommendation.  The regulatory rationale is that it is deceitful to recommend the purchase of a particular security when you have prior knowledge of the issuance of a research report that will be touting a security andyou intend to utilize the buyers’ orders to facilitate your ability to dump your own holdings.  This “scalping” of the recommendation is as classic a conflict of interest as can be imagined.

In June 2009, First Resource allegedly received 150,000 TrinityCare shares from a promoter, and during the telemarketing push from June 2009 to May 2010, the defendants purportedly sold approximately 92,000 of those shares, in approximately 84 different transactions, for proceeds of approximately $100,000.  Similarly, First Resource received from a promoter, 200,000 Cytta shares in December 2008, and from that date through April 2009, sold 32,150 of those shares, in approximately 11 different transactions, for proceeds of approximately $69,000.

The Complaint charges that the defendants and the telemarketers did not disclose that First Resource was selling TrinityCare or Cytta shares while recommending the purchase of those stocks to investors. Similarly, it was alleged that the research reports disseminated by the defendants TrinityCare and Cytta did not disclose that the defendants were selling their shares.

Market Manipulation

From December 2008 through at least May 2010, the defendants are charged with manipulating the markets for TrinityCare and Cytta stock in order to create the false appearance of a liquid and active market, and with the goal of inducing investors to buy the stocks. The Complaint alleges that the defendants were not passive in their efforts to realize profits on their promotional shares; to the contrary, it is alleged that Stern systematically submitted bids for small amounts of TrinityCare or Cytta stock at prices higher than the stock’s then-existing price.  On numerous occasions, Stern allegedly placed the daily high bid for the stock.

During the summer of 2009, this trading allegedly increased TrinityCare’s stock price from $1.55 a share on June 17, 2009, to $1.95 on July 10, 2009. After the manipulation ended, TrinityCare’s price plummeted to $0.41. Similarly, Stern made numerous purchases of small quantities of Cytta.  During Stern’s alleged manipulation from December 2008 to April 2009, Cytta traded as high as $3.25 per share in January 2009 but crashed in April 2009 to $0.04.

From December 2008 through at least May 2010, the Complaint alleges that the defendants profited by more than $169,000 from sales of Trinity Care and Cytta made while the defendants fraudulently touted these companies, scalped investors, and manipulated the markets in the two stocks.  The SEC’s complaint alleges that First Resource Group and Stern violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and financial penalties as well as a penny stock bar against Stern.


Previous Entries
July 1, 2015
If you're going to promise a Wall Street regulator that you will fix a problem, you better make certain -- in fact, you better make damn cer... Read On
June 30, 2015
In "SEC Commissioner Gallagher Rages Against The Dying Light In Two Dissents" (, June 18, 2015), I noted that:After four years ... Read On
June 30, 2015
Stockbroker, Compliance, Legal, and Regulatory JobsEmployment Page Jobs#wallstreetjobs @brokeandbrokerNOTICE TO EMPLOYERS: Brok... Read On
June 29, 2015
On June 26, 2015, the Financial Industry Regulatory Authority ("FINRA") published this somewhat unusual and intriguing press release:FINRA Supports NA... Read On
June 27, 2015
BREAKING NEWS: Supreme Court Rules On Gay MarriageIn Obergefell et al. v. Hodges, Director, Ohio Department Of Health, et. al (Slip Opinion,... Read On
June 26, 2015
In Obergefell et al. v. Hodges, Director, Ohio Department Of Health, et. al (Slip Opinion, Supreme Court, No. 14–556; 576 U. S. ____ / June ... Read On
June 26, 2015
During my three decades on Wall Street (which has included stints as an industry regulator, industry defense lawyer, and public customers' lawyer), I'... Read On
June 25, 2015
You ever heard of PPAC Act -- a Congressional Act passed in March 2010?  That law is formally known as the "Patient Protection and Affo... Read On
June 25, 2015
If there is a hallmark of the Financial Industry Regulatory Authority's ("FINRA's") approach to Wall Street regulation, it is likely found in the se... Read On
June 24, 2015
It has been said that lawyers' fees are like a gas, which expands to fill any size container. Sometimes you get what you pay for and your lawyer think... Read On
June 24, 2015
You can't do something about something that you don't know anything about. Yeah, I know, not exactly profound words but they are at the heart of today... Read On Job Search

Related Topics
Tag Cloud
Internet FINRA Bear Stearns Bloomberg SEC NASD NYSE Money Laundering Due Diligence Waiver Forbes China Broy Woody Allen Madoff NAC NPR Marketplace Stanford UBS Ketchum Antitrust NASDAQ RRBDLAW Schapiro Bill Singer BrokerAndBroker USERRA Morgan Keegan Arbitration Counterclaim Khuzami BrokeAndBroker Aleynikov Goldman Sachs brokeandbroker Promissory Note U4 Bill SInger EFL CFTC Huffington Post Flash Crash arbitration RBC Ponzi Affinity Fraud Wachovia Criminal Raymond James Expungement Fraud Securities Fraud Outside Business Activity Registered Rep Magazine FOREX FBI Banc of America Pro Se PCAOB Supreme Court Morgan Stanley Smith Barney E*Trade Margin email Galleon Penson U5 Defamation Protocol Wells Fargo Punitive Damages Citigroup Merrill Lynch ARS Employee Forgivable Loan Street Legal Morgan Stanley AWC Fidelity Bankruptcy Broke And Broker HFT David Sobel Day Trading Ameriprise Commissions Spouse Schwab Commission CRD Kenneth Starr IRS CNBC Complaint ATM Skimming Hacking Phishing Malware Naskovets Poteroba Koval Lincoln Financial Selling Away Outside Business Activities Rakoff 2nd Circuit Second Circuit IRA 401k Forgery Tax Email Netschi Moore Whistleblower Street Sweeper Countrywide Tran Bharara Facebook Online Severance Bonus Eligibility Rule TD Ameritrade Hedge Fund SAC 1099 Smith Barney Lehman Brothers SIPC IC3 Scottrade AIG Lehman JPMorgan Chase Hertz Insider Trading Bank of America Department of Justice Elles Bribe Auction Rate Securities Raiding Spam Edward Jones Medicare Diabetes Dow Schumer Thain Walter Bid Rigging Real Estate Discrimination Wall Street Statutory Disqualification Form U4 Form U5 Indictment Boyland DOJ Corruption bill singer FTC Do Not Call FINRA Arbitration Costa Rica Settlement LIBOR Varney Plea Rule 8210 Eligibility RRBDlaw 8210 Appeal Fowler LPL Johnson Cellphone US Airways JPM BrokeandBroker Reg D MSSB Vault Loan SunTrust Discovery Employment Rosenthal Recruiting Lawyer Trading Platform JP Morgan Employment Tuesday Wrongful Termination Bank Guarantee WaMu Solicitation REIT Martin Credit Cards Rule 3050 Away Account Credit Repair PN Advisor Placement Group Fifth Amendment Forex Mortgage Private Placement Moon CGMI Failure to Supervise Merrill Anderson Exam Lee Borrowing Tax Lien Charity Conversion Oppenheimer Wedbush Felony Misdemeanor Expenses ING Lien OTR Estate Jobs Florida Credit Card Elderly Flash Drive Annuity Expense Reimbursement FNMA BrokeAndBroke TIC DWI Promissory Notes Suitability Will POA Power of Attorney Casino NSF MF Global Counterfeit Preet Bharara Corzine Hacker Deferred Compensation RIA Prison Disclosure NASAA Aguilar FCPA Subway Testimony Identity Theft Gold Dell Bar Injunction Bank Deutsche Bank Hospital Retirement Due Process God HSBC Private Placements Eric Stein Wire Fraud FINOP CCO Compliance Audit Test Examination Cheating Joshua Brown Backstage Wall Street Obstruction of Justice Reuters Retaliation Variable Annuity Arbitraiton Outside Account Options Telephone Wine Series 7 Social Media ADA Pacifico Non-Prosecution Agreement Confirm Tax Fraud OBA Equity Indexed Annuities EIA Disability MetLife Continuing Education OIP Tax Liens Willful CE Unregistered Impersonation Annuities BBVA Business Expenses ETF JOBS Act Mail Fraud Parking Variable Annuities Signatures BitTorrent Impersonator Wire Transfer Wire Crowdfunding Nasdaq Away Accounts WSP Laptop Dodd Frank Checks RMBS AML PST Solicited Unsolicited Congress SRO Password Wife Discretion Non-Solicitation Restaurant Commodities Private Securities Transaction Offer of Settlement Money Market employment jobs Great Recession Chase Investment Services Arrest Barclays Liens Obamacare Failure To Supervise Apple Time And Price T&P Willfully Husband Letter of Authorization LOA Sexism Debit Card Knight Practice Sale Unfair Competition Signature Judgments Data Undisclosed Settlement Trainee Fee Trust Laser Side Bar Mattera Female Sales Assistant Kennedy Charge Sexist NML Argentina Embezzlement Silver Investor Alert Evidence Judgment Bank Fraud Deceased Bill Singer BrokeAndBroker TSSB OHO Leveraged ETF Mary Jo White Trustee FINRA AWC Motion To Dismiss Frumento Conspiracy 6th Circuit Proctor Commissioner Stein 401(k) Rule 3040 Customer Files Class Action Beneficiary NYAG Schneiderman 11th Circuit Insurance Gallagher White Self Regulation Short Sale Compromise Website Rule 2010 Check TRO Supervision Vacatur Remand SDNY Rule 12206 BrokeAndBroker Bill Singer Piwowar Stifel Rule 1122 Article V signature Confidential Inside Information Reg SP VA Leveraged ETFs Regulation SP Fees Cease And Desist Customer Rule 3270 Rule 3240 Annual Compliance Questionnaire OWB 2Cir Red Flags Payroll Stockbrokers ALJ Cybercrime Loans BrokerCheck Altered Records
Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+