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 Senior Living‘s website offers the following explanation of its business:

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:

Telemarketing

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.

TrinityCare

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.

Cytta

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.

Scalping