SEC Sues Individuals for Running "Boiler Room" Fraud Operation

The SEC charged three individuals for using "a network of unregistered sales agents to conduct illegal, unregistered, and fraudulent offerings of securities." The SEC alleged that the individuals sold "interests in investment vehicles that purportedly gave investors access to shares" of pre-IPO companies.

According to the Complaint filed in the United States District Court for the Southern District of New York, the defendants ran "boiler rooms" with "an unregistered sales force of more than 50 callers," which employed high-pressure sales tactics and falsehoods to ultimately defraud unsuspecting investors. The SEC claimed that the defendants did not disclose to potential investors that the shares being sold were "marked up" between 19 and 105 percent, above what defendants' had paid for the shares. The SEC claimed that the defendants received over $45 million in fees between 2019 and 2022.

Further, the SEC highlighted that after the it investigated and pursued an enforcement action to shut down the boiler room operations, the defendants launched a new venture to "rebrand their fraud." The ventures were both subject to SEC emergency action in May 2022 and June 2023, respectively and both entities are now subject to "court-ordered receiverships" (See here and here.)

In the Complaint, the SEC alleged that the individuals violated SEA Sections 5(a) and 5(c) ("Prohibitions relating to interstate commerce and the mails"), 17(a) ("Fraudulent Interstate Transactions") and Rule 10b-5 ("Employment of manipulative and deceptive devices"); and IAA Section 206 ("Prohibited transactions by investment advisers") and Rule 206(4)-7 ("Compliance procedures and practices").

The SEC requested that the Court order: (i) permanent injunctive relief, (ii) return of allegedly ill-gotten gains (iii) and civil penalties.