INVESTORS BEWARE: Stock Fraud Case Offers Lessons

January 29, 2010

If you're not familiar with “pump-and-dump” fraud schemes, it might be a good time to get educated.

That's because the FBI and its partners are now wrapping up an investigation of such a scam that was so massive it took the better part of a decade to unravel. So far, our joint investigation has uncovered more than 40 schemes, convicted 40 perpetrators, identified thousands of victims in nearly every state and several foreign countries, and discovered hundreds of millions of dollars in losses.

In Operation “Shore Shells,” so-named because it involved fake (or shell) companies and began in the coastal area of southern New Jersey, a group of co-conspirators—CEOs, stock brokers, CPAs, financial advisors, attorneys, etc.—had been engaging in pump-and-dump and other schemes for years.

How do these scams work? In this case, the ringleaders reated shell companies whose penny stock (worth less than $5 a share) was traded on the OTC Bulletin Board (not on the more widely known New York Stock Exchange or NASDAQ). They secretly issued most of the shares for themselves in fictitious names, then touted their companies’ stock through false statements in press releases, electronic bulletin board postings, online newsletters, and the like.

Often using their retirement funds, unsuspecting investors purchased the highly-touted stock—or their unscrupulous financial advisors did so without their knowledge—driving or “pumping” up the price. Then, the fraudsters “dumped,” or sold, their stock for thousands or millions of dollars, causing the stock to plummet and innocent investors to lose their shirts.

In many cases, the losses were significant. And while running an undercover operation and gathering enough evidence to put the criminals behind bars, our focus has been on helping victims get some of their hard-earned money back. We spent years interviewing more than 600 mainly elderly victims, painstakingly documenting their sometimes heartbreaking losses. For example:

We assisted a doctor from a prestigious hospital who began suffering from severe depression after learning of the scam and became unable to work.

To help a husband and wife who had both developed dementia during the investigation, our agents traveled to their nursing home and spent hours with them, their family members, and their accountants to substantiate their financial losses.

We worked with a man suffering from multiple sclerosis whose stockbroker had liquidated his pension and IRA and left him nearly penniless.

We learned of another victim who not only invested her savings and her pension, but also took out a second mortgage to invest more. Needless to say, she lost everything.

It was worth the effort. So far, more than 100 seizures and forfeitures totaling over $70 million in cash, artwork, jewelry, homes, cars, and other valuables have been made, and criminals have been ordered to pay more than $130 million in restitution. We expect millions more to be forfeited and repaid to the victims.

Because of their work on behalf of the victims in this case, the investigative team—comprised of special agents from our Atlantic City Resident Agency (out of the Newark FBI office), a Criminal Investigation agent from the Internal Revenue Service, and the Newark FBI’s victim/witness specialist—was awarded the FBI Director’s Annual Award for Distinguished Service for Assisting Victims of Crime.