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SEC Charges Two Texas Individuals in a Penny Stock Spam Campaign Involving Computer Botnets

The Securities and Exchange Commission filed securities fraud charges against two Texas individuals in a high tech spam campaign that involved personal computers nationwide to disseminate millions of spam emails that yielded over $4.6 million for the defendants. The scheme involved the use of so-called computer "botnets" or "proxy bot networks," which are networks comprised of personal computers that, unbeknownst to their owners, are infected with malicious viruses that forward spam or viruses to other computers on the Internet.

The Commission alleges that Darrel Uselton and his uncle, Jack Uselton, both recidivist securities law violators, illegally made more than $4.6 million during a 20-month "scalping" scheme by obtaining shares from at least 13 penny stock companies and selling those shares into an artificially active market they created through manipulative trading, spam email campaigns, direct mailers, and Internet-based promotional activities. Scalping refers to recommending that others purchase a security while secretly selling the same security in the market. In March 2007, the Commission suspended trading in the securities of 3 of the 13 penny stock companies identified in the complaint because they were the subject of repeated spam email campaigns.

The Commission's complaint, filed in U.S. District Court in Houston, alleges that the Useltons violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each of the individual defendants, as well as a penny stock bar against the Useltons.

In related enforcement actions, the Attorney General's Office for Texas and the Harris County District Attorney's Office indicted the Useltons for engaging in organized criminal activity and money laundering. The Texas criminal authorities have also seized more than $4.2 million from bank accounts associated with the Useltons.

The Commission acknowledges the assistance of the Attorney General's Office for New York and Texas, The Harris County (Houston, Texas) District Attorney's Office, the Federal Bureau of Investigation, the Texas State Securities Board, the State of Oklahoma Department of Securities, the National Association of Securities Dealers and the National Cyber-Forensics & Training Alliance.