Penny Stock Scammers: Oops, Wrong Address

Read more commentary from Ken Magill

What’s the one thing a penny-stock pump-and-dump spammer shouldn’t do? Why, send their scam e-mail to a staff attorney at the Securities and Exchange Commission, that’s what.

And that’s exactly what two Texas men reportedly did, leading to charges by the SEC and ultimately a $3.8 million settlement announced last week.

According to the SEC, in August 2005, a staff attorney received an unsolicited e-mail with the subject line: “Experts are jumping all over this stock …”

After receiving several more similar e-mails, the SEC began an investigation during which the agency claims it determined Darrel T. Uselton and his uncle Jack E. Uselton of were behind a massive botnet sending the messages.

According to the SEC, the Useltons obtained cheap stock from at least 13 companies. The two then sold the shares into an artificially active market they created through manipulative trading, spam e-mails, direct mailers, and Internet-based promotions, according to the SEC.

By matching various spam e-mails against the Useltons’ brokerage records, the SEC determined that each of the market manipulations followed a similar pattern, the SEC said. The Useltons and the companies they controlled received unrestricted shares from the penny stock companies for little or no money in return for financing or promotional activities, according to the SEC.

The Useltons then transferred the shares into brokerage accounts they controlled and encouraged many of the penny stock companies to issue positive press releases, the SEC charged. At the same time, the Useltons spammed e-mail campaigns using a botnet, the SEC said.

Each campaign, which featured a single company, lasted from between several days to several weeks, the SEC said. The scams lasted a total of 20 months, according to the SEC.

In reaching the settlement, the Useltons admitted no wrongdoing.