SEC FILES FILES CHARGES IN FLORIDA-BASED MICROCAP STOCK SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23242 / April 16, 2015
Securities and Exchange Commission v. eCareer Holdings, Inc., eCareer, Inc., Joseph J. Azzata, Dean A. Esposito, Joseph DeVito, and Frederick J. Birks, et al., Civil Action No. 9:15-CV-80446-JIC-COHN (S.D. Fla.)

SEC Halts Microcap Scheme in South Florida

The Securities and Exchange Commission announced that on April 7, 2015, it filed fraud charges and sought an asset freeze against the operators of a South Florida-based microcap scheme, including three boiler room brokers caught trying to conceal from investors that they have been barred from the industry. That same day, the Honorable James I. Cohn, United States District Judge for the Southern District of Florida, entered, among other things, a temporary restraining order, and a freeze of the defendants' and relief defendants' assets.

The SEC alleges that investors were defrauded in cold calls placed to investors through a boiler room spearheaded by Dean A. Esposito of Boca Raton, Fla., Joseph DeVito of Brooklyn, N.Y., and Frederick Birks of Orlando, Fla. These brokers and their sales agents were hired by Joseph J. Azzata of Boca Raton, Fla., CEO of eCareer Holdings, Inc., to sell unregistered stock shares in the company. Investors were told their money would be used as working capital to develop eCareer's online job staffing business, however about 30 percent of investor proceeds has been diverted to pay exorbitant fees to the brokers and sales agents. These payments were mischaracterized in eCareer's corporate filings as dispensed to third parties for consulting and advisory services rather than to the sales agents. Company filings and offering materials also misrepresented that eCareer shares would be sold only to accredited investors when in reality stock has been pitched and sold to people not necessarily meeting that definition, including some non-accredited investors aged 85 to 98 years old.

According to the SEC's complaint unsealed on April 9, 2015, Esposito, DeVito, and Birks were subjects of a prior SEC enforcement action that resulted in them being barred from acting as a broker or dealer or participating in any offering of a penny stock. Therefore, they were prohibited from earning transaction-based compensation from the sale of eCareer's stock. In an attempt to circumvent these prohibitions and disguise the true nature of their compensation, Esposito, DeVito, and Birks and their companies entered into agreements typically signed by Azzata that miscategorized their compensation as advisory fees and finder's fees.

The SEC alleges that eCareer, Azzata, Esposito, DeVito, and Birks fraudulently raised more than $11 million in funds from more than 400 investors since August 2010. In addition to approximately $3.5 million paid out of investor funds in the form of undisclosed exorbitant fees, Azzata diverted $650,000 to pay expenses related to his motorsports hobby as well as other family expenditures such as private school tuition for his children and shopping bills for his wife. Corporate filings by eCareer falsely claimed that private offering funds were used for working capital purposes and concealed Azzata's misappropriation of investor proceeds.

The SEC's complaint charges eCareer, Azzata, Esposito, DeVito and Birks with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 along with Rule 10b-5. The SEC's complaint also charges eCareer Holdings, Inc. for its violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13, and the complaint charges Azzata for aiding and abetting and control person liability for eCareer's violations among other violations. The SEC seeks disgorgement of ill-gotten gains, prejudgment interest, and financial penalties among other relief for investors. The court has granted the SEC's request for a temporary restraining order and temporary asset freeze, and temporarily barred Azzata from serving as an officer or director of eCareer Holdings and voting the company's shares.

The SEC also suspended trading in shares of eCareer Holdings due to questions that have arisen about the accuracy and adequacy of publicly disseminated information in its filings. More information about the trading suspension process is available in an SEC investor bulletin on the topic.

The SEC's investigation, which is continuing, is being conducted by Linda S. Schmidt and Fernando Torres in the Miami Regional Office. The case is being supervised by Jason R. Berkowitz, and the SEC's litigation is being led by Christopher E. Martin. The SEC appreciates the assistance of Florida's Office of Financial Regulation.

SOME E*TRADE SUBSIDIARIES IN TROUBLE OVER ALLEGED UNREGISTERED SALES OF MICROCAP STOCKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced an enforcement action against current and former brokerage subsidiaries of E*TRADE Financial Corporation that failed in their gatekeeper roles and improperly engaged in unregistered sales of microcap stocks on behalf of their customers.

An SEC investigation found that E*TRADE Securities and E*TRADE Capital Markets sold billions of penny stock shares for customers during a four-year period while ignoring red flags that the offerings were being conducted without an applicable exemption from the registration provisions of the federal securities laws.  E*TRADE Securities remains an E*TRADE subsidiary while E*TRADE Capital Markets was sold earlier this year and is now called G1 Execution Services.

E*TRADE Securities and G1 Execution Services agreed to settle the SEC’s charges by paying back more than $1.5 million in disgorgement and prejudgment interest from commissions they earned on the improper sales.  They also must pay a combined penalty of $1 million.

In addition to the enforcement action, the SEC staff today published a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers.

“Broker-dealers serve an important gatekeeping function that helps prevent microcap fraud by taking measures to ensure that unregistered shares don’t reach the market if the registration rules aren’t being followed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Many billions of unregistered shares passed through gates that E*TRADE should have closed, and we will hold firms accountable when improper trading occurs on their watch.”

According to the SEC’s order instituting a settled administrative proceeding, the failures by E*TRADE occurred periodically from March 2007 to April 2011.  The securities laws generally require all offers and sales of securities to be registered with the SEC unless those offers and sales qualify for an exemption.  When brokers facilitate an unregistered sales transaction on behalf of a customer, they must reasonably ensure that an exemption does indeed apply.

The SEC’s order finds that three customers of E*TRADE routinely deposited to their E*TRADE accounts large quantities of newly issued penny stocks they had acquired through private, unregistered transactions with little-known, non-reporting issuers.  The customers claimed that these penny stocks were “freely tradable” and they placed orders for E*TRADE to sell the securities to the public through “resales” without any registration statements in effect.  Following the resales, the customers immediately wired the sales proceeds out of their accounts.

According to the SEC’s order, E*TRADE encountered numerous red flags indicating potential improper sales of securities.  Nevertheless, the firm relied on a registration exemption for broker-dealers that permits them to execute a customer’s unregistered sales of securities if, after a reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer is violating registration requirements.  E*TRADE initially failed to identify any exemptions potentially available to these customers.  When it later identified the purported exemptions upon which the customers claimed to be relying, E*TRADE failed to perform a searching inquiry to be reasonably certain that such exemptions applied for each unregistered sale executed by the three customers.

“E*TRADE failed to fulfill its obligation to determine whether any exemptions applied to  the sale of billions of shares of securities thereby depriving investors of critical protections under the federal securities laws,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement.  “Firms must take their reasonable inquiry obligations seriously and do more than check the box, particularly when red flags are apparent.”

The SEC’s order finds that E*TRADE Securities and G1 Execution Services violated Sections 5(a) and 5(c) of the Securities Act of 1933.  In addition to the monetary sanctions and without admitting or denying the SEC’s findings, the two firms agreed to be censured and consented to the order requiring them to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act.  

The SEC’s investigation was conducted by Deborah R. Maisel and Richard E. Johnston with assistance from Kyle DeYoung.  The case was supervised by Jennifer S. Leete.