When the U.S. Securities and Exchange Commission (SEC) comes knocking at your door, they rarely bring you good news. For two Massachusetts residents, their alleged scheme to defraud investors has led them to SEC charges as well as criminal charges involving their sale of a ticket-selling company, CitySide Tickets.
Last week, the SEC charged Thomas Brazil and Coleman Flaherty, as well as a California lawyer, Richard Weed, for tricking investors into putting money in their ticket company. Brazil lives in Topsfield, and Flaherty resides in Hingham, Massachusetts. Together, these three men allegedly sold millions of shares in CitySide, by making it appear that the company would go national, and a prime target for takeover by Ticketmaster.
The men promoted CitySide as in the process of buying up a number of smaller ticket resellers, when in reality, the company was in a very poor financial state. They issued an alert that CitySide would be, "an irresistible takeover target for Ticketmaster," which could result in the stock jumping from under-50-cents to $2.50 to $3.50 overnight. Brazil and Flaherty earned about $3 million by selling their shares in CitySide. Soon after, CitySide went bust, leaving investors holding worthless stock. Weed was allegedly "well-compensated" for his part in the scheme.
According to Paul Levenson, director of the SEC's Boston Regional Office, "CitySide was billed as the hottest ticket in town, and investors were encouraged to get in the game when the playing field was actually tilted against them." Levenson continued, "Weed exploited his position of legal authority to enable Brazil and Flaherty to get the stock needed to pull off the scheme, and he served as an officer and director of CitySide to help them secretly control the company."
These financial fraud investigations can involve many government and law enforcement agencies. For this case, the SEC thanked the Federal Bureau of Investigation, the U.S. Attorney's Office for the District of Massachusetts, and FINRA, the Financial Industry Regulatory Authority. The Boston Globe has reported this case is part of the FBI's long-running effort to tackle micro-cap stock schemes.
Termed a "pump-and-dump" scheme, these market manipulations involve misleading investors by promoting the coming profitability of a company through false statements. Often times, these claims will involve fake insider information that comes through internet spam, or online social media. The schemes usually involve a pitch to buy quickly before the price goes up. However, when the price goes up after the hype, the schemers sell their shares making a hefty profit, while the company reveals itself as unprofitable, resulting in a loss for the investors.
The SEC has charged the men with multiple federal securities violations, including antifraud provisions. The SEC is seeking a return of all the gains made from the scheme in addition to interest and penalties, and further injunction against further violations of the securities laws. Additionally, the three will face criminal charges including securities fraud, wire fraud and conspiracy. In addition to the potential millions of dollars in fines and penalties, they face potential time in federal prison.