The Securities and Exchange Commission today charged three firms and four individuals involved in a boiler room scheme operating out of Los Angeles that defrauded investors who they persuaded to buy purportedly profitable trading systems.
The SEC alleges that representatives of Spyglass Equity Systems Inc. cold-called investors and made false and misleading statements to help raise more than $2.15 million from nearly 200 investors nationwide for two related investment companies – Flatiron Capital Partners LLC (FCP) and Flatiron Systems LLC (FS). However, only a little more than half of that money was actually used for the advertised trading purposes, and much of the trading that did occur failed to use the purported trading systems. FCP and FS wound up losing about $1 million in investor funds. The managing member of the two firms – David E. Howard II – misused almost $500,000 of investor money for unauthorized business expenses as well as personal expenses including travel, entertainment, and gifts for his girlfriend.
Along with FCP, FS and Howard, Spyglass and its owners – Richard L. Carter, Preston L. Sjoblom and Tyson D. Elliott – also are charged with fraud in connection with the unregistered securities offerings.
According to the SEC’s complaint filed in federal court in the Central District of California, Howard conspired with Spyglass to sell the securities, and Spyglass earned an estimated $1 million in the deal. The trading systems pitched to investors by Spyglass representatives could only be used if the investor also funded a brokerage account at FCP. However, FCP was not a broker-dealer and thus could not offer brokerage services to customers.
The SEC alleges that Spyglass representatives falsely touted a successful performance history and level of automation of the trading systems, and misled investors to believe that FCP had a positive reputation and solid affiliations in the brokerage industry. To seal the deal, Spyglass offered investors a money-back guarantee if the system did not generate a profit within the first 180 days of trading. However it was only after an investor paid Spyglass a license fee of about $6,000 that Spyglass put the investor in contact with Flatiron, ostensibly to open a brokerage account.
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