S.E.C. Reaches Settlement in Web-Based `Pump and Dump' Case

March 3, 2000

S.E.C. Reaches Settlement in Web-Based `Pump and Dump' Case

By ALEX BERENSON

ouglas Colt was a second-year law student at Georgetown University with a head for computers and a passion for politics when he hit upon a foolproof way to make money from the Internet.

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He set up a free Web site promising investors hot tips on penny stocks. But, according to the Securities and Exchange Commission, Mr. Colt bought the stocks in advance of his tips and sold them at a profit as soon as his followers bid up the prices. The stocks then plunged back to earth, causing losses for unwary investors in what the S.E.C. called an updated version of the classic market manipulation known as a pump and dump.
The system netted Mr. Colt, his mother, and three other Georgetown law students nearly $350,000 in only a couple of months last year. Nearly all the money went to Mr. Colt and his mother, Joanne Colt, a councilwoman in Colorado Springs.
Under an S.E.C. settlement announced yesterday, none of the five participants have to pay a fine.
Nor do they have to pay back their profits.
While not admitting or denying wrongdoing, they merely agreed not to violate securities laws in the future, a sanction that some experts characterized as a slap on the wrist.
In addition to the Colts, the settlement covers Kenneth Terrell, 23; Jason Wycoff, 23; and Adam Altman, 25.
Mr. Terrell and Mr. Wycoff are third-year law students at Georgetown.
Mr. Altman graduated from Georgetown last year. A Georgetown law student who knows Mr. Colt said he was spending this year at the Pepperdine University law school but was expected to graduate with a Georgetown degree. Neither Georgetown nor Pepperdine would comment.
Georgetown said it had no plans to discipline the students.
In a three-paragraph statement, the university said that it "expects students to conduct themselves with the highest degree of honesty, integrity and trustworthiness." The students already face "public humiliation and future scrutiny by bar admissions committees," the school said.

A `free' service trumpeted stock picks and then took quick profits.

The S.E.C. depends on the deterrent effect of high-profile cases to keep potential lawbreakers in line, and the agreement surprised some legal experts.
"I'm really puzzled," said James Cox, a law professor at Duke University.
"If you don't make people give up their ill-gotten gains, it seems to me an invitation for people to step forward and see if they can pull a fraud off and not get caught."
S.E.C. officials said the Georgetown settlement was fair. "I don't think anyone is walking away from anything here," said Paul Berger, an assistant director of enforcement for the commission.
"I think the consequences are potentially severe."
Mr. Berger said the commission had decided not to ask for a monetary penalty after reviewing the individuals' finances and determining that they could not afford to pay a penalty.
"We're not a collection agency," he said.
"You can get a judgment for 20 years, but I don't think that's what we're here to do."
Ms. Colt, who the S.E.C. said earned more than $100,000 in a matter of hours trading two stocks, said she was "near bankruptcy" from the cost of defending herself and her son. "I view this as an enormous emotional and financial drain, an enormous embarrassment as a human being," she said.
"At this point in my life, I'm hoping I can pick up the pieces and salvage my more senior years."
Ms. Colt said she did not plan to step down as councilwoman.
"I think I have served my community with great conscientious effort," she said. "I hope the community will allow me to continue."
Wayne Williams, the chairman of the Republican Party in El Paso County, said the Colts were "people that I view as very honest." Mr. Colt worked as a volunteer for the El Paso Republicans in the summer of 1998.
"He did a lot of database work, was very thorough," Mr. Williams said.
None of the others involved in the settlement could be reached for comment. Jeffrey Robertson, a lawyer for Mr. Wyckoff, said his client "was a relatively minor focus of this investigation."
"He cooperated fully with that investigation, and he is eager to put this matter behind him," the lawyer said.
According to the S.E.C., Mr. Colt masterminded the plan by setting up a Web site, since defunct, called fast-trades.com that was directed at day traders.
Mr. Colt bought substantial positions in thinly traded micro-cap stocks, then promoted them as selections on the site. As the stocks rallied, he sold his shares for several times what he had paid.
The site disclosed that its operators might buy or sell stocks. But the disclaimer was "materially misleading as to the real trading intent of the participants," the S.E.C. said, adding, "If fast-trades had accurately disclosed their trading intentions, subscribers would have been able to deduce that the only reason Colt offered his 'free' service was so he could further influence the market price movement initiated by his purchase of the recommended stock just before the announcement."

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