SEC Shuts Down Hollywood “Pump and Dump” Scheme

In a “pump and dump” scheme that looks like the movie The Wolf of Wall Street, the Securities and Exchange Commission today charged three California residents with defrauding investors.

SEC Shuts Down Hollywood "Pump and Dump" Scheme

SEC: “Boiler room” operation claims participation of top movie stars

The SEC alleges that a Los Angeles-based group raised money through a “boiler room operation” with “high pressure salespeople” who bilked investors out of $1.8 million for a movie that was never going to be made.  Their successful sales pitch to over 60 investors included false promises that well-known actors such as Donald Sutherland and Jean-Claude Van Damme would appear in the movie, but these stars were not even approached. Rather, the group “spent most of the money among themselves,” according to an SEC statement.

Funds that remain “couldn’t produce a public service announcement”

“The investor funds that remain aren’t enough to produce a public service announcement let alone a full-length motion picture capable of securing the theatrical release promised to investors,” the statement said.

The three participants in the fraud “sold investors on the Hollywood dream,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “But the dream never became a reality because they took investors’ money for themselves rather than using it to make a movie.”  At the same time the SEC brought its charges, the U.S. Attorney’s Office for the Central District of California today also announced criminal charges against the trio.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, the apparent ring leader, an LA attorney, set up companies named Mutual Entertainment LLC and Film Shoot LLC to raise funds from investors for the movie project.  In January 2011, the complaint alleges Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II.  Shortly thereafter, Mutual Entertainment began raising money from investors through a boiler room operation that operated out of Van Nuys, Calif.

If the promise is too good to be true, that is typically the case

The SEC alleges that the trio operating the front companies claimed that 63.5 percent of the funds raised from investors would be used for “production expenses.”  However, the complaint notes that “very little if any money was actually spent on movie expenses as they instead used the vast majority of investor funds to pay sales commissions and phony ‘consulting’ fees to themselves and other salespeople.”  Numerous false claims were made to investors, according to the complaint, including “a baseless projected return on investment of about 300 percent.”  Sales claims “falsely depicted that they were just shy of reaching a $7.5 million fundraising goal and the movie was set to begin shooting in summer 2013” and “instilled the belief that Mutual Entertainment was a successful film company whose track record encompassed the Harold and Kumar movies produced by Carsten Lorenz.”

Before investing, the SEC encourages research. “Investors can help protect themselves when approached for an investment opportunity by using the Internet to their advantage and researching the individual making the offer,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy.  In this case, she noted, a quick search of the SEC website would have revealed a complaint filed against one of the participants for participating in an offering fraud as well as an order barring him from the brokerage industry.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com