Securities Fraud—Organized Crime Indictment

Houston-based Rick’s Cabaret has found itself mentioned in an investigation into a organized-crime stock manipulation scheme, news which sent the publicly-traded company’s stock plummeting.^[1] The company released a statement over the weekend that “it is not a part of and has no knowledge of any investigation by the US Attorney’s Office in Brooklyn into alleged manipulation by organized-crime families of the stocks or more than a dozen companies, including its own.”^[2] Though, “[t]he companies whose stocks were involved were not accused of any wrongdoing,” ^[3] merely being named in an indictment can obviously have adverse effects for individuals or corporations.

The crime families which are the target of the federal indictment are the Colombo, Luchese, and Bonanno families.^[4] 10 individuals have been charged with conspiracy, racketeering, securities fraud, extortion, witness tampering, kidnapping, and money laundering.^[5] Their arrest is the culmination of a “three-year investigation of the Colombo Family’s corruption of the ‘penny’ stock market. A penny stock is a stock of a corporation that trades under $5.00.”^[6]

According to the indictment, the defendants allegedly “secretly controlled at least fifteen branch offices of brokerage firms located in Brooklyn, Manhattan, and Staten Island, through which unsuspecting investors were sold stocks whose prices had been falsely inflated through fraudulent means. Many investors were victims of classic ‘pump and dump’ schemes involving the use of licensed and unlicensed brokers and cold callers who misrepresented their own credentials and the prospects of the stocks they were pushing,” which would inflate the price of the stocks, allowing the defendants to allegedly “sell their personal holdings of the stocks at inflated values.”^[7]

Securities Fraud in this case is covered by 15 U.S.C. § 78j(b), which makes it a crime for a person to use any means or instrumentality of interstate commerce, the mails, or any facility of any national securities exchange in order to use or employ “any manipulative or deceptive device or contrivance.” The statute of limitations for securities fraud is five years,^[8] and some of the alleged activities occurred more than five years before the indictment was handed down. It seems that the government, as usual, is trying to get around that time-frame problem in some ways by alleging a conspiracy. The “crucial question in determining whether the statute of limitations has run is the scope of the conspiratorial agreement, for it is that which determines both the duration of the conspiracy, and whether the act relied on as an overt act may properly be regarded as in furtherance of the conspiracy.”^[9] Furthermore, “where a conspiracy’s purpose is economic enrichment, the jointly undertaken scheme continues through the conspirators’ receipt of ‘their anticipated economic benefits.’”^[10] This is because, absent withdrawal, a conspirator’s “participation in a conspiracy is presumed to continue until the last overt act by any of the conspirators.”^[11]

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[1] Rick’s Falls on Stock Manipulation Scam, Associated Press (via Houston Chronicle), Mar. 24, 2006.
[2] Rick’s Cabaret International, Inc. Responds to Press Report, Business Wire (via Houston Chronicle), Mar. 26, 2006.
[3] AP, supra note 1.
[4] US Attorney’s Office, Ten Members and Associates of the Colombo, Luchese, and Bonanno Organized Crime Families Charged With Racketeering and Extortion in Connection With Boiler Room Stock Fraud Schemes, Mar. 24, 2006.
[5] Id.
[6] Id.
[7] Id.
[8] 18 U.S.C. § 3282.
[9] United States v. Salmonese, 352 F.3d 608, 614 (2d Cir. 2003) (quoting Grunewald v. United States, 353 U.S. 391, 397 (1957)).
[10] Id. at 615.
[11] Id.