SEC wins LV fraud initiatives

Grace Leong

Friday, July 12, 2002 | 10:50 a.m.

The Securities and Exchange Commission won a $1.27 million judgment on Monday against two companies with a purported "phantom storefront" operation in Las Vegas accused of using the events of Sept. 11 to solicit more than 65 senior citizens nationwide to invest in an oil and gas Ponzi scheme.

The SEC sued Inglewood, Calif.-based oil and natural gas producer Texon Energy Corp., affiliate Lonestar Petroleum and two principals, James Hammonds and Barry Reed, on Nov. 13 in federal court in Los Angeles, alleging violations of federal securities laws.

Reed and Hammonds, whom the suit described as a "recidivist securities violator," were accused of selling unregistered Texon stock from February 1998 through November 2001 and falsely claiming the company is in a "good position" to benefit from the war on terrorism because energy prices will rise and Texon has oil and gas well interests.

The defendants allegedly promised investors an annual 12 percent "dividend" they claimed was derived from Texon's oil and gas profits when, in fact, Texon's oil and gas interests do not generate enough income to support these dividend payments and instead new investor funds are used to make the payments.

A federal judge on Monday ordered Texon and Lonestar to pay civil penalties of not more than $1.25 million if a court-appointed receiver collects proceeds of more than $1.27 million. But if the receiver fails to collect $1.27 million, the unsatisfied amount will be waived, the ruling said.

The SEC's case is still pending against Reed and Hammonds, who was also accused in 1994 of engaging in a similar oil and gas scam and was barred in 1996 by the SEC from the securities industry.

Meanwhile, the SEC on July 3 upheld an administrative law judge's decision to bar from the securities industry John Brownson of Las Vegas -- who was convicted in 1999 on one count of conspiracy to commit securities fraud, mail fraud and wire fraud.

Brownson, who was indicted in August 1998 along with five other brokers for conspiring with an unnamed stock promoter to recommend obscure stocks to customers between 1993 and 1995 in return for kickbacks, was sentenced to five months imprisonment and three years supervised release and ordered to pay restitution of $1,000.

Brownson, who solicited stock purchases totalling more than $60,000, was instructed by the promoter to direct securities trades to specific securities firms where the promoter had "parked" stock in accounts it controlled.

Brownson, who was recommended to be barred from the securities industry by the SEC's Division of Enforcement last January, opposed the sanction. He said it was unfair that his case was being considered with the five other brokers because he was a "very minor player in the conspiracy," and had cooperated with the investigation and paid restitution.

But a judge in March 2001 ruled in favor of the division, saying it found that barring Brownson serves the public interest and protected investors.

Brownson appealed that decision.

The SEC said this week it rejected Brownson' appeal. "Brownson engaged in serious misconduct. Over an extended period, he made recommendations to his clients motivated by his potential personal gain in furtherance of a criminal conspiracy. This was an egregious abuse of the trust placed in him as a securities professional."

"While he asserts he has learned from this experience, he is unwilling to accept responsibility for his actions. This attitude suggests a troubling lack of appreciation for his responsibilities as a securities professional," the SEC said.

The SEC said that at various times between 1992 and 1994, Brownson was associated with several firms. They are Corporate Securities Group Inc., Gruntal & Co., PCM Securities Ltd., Global Strategies Group Inc. and Paragon Capital Corp.

The stocks involved were issued by Malvy Technology Inc., United States Exploration Inc., Linium Technology Inc., Madison Sports and Entertainment Inc., Musicsource Inc., Entertainment & Gaming International Inc. and Optimax Industries Inc.