U.S. Busts E-Commerce Stock Scam

The U.S. Securities and Exchange Commission (SEC) announced Wednesday that it has taken action against three men it says fraudulently sold securities in a phony online art gallery and jewelry store.

The three men — Russell Rapoport, 26, of Manhattan, and brothers Edward Landenbaum, 28, and Igor Landenbaum, 38, both of Brooklyn, New York — were charged in a federal court in Manhattan with mail and wire fraud and conspiring to commit securities fraud. The SEC also filed a related civil suit against the men.

SEC deputy assistant regional director Helene Glotzer told the E-Commerce Times that the defendants had set up a Web site called Precious Stones Trading Worldwide, but apparently never sold any goods through their site. Instead, they used it to provide would-be investors with enticing information about their fraudulent stock offering.

The Business of Fraud

The three allegedly told investors that Precious Stones was a wholesaler that purchased precious gems, rare art and coins from Eastern Europe, Russia and South America. The company also purported to be developing a virtual art gallery for “exhibiting these jewelry and/or artistic designs,” in order to gain Internet exposure for jewelry designers and other artists to showcase their work.

By telling investors that an initial public offering was imminent and that the company had filed the necessary paperwork with the SEC, the men allegedly were able to sell at least 208 investors approximately $5.5 million (US$) in phony stock through a private placement offering memorandum. In addition to disseminating information about their company through their Web site, the defendants also cold-called potential investors.

Investors were told that the money raised would be used to finance Precious Stones’ online store and virtual art gallery, the SEC said. The trio led investors to believe that they could sell their stock for a substantial profit when the company conducted its IPO.

In reality, according to the SEC, “Precious Stones was not engaged in any business except defrauding investors” and there was no real possibility that the company would successfully conduct an IPO. The bulk of the money raised allegedly went into the defendants’ pockets to pay their personal expenses.

Payback Time

If convicted, the three men each face up to 15 years in prison and fines of up to $1.25 million. Additionally, the SEC is asking in its civil action that the men be required to “disgorge their ill-gotten gains plus prejudgment interest.”

Glotzer told the E-Commerce Times that the SEC might set up a fund to reimburse investors who were defrauded by Precious Stones. However, she stressed that the SEC’s action was not a substitute for private legal action against the company by defrauded investors.