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Four Men Arrested in Anthrax-Related
Stock "Pump and Dump"Scheme

Stephen Barrett, M.D.

Four New York area men are facing civil and criminal charges arising from a "pump and dump" scheme that exploited the Nation's fear of anthrax and bioterrorism. On December 11, 2001, the U.S. Department of Justice announced the the arrests of Saverio "Sammy" Galasso III, David Hutter, Charles Dilluvio and Michael J. Burns on charges arising from a scheme involving publicly-traded stock in Spectrum Brands Corp. (OTCBB symbol "SPBR"). [1] Simultaneous with the arrests, the U.S. Securities and Exchange Commission (SEC) announced the filing of a civil lawsuit against the men and the company for securities fraud [2]. Government press releases allege:

• In October 2001, Galasso and Hutter led the group to acquire a controlling interest in Spectrum. In August, Galasso had pled guilty to unrelated federal racketeering charges of arson, mail fraud, and wire fraud, while acting as the leader of a criminal enterprise associated with the Colombo Organized Crime Family of La Cosa Nostra. In the same case, Hutter had pled guilty federal money laundering conspiracy [1].
• While out on bail and awaiting sentencing, the pair plus Burns and Dilluvio purchased Spectrum on October 26, and acquired 3 to 4 million shares of its stock. Burns then acted as a nominee president and chief executive officer to conceal the fact that Spectrum was owned and controlled by the two convicted felons. The government has moved to revoke their bail and can move to increase the sentences on the previous convictions [1].
• The four men then used various manipulative practices to artificially inflate ("pump") Spectrum's stock price and then sell ("dump") the company's nearly worthless shares onto an unsuspecting investing public [1].
• Inside his personal office located in Westbury, New York, Galasso displayed a sign that read "Operation Infinite Liquidity," in an apparent play on the original name for the U.S. military operation in Afghanistan, "Operation Infinite Justice." [1].
• On November 1, Spectrum issued a press release announcing the formation of a wholly-owned subsidiary named Spectrum Homeland Security Solutions, Inc. ("SHSS"). Other press releases falsely claimed that SHSS and Spectrum had obtained exclusive rights to sell the DeGERMinator, a hand-held device that purportedly killed anthrax in five seconds or less through the use of ultraviolet light. The device's manufacturer disavowed these claims and directed Spectrum to remove them from its Web site, but Spectrum ignored those directions [1].
• Spectrum, which was a shell company with no revenues or assets, opened a bank account on November 1 with a $1 deposit. The headquarters address listed on the company's Web site was actually a rented mail box at a mail-reception company [1].
• As part of the manipulation scheme, Dilluvio executed dozens of successive buy and sell orders that artificially increased the trading volume of Spectrum stock in an effort to make it appear that the company's stock was widely-traded and was a desirable investment. For example, on November 2, a brokerage account opened by Dilluvio was responsible for 13,800 (54%) of the 25,220 trades of the Spectrum common stock that day [1].
• Spectrum made certain corrective disclosures on its Web site, but continued to tout in press releases and soam e-mails its supposed progress in combating "bio-terrorism" and "cyber-terrorism." These include an e-mail dated November 29 touting the company's management and predicting a "$15.00 stock price! Over a 10-fold move!" [2]
• These efforts successfully "pumped" the stock price up from virtually nothing on October 17, (just before Spectrum was acquired by Galasso and Hutter) to an intraday high of $14 in early November, even though Spectrum lacked revenue and assets. After the price peaked, the defendents "dumped" the stock at a significant profit [1].
• On or about November 7, Bloomberg News Service ran an article questioning the DeGERMinator's effectiveness against anthrax, as well as various claims made on Spectrum's Web site. The stock price fell dramatically [1].

If criminally convicted, each of the four defendants faces up to five years in peison and a $250,000 fine. In announcing the four arrests, U.S. Attorney Alan Vinegrad stated:

This securities fraud scheme, by a convicted organized crime associate, a confessed money launderer, and others is particularly reprehensible. The defendants resorted to a variety of manipulative devices in order to profit illegally from anthrax attacks, harming unsuspecting investors in the process. The dismantling of this scheme is the result of the outstanding work and cooperative efforts of the U.S. Postal Inspection Service, the FBI and the SEC [1].

The SEC has charged the men with violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Its civil action seeks permanent injunctions, restitution, disgorgement of ill- gotten gains, and civil penalties from all defendants and an officer-and-director bar against Burns.

Spectrum's December 16 closing price, which reflected a November 5th stock dividend of 5 shares for each share held, was 14 cents [4]. The Web sites of Spectrum and the manufacturer now carry a disclaimers that the device is not recommended for killing anthrax spores.

References

1. Organized crime associate and three others arrested in anthrax-related stock fraud scheme. U.S. Department of Justice news release, Dec 11, 2001.
2. SEC sues company, company president, and three promoters for fraudulent anthrax protection claims. Securities and Exchange Commission news release, Dec 11, 2001.
3. United States v. Saverio Galasso III, et al., 00-CR-122 (S-3) (ADS).
4. Yahoo! Finance provides detailed information on the stock price, press releases, and other news about the company.