Texans Charged With Using Botnet In Pump-And-Dump SchemeTexans Charged With Using Botnet In Pump-And-Dump Scheme

The Texas attorney general charged two men with running a pump-and-dump spam scam that defrauded investors out of more than $4.6 million.

On Monday, Darrel Uselton, 40, of Katy, Texas, and his uncle, Jack Uselton, 69, of Houston, face organized criminal activity and money laundering charges, along with securities fraud charges. Both men, who were indicted on July 3 by a Harris County grand jury, still are the subject of an ongoing investigation being conducted by several states and the Securities and Exchange Commission.

Both men are accused of using a nationwide botnet of hijacked computers to distribute the spam. The investigation reportedly began after an SEC lawyer received one of the fraudulent e-mails at work.

Darrel Uselton was arrested and is being held in Harris County Jail in lieu of $8 million bond. An arrest warrant has been issued for Jack Uselton.

"Investors will not tolerate scam artists who use the Internet to illegally manipulate stock prices," Attorney General Greg Abbott said in a written statement. "Together with several states and the SEC, we have uncovered an elaborate scheme to defraud unwitting investors. The Office of the Attorney General will aggressively prosecute market manipulators, spammers and con artists whose illegal schemes defraud unsuspecting citizens."

For the past several months, security professionals have been warning about the burgeoning number of pump-and-dump e-mail schemes that are buffeting the Internet. Pump-and-dump refers to potentially fraudulent spam that hypes small-company stocks with phrases like "Ready to Explode," "Ride the Bull," and "Fast Money." The spammers invest in these generally low-cost stocks before the spam campaign begins. Once people are duped into buying the stocks, the share prices go up and the spammers sell off and cash in. The sell-offs, though, usually drive the stock prices down, and the other investors lose their shirts.

The Useltons reaped millions in illegal profits by promoting shares from at least 13 penny stock companies, according to information released by the Attorney General's Office. The suspects then allegedly secretly sold those stocks into an artificially active market they created with manipulative trading schemes, spam campaigns, direct mailers, and Internet-based promotional activities.

The Attorney General's Office reported that its investigators seized more than $4.2 million from the Useltons' bank accounts.

"Unfortunately for the SEC, pump-and-dump spam campaigns don't seem likely to go away any time soon," said Graham Cluley, senior technology consultant at Sophos, in a written statement. "The use of compromised networks of computers to spread these illegal spam messages can result in quick fortunes for the scammers, and can have serious detrimental effects on the stock involved. But it seems that these criminals were in such a rush to make their millions that they forget to pay any attention to which e-mail addresses were being spammed and in the end, this looks likely to be their downfall."

In March, the SEC suspended trading on 35 companies that had been touted in recent spam campaigns. The trading suspensions -- the most ever aimed at spammed companies -- were ordered because of questions regarding the adequacy and accuracy of information about the companies, according to an advisory put out by the SEC.