Last week, a federal judge in Florida sentenced Erik B. Walsh, former CEO of Florida-based broker-dealer Discovery Capital to 57 months in prison and ordered him to pay $2.6 million in criminal restitution.

Walsh and his business partner, John Abresch, pled guilty to violating federal securities laws in connection with their role in a "boiler room" operation that duped investors in the U.S. and Europe out of millions of dollars. The judge set Abresch’s sentencing date for September 11, 2006.

The court convicted Walsh of conspiracy to commit wire fraud, mail fraud, and securities fraud, as well as of lying to Commission investigators during an on-site examination of Discovery Capital in 2002. According to the SEC, Walsh lied in writing to investigators’ questions.

Walsh’s sentencing brings to a close the action the Commission filed against him, Abresch, and Discovery Capital in March 2002. At that time, a Florida federal court issued a temporary restraining order, imposed an asset freeze, and appointed a receiver to halt an on-going securities offering at Discovery Capital.

In October 2002, the court permanently enjoined Walsh and Abresch from violating federal securities laws and ordered Abresch to disgorge $500,000. Later, the court reduced the amount of disgorgement to $195,000 and did not impose a monetary penalty based upon Abresch’s sworn financial statement.

In January 2003, the Court ordered Walsh to pay over $500,000 in disgorgement and prejudgment interest and imposed a $90,000 civil penalty. Subsequently, in March and April 2003, the Commission barred Walsh and Abresch from associating with any broker-dealer. In March 2003, the Commission revoked the registration of Discovery Capital.

The Commission charged that from June 2001 through the filing of its complaint, Walsh operated Discovery Capital as a boiler room, where a network of primarily unlicensed sales agents used high-pressure sales tactics and made material misrepresentations to push a private placement offering that raised approximately $2.7 million. It also raised $1.3 million through the sale of promissory notes.

Among other things, the reps claimed that Discovery Capital had been in the business for decades, managed millions of dollars time, and had grown over 300 percent. The sales agents told customers that profits were virtually guaranteed, that they would earn 10 to 30 times their investment when the company went public, and that Discovery Capital was the acquisitions target of a major broker-dealer. Sales agents also told investors that E.F. Hutton was a major shareholder and that Discovery Capital had alliances with major banks.

According to the Commission, all of these claims were false. In fact, Discovery was founded in 1991 and its prospects were dismal. The company’s quarterly FOCUS reports filed with the SEC show that the firm had been losing money since at least 2000. As of December 31, 2001, the FOCUS report shows it as having an accumulated deficit of $1,225,162, excluding debt incurred through the sale of promissory notes.

Discovery Capital’s offering materials, which Walsh prepared, also contained material misrepresentations and omissions. One private placement memorandum claimed that "no commissions will be paid" in connection with the private placement and that "none of the offering proceeds that the company may receive will be used to make loans to officers, directors and/or affiliates." In truth, Discovery Capital paid its sales agents commissions ranging from 10% to 20%. In all the company paid approximately $900,000 to sales agents, including over $500,000 to Abresch alone.

The SEC also charged Discovery Capital for books and records violations. It falsely claimed that it was in compliance with net capital requirements, when in fact it had a net capital deficiency since November 2001. The company also failed to keep accurate records and preserve bank statements, correspondence files, and investor subscription agreements.

For example, sales agents told investors that by purchasing units through Discovery Capital's private offering they were purchasing an ownership interest in the company. the firm. But it failed to issue any certificates to investors evidencing their purchase of units in the private placement offering, and only one investor appears on the books and records of the company as a shareholder.

Furthermore, Walsh misappropriated at least $130,000 of the money raised from investors by improperly crediting those funds in Discovery's books and records as his own capital contributions.

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