Man Sentenced For Role In 'Pump and Dump' Investment Fraud Scheme

EAST MORICHES, NY — An East Moriches resident is one of two men sentenced to six years in prison for his part in an investment fraud scheme, according to John H. Dorham, according to United States Attorney for the District of Connecticut.

The U.S. Department of Justice said Thomas Heaphy, 43, of East Moriches, and Brian Ferraioli, 41, of Sayville, were each sentenced to 72 months in prison, followed by three years of supervised release, for two separate stock schemes.

According to court documents and statements made in court, for several years, Heaphy, Ferraioli and others defrauded investors through a stock “pump and dump” scheme, Durham said.

As part of the scheme, Heaphy, Ferraioli and their co-conspirators induced investors to purchase securities by making false and misleading representations in calls, emails and press releases concerning the securities and the issuing companies, thereby causing the price of those securities to become falsely inflated, Durham said.

The issuing companies were essentially shell companies with virtually no legitimate business activities — but Heaphy and Ferraioli’s "numerous misrepresentations" induced investors to purchase securities, causing the share price of the securities to become artificially inflated, Durham added.

Certain co-conspirators then sold their own preexisting positions in the securities at a profit and then allowed the price of the securities to fall, leaving investors with worthless and unsalable stock — as a result, victim investors lost millions of dollars, Durham said.

Heaphy and Ferraioli received approximately 25 percent of all money that they induced individuals to invest, and gained approximately $719,000 and $1.25 million, respectively, from the scheme, Durham said.

They disguised the income by having the funds flow through the trust accounts of various attorneys, including Corey Brinson in Connecticut, into bank accounts in the name of various shell entities under their control, and failed to pay federal income taxes on most of the income, Durham said.

In the summer of 2016, after Heaphy and Ferraioli learned that they were under federal investigation for their roles in the stock pump and dump scheme, they became involved in the promotion and sale of securities of Waters Club Worldwide, Inc. and Waters Club Holdings, Inc., which provided yacht charter services to customers, Durham said.

From around August, 2016 to February, 2017, Heaphy and Ferraioli solicited prospective investors to purchase shares of Waters Club stock purportedly in advance of an initial public offering, or IPO, Durham added.

Heaphy and Ferraioli represented that Waters Club intended to form a membership-based “time share” club with a fleet of yachts that members jointly owned and could use for yachting vacations; they stated that investors’ money would be used to develop the business and fund the operations of Waters Club, and that Heaphy and Ferraioli were being compensated with stock for recruiting investors, Durham said.

Heaphy and Ferraioli received approximately half of all the money they induced investors in Waters Club to invest, Durham said.

Due in part to the payments to Heaphy and Ferraioli, Waters Club lacked the capital to develop its membership-based club, Waters Club did not pursue an IPO, and the shares purchased by investors were unsalable, Durham said.

Heaphy and Ferraioli recruited at least 12 investors to pay a total of at least $1,289,500 for shares of Waters Club stock, Durham said. One of the victims of the Waters Club scheme was a Connecticut resident who paid $475,000 to Waters Club— Heaphy’s total gain from the scheme was $307,658 and Ferraioli’s total gain was $297,546, Durham said.

At least six Waters Club victim-investors have also been identified as victims of the earlier stock pump and dump scheme, Durham said.

Heaphy and Ferraioli each pleaded guilty to one count of conspiracy to commit mail and wire fraud and one count of tax evasion related to the stock pump and dump scheme last year, as well as one count of conspiracy to commit mail and wire fraud related to the Waters Club investment scheme, Durham said.

Judge Meyer ordered Heaphy to pay total restitution of $6,738,539, and Ferraioli to pay total restitution of $6,896,927. The restitution orders include restitution owed to victims of the schemes, and to the Internal Revenue Service, Durham said.

Judge Jeffrey Alker Meyer ordered Heaphy and Ferraioli, released on bonds, to report to prison on July 9, Durham said.

On January 20, 2017, Brinson, of Hartford, CT, pleaded guilty to one count of engaging in a monetary transaction in property derived from specified unlawful activity; on April 13, 2017, he was sentenced to 36 months of imprisonment, Durham said.

Attorney Brian Spears of Fairfield, CT, representing Heaphy, did not immediately return a call for comment, and neither did John F. Kaley of Garden City, representing Farraioli.

The investigation was conducted by the Federal Bureau of Investigation, Internal Revenue Service-Criminal Investigation Division and the U.S. Postal Inspection Service, with assistance from the Connecticut Department of Banking and the Hartford and Stamford Police Departments. The case is being prosecuted by Assistant U.S. Attorney Avi M. Perry.

Image via Shutterstock.