The US regulator has obtained an emergency court order freezing the assets of LottoNet Operating Corp, as well as those belonging to chief executive David Gray and the company’s top sales agent Joseph Vitale.
The Florida-based scam raised $4.8m (£3.8m, €4.4m) from 138 investors by telling them their money would be used to develop and market LottoNet, which enables users to buy tickets for lotteries in various US states.
The SEC alleges that, of the $4.8m LottoNet raised, the company had only paid $10,525.43 in investment returns to investors through the end of February.
No commission
Gray used unregistered sales agents to place cold calls to potential investors nationwide.
Investors were told that sales agents did not receive commissions. However, at least 35% of investor proceeds were allegedly paid to boiler room sales agents in the form of commissions.
Officer and director compensation was also set at $200,000, according to SEC filings. However, Gray and others were paid more than three times that amount.
Gray, who was also president and chairman of the board of LottoNet, is also accused of siphoning investor funds for personal spending on clothing, wedding-related expenses, and strip clubs.
“As alleged in our complaint, little did investors know they were being duped with a script based on misrepresentations while investor funds were being spent in strip clubs,” said Eric Bustillo, director of the SEC’s Miami regional office.
‘safe investment’
According to the complaint, which was unsealed in federal court on Monday, among the pitches used in sales agent scripts prepared for cold calls to investors was “you’re looking at a monthly dividend pay-out of $8,500 every month” on a $25,000 investment if LottoNet reaches 1% market share.
The scripts also allegedly touted the purported safety of the investment, noting a 60% return as a “worst case” scenario if the company was ever sold.
The SEC’s complaint further alleges that Vitale, who personally raised at least $1.4m from investors, used the alias Donovan Kelly in an apparent attempt to hide from investors that he is permanently barred by the Financial Industry Regulatory Authority (FINRA).
