April 9, 2003

OFFICE OF THE UNITED STATES ATTORNEY
SOUTHERN DISTRICT OF CALIFORNIA
San Diego, California

United States Attorney
Carol C. Lam

For Immediate Release

NEWS RELEASE SUMMARY

United States Attorney Carol C. Lam today announced that the Government's continuing effort to combat telemarketing and securities fraud achieved another major success through the guilty pleas of four former members of Commercial Express, LLC, an organization headquartered in Los Angeles. Commercial Express had boiler rooms in several U.S. cities, including San Diego, and defrauded over 700 victims nationwide of over $18,000,000 through a sophisticated "Ponzi scheme" (involving investments purportedly to be used to buy television time for commercials advertising and selling a number of different products). The guilty pleas, which were entered before U.S. District Judge Napoleon A. Jones, Jr., were the result of a combined federal and state investigation of the defendants.

The defendants who pleaded guilty included Joel Alan Fein, 51, of Lafayette, Colorado, Timothy McNeill Hazzard, 46, of Pinehurst, North Carolina, Grace Na, 42, of Northridge, California, and Bill Wayne Whitely, 54, of Thousand Oaks, California. According to United States Attorney Lam, defendants Fein and Hazzard were promoters of Commercial Express; defendant Na was the Controller of Progressive Financial, Commercial Express' sales arm; and defendant Whitely was the operator of two boiler rooms Nexgen Financial Corporation and Westar Network located in the San Fernando Valley area of Los Angeles.

According to Assistant United States Attorney Steven A. Peak, the lead prosecutor in the case, the San Diego Boiler Room Task Force, an organization made up of representatives from the United States Attorney's Office, the Federal Bureau of Investigation (FBI), the Internal Revenue Service Criminal Investigations (IRS-CI), the United States Postal Inspection Service (USPIS), the California Attorney General's Office and other federal, state, and local agencies in San Diego and Southern California, had investigated this telemarketing organization for over three years. These law enforcement agencies worked closely with the U.S. Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC), both of which had investigated Commercial Express for regulatory violations. According to United States Attorney Lam, prosecutors from three Department of Justice components also participated in the investigation, including the Fraud Section, Criminal Division, the Antitrust Division, and the Tax Division.

Documents filed with the court and admissions of the defendants in court showed that Commercial Express offered to the investing public the opportunity to purchase "Media Units" for the amount of $5,000 or $10,000 per unit or "Equity Participations" for a minimum investment of $100,000. A Media Unit was purported to be a purchase of a minimum of 80-100 media broadcast spots with the investor to profit from the gross revenues from sales generated from direct response commercials whose media buys were funded from those units. An Equity Participation was purported to be an ownership interest in Commercial Express with participation in the business' worldwide profits. The Media Units and Equity Participations constituted investment contracts and securities within the meaning of federal and state securities laws.

Commercial Express paid only a fraction of the money received from investors from the sale of Media Units to buy television time to air direct response commercials to advertise and sell a number of different products, and Commercial Express promised to share the profits from the sale of these products with the purchasers of the Media Units and Equity Participations. In addition, Commercial Express and its telemarketers falsely claimed that an investor would receive a return of up to twenty-six percent (26%) per quarter from the sale of products. They also claimed that the money received from the sale of the Equity Participations would give investors an ownership interest in Commercial Express, and misled investors into believing that there were adequate revenues to make future distributions.

Commercial Express and its boiler rooms marketed the Media Units and Equity Participations as legitimate business investments when in fact the defendants and their coconspirators were operating a Ponzi scheme. Assistant U.S. Attorney Peak said that during their guilty pleas, the defendants admitted that the Ponzi scheme operated by Commercial Express involved selling Media Units and Equity Participations while falsely representing that the money received from those sales would be used to buy television time to air direct response commercials to advertise and sell products that would generate profits for the investors. In reality, Commercial Express had only minimal product sales and no profits, and was using the money received from later investors to pay earlier investors and its own overhead and expenses, including the exorbitant, undisclosed commissions paid to the boiler rooms. According to Peak, up to 50% of all funds invested were paid out in such commissions.

The Special Crimes Unit of the California Attorney General's Office was a critical component of the federal-state investigative team and that, among other things, it provided a thorough financial analysis of Commercial Express's operations. Special Assistant U.S. Attorney Ronald D. Smetana, a Supervising Deputy Attorney General for the State of California, headed the California Department of Justice team working on the investigation. Special Assistant U.S. Attorney Smetana said that the scheme employed by Commercial Express to defraud investors focused on misleading victims by means of intentional misrepresentations and concealment and omission of material facts. According to Smetana, the key false and fraudulent pretenses, representations, and promises employed by Commercial Express included that Commercial Express: (1) was a successful company that had been in the business of creating commercials and sales campaigns for products for several years; (2) would consult with each investor to choose products and buy media time to promote and induce the sale of products through direct response commercials and media; (3) had met its projections and had made distributions to earlier investors from the profit on its product sales. According to Smetana, Commercial Express falsely claimed further that each investor would be provided a separate, third party accounting of the products sold and revenues received in their chosen market and that successful sales tests had been conducted on its products.

Special Assistant U.S. Attorney Smetana said that in carrying out the scheme, Commercial Express also knowingly and intentionally concealed and omitted the following material facts from its investors: (a) that it relied on the continued recruitment of new investors to generate the money paid to earlier investors; (b) that the majority of the funds invested were used to pay commissions and overhead; (c) that its boiler rooms were paid up to 50% commission for the sale of each Media Unit or Equity Participation; (d) that it was obligated to sell a minimum number of products to keep the rights to sell the products and had failed to sell a sufficient number of products to keep the rights to sell them; (e) that only minimal products had actually been sold as a result of television advertising; (f) that it was the subject of Cease and Desist Orders issued by various state regulatory agencies; (g) that its operations were being investigated by the SEC and the FTC; (h) that one or more of the promoters of Commercial Express had been subject to adverse federal and state regulatory action for the sale of unregistered securities and fraud; and (i) that Media Units and Equity Participations, as investments granting the purchaser the right to earn income from the efforts of others, constituted securities under federal and state law and had not been registered with the SEC or the State of California.

Assistant U.S. Attorney Peak said that Commercial Express sent investors and potential investors eight newsletters that falsely represented, among other things, that Commercial Express was meeting or exceeding its projected product sales. According to Peak, to facilitate the scheme to defraud, Commercial Express mailed sums of money which they called "distributions" to certain purchasers of Commercial Express Media Units and Equity Participations, thereby creating the impression that the "distribution" was profit generated from product sales, when in fact, the money had been generated from the sales of Media Units and Equity Participations to later investors.

The defendants each pleaded guilty to various counts of conspiracy, securities fraud, mail fraud and wire fraud. Peak said that defendants Fein and Hazzard also pleaded guilty to several counts of engaging in monetary transactions greater than $10,000 in criminally-derived property and income tax evasion for their roles as promoters and partners in controlling Commercial Express, as well as admitting a criminal forfeiture allegation. Defendant Whitely also pleaded guilty to one count of failure to file an individual income tax return.

The maximum penalty provided by federal law for each count of conspiracy, mail fraud and wire fraud, and income tax evasion is five years' imprisonment and a $250,000 fine or both. The maximum penalty for each count of securities fraud is ten years imprisonment and a $1,000,000 fine or both. The maximum penalty for each count of engaging in monetary transactions in criminally-derived property is ten years' imprisonment and a $250,000 fine or both. According to Peak, because the crimes of mail fraud and wire fraud were committed in connection with conduct of telemarketing, and because 10 or more persons over the age of 55 were victimized by the scheme, an additional 15 years' imprisonment could be imposed by the court at the time of sentencing.

Assistant U.S. Attorney Peak also said that the criminal investigation and resulting guilty pleas by the defendants were in part the result of regulatory enforcement actions taken against Commercial Express and the defendants during 1998 by the Denver, Colorado, office of the SEC. The SEC enforcement action filed in Denver resulted in settlements which included monetary penalties and disgorgement orders.

United States Attorney Lam praised the Boiler Room Task Force for its investigative efforts in connection with this prosecution and commended the heads of the local offices of the FBI, IRS-CI and the Postal Inspectors for the exemplary work of their agents. FBI Special Agent in Charge Daniel R. Dzwilewski said that in the last 12 years, the Boiler Room Task Force has made significant accomplishments in combating increasingly sophisticated combinations of Internet investment and telemarketing frauds, many of which involved unregistered securities. Special Agent in Charge Dzwilewski said that this case showcases the ability of the Task Force to bring together multiple agencies from the federal and state level to investigate complex frauds. This case again demonstrates the need for consumers to be cautious and to seek advice from appropriate regulatory agencies prior to investing. IRS-CI Special Agent in Charge Denise Rubin said that the perpetrators of the scheme evaded the tax laws in order to keep their ill-gotten gains and said that IRS-CI will continue to focus its efforts on this significant law enforcement problem. According to Rubin, "Engaging in monetary transactions in criminally-derived property - one form of money laundering - is tax evasion in progress, and we will aggressively apply our resources and expertise to investigate and prosecute telemarketers who commit these crimes." USPIS Assistant Inspector in Charge Ken Laag said the Postal Inspectors are committed to maintaining the integrity of the mail and ensuring citizens are not defrauded through it. Laag said, "Today's high-tech environment provides new opportunities for telemarketing fraud every day and this case highlights the successes realized by the Boiler Room Task Force, where the cooperation of multiple law enforcement agencies results in the effective investigation of increasingly sophisticated telemarketing fraud schemes." According to United States Attorney Lam, today's guilty pleas are an example of the Government's continuing commitment to charge and convict illegal telemarketers and her intention to attack vigorously the continuing investment fraud problem. U.S. Attorney Lam also said that the Government's investigation into the fraudulent telemarketing activities of Commercial Express and its members is continuing.

Sentencing for Joel Alan Fein, Timothy McNeill Hazzard, Grace Na and Bill Wayne Whitely will be before U.S. District Judge Napoleon A. Jones, Jr., on January 22, 2004, at 8:00 a.m. in Courtroom 12 on the second floor of the United States Courthouse in San Diego.

SUMMARY OF CHARGES

All Defendants

Title 18, U.S.C., Sec. 371 - Conspiracy to Commit Securities Fraud (1 count)
Maximum penalty per count: five years; fine of $250,000 (or twice the gain)

Title 15, U.S.C., Sec. 78j(b) and 78ff - Securities Fraud (1 count)
Maximum penalty per count: ten years; fine of $1,000,000

Title 18, U.S.C., Sec. 1341 - Mail Fraud (3 counts)
Maximum penalty per count: five years; fine of $250,000 (or twice the gain)

Title 18, U.S.C., Sec. 1343 - Wire Fraud (2 counts)
Maximum penalty per count: five years; fine of $250,000 (or twice the gain)

Joel Alan Fein and Timothy McNeill Hazzard

Title 18, U.S.C., Sec. 1957 - Engaging in Monetary Transactions Greater Than $10,000 in Criminally-Derived Property (7 counts)
Maximum penalty per count: ten years; fine of $250,000 (or twice the involved funds)

Title 26, U.S.C., 7201 - Tax Evasion (1 count per defendant)
Maximum penalty per count: five years; fine of $250,000

Criminal Forfeiture Allegation

Title 18, U.S.C., Sec. 982(a)(1) and Title 18, U.S.C., Sec. 1957

Bill Wayne Whitely

Title 26, U.S.C., 7203 - Failure to File Individual Income Tax (1 count)
Maximum penalty per count: one year; fine of $100,000

AGENCIES

San Diego Boiler Room Task Force
Federal Bureau of Investigation, San Diego Division
Internal Revenue Service, Criminal Investigations
United States Postal Inspection Service
California Attorney General's Office/California Department of Justice
Fraud Section, Criminal Division, United States Department of Justice
Antitrust Division, United States Department of Justice
Tax Division, United States Department of Justice