By Christine Kearney
Thu Mar 23, 6:41 PM ET

Members of two New York organized crime families were arrested and indicted on Thursday for running a penny stock scam that controlled and extorted money from brokerage firms through bribes, threats and violence, prosecutors said.

Ten members and associates of the Colombo and Luchese families were indicted in federal court in Brooklyn on charges including racketeering, conspiracy, extortion, kidnapping and money laundering.

According to the indictment, the defendants controlled 15 small New York brokerage firms, mainly based in downtown Manhattan.

It said they falsely inflated stock prices by promoting penny stocks -- shares that trade under $5 -- before dumping their own personal holdings. The estimated loss to investors was $20 million.

Investors should not be "victimized by unscrupulous brokers backed by the mob," Roslynn Mauskopf, U.S. Attorney for the Eastern District of New York, said in a statement. "Investors are entitled to a level playing field."

According to the indictment, between 1994 and 2005, licensed and unlicensed brokers were paid bribes in the form of commissions up to 50 percent of the price of each stock sold.

Investors opening accounts were at first encouraged to buy established stocks, and then penny stocks, the indictment said.

The defendants, including accused Colombo family captain Joseph Baudanza, 61, and his brother Carmine Baudanza, 63, also extorted stock brokers, traders, cold callers and brokerage firm owners through threats and violence, authorities said.

One stock promoter was kidnapped and chained to a pit bull dog, one broker was beaten with a bat, and another was stabbed when he tried to leave one of the firms, authorities said.

Joseph Baudanza faces a maximum prison sentence of 70 years, while Carmine Baudanza faces up to 90 years.

Lawyers for the defendants could not be immediately reached for comment.

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