Defunct broker Spencer Edwards gets slapped by FINRA NAC

An enduring theme on this blog over the last few years has been the SEC and FINRA’s crackdown on brokers accepting penny stocks for deposit. There are a number of different violations these firms have been cited for: violations of rule 15c2-11, failures to maintain adequate supervisory systems, failures to establish and implement appropriate anti-money laundering (AML) sytems and procedures, and allowing the sale of unregistered shares without a valid exception. On December 10, 2019 the FINRA National Adjudicatory Council (NAC) published its decision (pdf) in the matter of Spencer Edwards, a defunct brokerage. The decision cites Spencer Edwards for selling unregistered shares, failing to establish adequate supervisory procedures, and failing to implement an appropriate AML program. This decision follows from FINRA Enforcement’s complaint (pdf) filed on November 2, 2015 and the FINRA OHO extended hearing panel decision (pdf) on March 21, 2017. For some reason, the NAC decision is no longer listed in the case history and doesn’t show up in a FINRA FDA search for “Spencer Edwards.” The decision itself is still online at FINRA’s website, however.

See the NAC decision.

The summary:

Spencer Edwards, Inc. (“Spencer Edwards” or the “Firm”) appeals an extended Hearing Panel decision issued on March 21, 2017. The Hearing Panel’s decision concerns Spencer Edwards’s liquidation of more than four billion unregistered shares of six microcap issuers on behalf of seven customer accounts during a two-year period.

The matters that are the subject of this appeal relate to the circumstances surrounding Spencer Edwards’s liquidation of the unregistered microcap shares, and, more generally, to the operations, policies, and procedures effecting the Firm’s microcap securities liquidation business. Specifically, on appeal, we examine whether: (1) Spencer Edwards’s liquidations of the unregistered microcap securities were subject to two registration exemptions under the Securities Act of 1933 (“Securities Act”); (2) Spencer Edwards established and maintained a supervisory system, including written supervisory procedures (“WSPs”), that was reasonably designed to prevent the sale of unregistered microcap securities; (3) Spencer Edwards established and maintained a supervisory system, including WSPs, related to the retention and review of its registered representatives’ emails; (4) Spencer Edwards adequately implemented its anti-money laundering policies and procedures to detect and cause the reporting of suspicious transactions related to its microcap securities liquidation business; and (5) Spencer Edwards preserved its registered representatives’ emails.

In the proceedings below, the Hearing Panel examined each of these issues and determined that Spencer Edwards engaged in the misconduct as alleged in each cause of action in the complaint. For sanctions, the Hearing Panel fined Spencer Edwards a total of $707,000, consisting of $600,000 in fines and $107,000 in disgorgement, and it suspended Spencer Edwards until the Firm retains an independent consultant who determines that the Firm has
implemented procedures adequate to reasonably ensure that the Firm is not improperly participating in unregistered securities sales. After an independent review of the record, we affirm, in relevant part, the Hearing Panel’s findings and modify the sanctions that the Hearing panel imposed.

NAC Decision

The time period at issue was only one year: 2011. Spencer Edwards at the time specialized in the deposit and liquidation of microcap securities (penny stocks). From the decision:

During the relevant period, Spencer Edwards’s business focused on executing transactions in low-priced, thinly traded securities, and much of its revenues were derived from commissions on trades of microcap securities. In fact, during the relevant period, the Firm described itself as “one of the few remaining firms that actively trade low price securities and accept stock certificates.” Between January 2011 and December 2012, Spencer Edwards received more than $1.6 million in commissions on sales of roughly 16.5 billion shares of microcap securities.

NAC Decision

There were six companies’ stocks that were covered in the decision: All-State Properties Holdings, Inc (ATPT), Eastern Asteria, Inc (EATR), Encounter Technologies Inc (ENTI), Healthnostics, Inc (HNSS), Greene Concepts, Inc (LKEN), and Strategic Management & Opportunity Corp (SMPP). The companies themselves were not accused of wrongdoing.

One of the parties that deposited stock at issue in the NAC decision is Belmont Partners, LLC, controlled by “JM”. I believe that “JM” is Joseph Meuse and Belmont Partners, LLC is the same company that the SEC sued along with Meuse in December 2011. Belmont Partners, LLC and Meuse settled with the SEC in 2014. JM and Belmont were not accused of wrongdoing in the FINRA complaint or decision. The stock at issue in that case was not one of the ones traded at Spencer Edwards.

The final decision:

We affirm the Hearing Panel’s findings that Spencer Edwards: (1) sold unregistered and nonexempt microcap securities, in violation of FINRA Rule 2010 (cause one); (2) failed to supervise its microcap securities liquidation business and the retention and review of its registered representatives’ emails, in violation of NASD Rule 3010 and FINRA Rule 2010 (cause two); (3) failed to implement the anti-money laundering procedures related to its microcap securities business, in violation of FINRA Rules 3310 and 2010 (cause three); and (4) failed to retain its registered representatives’ emails, in violation of Section 17(a)(1) of the Exchange Act, Exchange Act Rule 17a-4, FINRA Rules 4511 and 2010 (on or after December 5, 2011), and NASD Rule 3110 and FINRA Rule 2010 (on or before December 4, 2011) (cause four).

For sanctions, we fine Spencer Edwards a total of $3,490,940 as follows: (1) $1.7 million for the unregistered securities sales (cause one); (2) $1.7 million for the supervisory and antimoney laundering violations (causes two and three); and (3) $90,940, plus prejudgment interest,76as disgorgement for the unregistered securities sales. We also assess, but do not impose, a suspension on Spencer Edwards until the Firm engages an independent consultant who will monitor the Firm’s acceptance and liquidation of microcap securities deposits and review the Firm’s supervisory and anti-money laundering procedures related to its microcap securities liquidation business. Finally, we affirm the Hearing Panel’s order that Spencer Edwards pays hearing costs of $16,813.43, and we assess appeal costs of $1,669.74.

NAC Decision, pages 39-40

The fine imposed by the NAC is almost five times larger than the $707,000.00 fine imposed by the Hearing Panel that the firm had appealed! The NAC explains the large fine as being warranted because of Spencer Edwards’ history of violations, including a June 2019 AWC (pdf) in which the firm admitted having an inadequate AML program from 2013 to 2015. While this decision may appear meaningless (I don’t even think a defunct firm has to pay a FINRA fine), this should serve as a warning to the few remaining brokers specializing in the deposit and liquidation of microcap securities.

It is possible that Spencer Edwards could appeal the decision to the SEC and from there to US Appeals Court. If they appeal I will update this post.

Edits: 2019-12-13 added two sentences to first paragraph: “The decision cites Spencer Edwards for selling unregistered shares, failing to establish adequate supervisory procedures, and failing to implement an appropriate AML program” and “The decision itself is still online at FINRA’s website, however. “

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Stock promoter Dino Paolucci gets 7 years in prison in plea deal

Long-time readers of this blog will likely recall The Bull Exchange and related websites. They allegedly stole AwesomePennyStocks’ email list and APS sued them for that back in 2012. That case was MARKETING INTEGRALE CO. v. Roberson (4:12-cv-00880) in US District Court of the Southern District of Texas. See case docket on Court Listener. That case was dismissed by Marketing Integrale. The Bull Exchange websites also had a number of quite successful (in terms of price action and volume) stock promotions in 2011 and 2012. There have been a number of civil and criminal cases involving various people who were associated at one point or another with The Bull Exchange group or with companies they promoted.

On September 29, 2016 the SEC sued Dino Paolucci, who ran TheBullExchange.com and other promotional websites, and his associates that aided the manipulation and promotion, in U.S. SECURITIES AND EXCHANGE COMMISSION v. BUONOCORE (2:16-cv-05176), in US District Court, Eastern District of Pennsylvania. See case docket at Court Listener. Read the SEC’s complaint (pdf). Also charged in the SEC’s lawsuit were Jeremy R. Draper, Louis T. Buonocore, Frank J. Morelli III, and Don L. Rose. Paolucci was named in the suit as Bernardino “Dino” Paolucci, Jr. The SEC suit related to the promotion and manipulation of Ecoland International Inc. (OTC: ECIT), which if I recall correctly was The Bull Exchange’s first stock promotion (or at least first successful stock promotion).

Buonocore, Morelli, and Draper consented to judgments against them. The SEC won a default judgment against Paolucci. Don Rose later consented to a judgment against him that was entered November 30, 2017. All the judgments included the normal SEC ‘obey the law’ injunctions. The final judgments against all defendants but Rose were entered on August 10, 2017 (docket 48-51) . The final judgment against Rose was entered on May 24, 2018. The defendants were found liable for disgorgement and prejudgment interest and civil penalties in the following amounts: Don L. Rose ($1,052,817.97 disgorgement/interest & $914,249.56 civil penalty), Dino Paolucci ($2,366,692.50 disgorgement/interest & $2,050,000.00 civil penalty), Frank J. Morelli III ($183.368.47 disgorgement/interest & $158,700.00 civil penalty), Buonocore ($227,083.54 disgorgement/interest & $200,000.00 civil penalty), and Draper ($17,462.31 disgorgement/interest & $15,000.00 civil penalty). The following defendants also received permanent penny stock offering bars: Jeremy Draper, Dino Paolucci, and Don Rose.

On December 8, 2016 Dino Paolucci was charged in a sealed criminal indictment in United States v. PAOLUCCI (2:16-cr-00503) in US District Court, Eastern District of Pennsylvania. See case docket. Read the original indictment from 2016 (pdf) and the superseding indictment (pdf) that was filed on December 13, 2018. The case was unsealed on August 20, 2018. Stocks that Paolucci was alleged to have manipulated and promoted in the indictment include Ecoland International (OTC: ECIT; later traded as OTC:NRBT), Refill Energy (OTC: REFG), YaFarm Technologies (OTC: YFRM), Resource Ventures (OTC: REVI), Crown Marketing (OTC: CRWN), and LiveWire Ergogenics (OTC: LVVV). The indictment was unsealed on August 20, 2018. Paolucci was the only one criminally charged in this case, although as mentioned in the indictment, Louis Buonocore and Frank J. Morelli, III were criminally charged for other stock promotions (see below). Paolucci pleaded guilty to four counts (counts 22-25) on September 9, 2019. The government dismissed the remaining counts and Paolucci was sentenced to 84 months in prison on December 10, 2019. He was also ordered to forfeit $2,000,000 (pdf).

Morelli was criminally charged on May 17, 2014 via information in United States v. MORELLI (2:14-cr-00129) in US District Court for the Eastern District of Pennsylvania. See case docket and information (pdf). That case involved the manipulation and promotion of Super Nova Resources (OTC: SNRR), which occurred in 2008-2009 (prior to TheBullExchange.com). Morelli pleaded guilty and was sentenced to 84 months in prison on July 10, 2018. Buonocore was criminally charged along with five other men in a separate case also involving Super Nova Resources (OTC: SNRR). That case, United States v. MARCINIAK (2:14-cr-00133) in US District Court, Eastern District of Pennsylvania, was filed on March 18, 2014. See case docket and indictment (pdf). Buonocore was dismissed from that case on October 16, 2018 after he died.

Louis Buonocore was also charged in a separate criminal case for actions relating to YaFarm Technologies (OTC: YFRM), another Bull Exchange stock promotion. That case is United States v. Buonocore (1:15-cr-10272) in US District Court for the District of Massachusetts. See case docket and information (pdf) with which Buonocore was charged. See the Department of Justice PR announcing the charges. Parallel to that criminal case, both Buonocore and Frank J. Morelli, III were sued by the SEC on September 21, 2015. That case was Securities and Exchange Commission v. Morelli (1:15-cv-13396) in US District Court, District of Massachusetts. See case docket and complaint (pdf). The SEC won judgments against both men but elected not to pursue penalties because Louis Buonocore died and Morelli was sentenced to prison in the criminal case described in the previous paragraph.

For more on Dino Paolucci getting sentenced to prison, read Mike Caswell’s article on StockWatch (requires free sign-up to read full article). One interesting point that Caswell brings up is the possibility that Paolucci cooperated:

The sentence is the product of some sort of plea negotiations, the details of which are unclear. All of the materials leading up to Mr. Paolucci’s sentencing are not part of the public court file. Also hidden from the public is his plea agreement. These documents would usually set out the jail term that prosecutors sought and would set out any co-operation that Mr. Paolucci provided.

It is entirely possible that Mr. Paolucci provided assistance to the government. Generally, plea agreements in fraud cases specify that a defendant must co-operate with the government, and in some instances the government’s sentencing recommendation is directly linked to that co-operation. Given that many of Mr. Paolucci’s associates were separately charged, prosecutors could have been very interested in his assistance.

While the factors that led to Mr. Paolucci’s jail term are not clear, the size of the forfeiture order indicates that he had earned at least some favour with prosecutors. When he was initially charged, the government calculated his gains from the scheme to be $8.4-million. Prosecutors previously stated their intention to seek the forfeiture of the full amount. Tuesday’s sentence only includes $2-million in forfeiture, however.

StockWatch article by Mike Caswell

One last note: according to the Dino Paolucci indictment, 3 million ECIT shares were sold using an account Rose opened in the name of his company Global Media at defunct broker Spencer Edwards. Shares were also sold using offshore broker Clear Water Securities (per the SEC complaint). Neither Spencer Edwards nor Clear Water Securities were charged in any of the above cases. Clear Water Securities shut down after being sued by the SEC in 2015. That case is Securities and Exchange Commission v. Caledonian Bank Ltd. (1:15-cv-00894) in US District Court, S.D. New York. See case docket and complaint (pdf). The SEC won a final judgment (pdf) against Clear Water Securities.

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Broker and OTC Market Maker Vandham Securities settles with SEC over penny stock violations

On September 16, 2019, Vandham Securities Corp settled with the SEC. See Vandham Securities BrokerCheck report. In July 2018 Vandham was bought or merged with Wall Street Access (see its BrokerCheck report). Vandham (technically Wall Street Access now) continues to act as an OTC market maker with the market maker ID “VNDM” but I am unsure of how active it is in that line of business. According to the settlement, Vandham’s “primary business during the relevant period [January 2016 to April 2017] involved facilitating the sale of thinly traded, low priced over-the-counter stocks into the market by other broker-dealers, principally Broker-Dealer A and Broker-Dealer B.” Also according to the settlement, in 2016 Vandham reported revenue of approximately $9 million and in 2017 it reported revenue of approximately $10m.

There are three different types of violations covered by the settlement, which covers Vandham’s actions from January 2016 to April 2017. The first type of violation was of Rule 203(b)(1) of Reg SHO which relates to how Vandham sold shares for its client brokers on behalf of their clients liquidating shares in OTC stocks. Rather than simply sell the shares, Vandham would sell short shares in its own account first and then cover its short into the sell orders of its clients. Because Vandham was short in its own account it was required to locate shares it sold short but it failed to do that on “over 10,000 short sales.”

The second type of violation is of rule 15c2-11 which should be familiar to this blog’s readers after I blogged about an SEC suit against Spartan Securities and an SEC settlement with Canaccord Genuity for violations of 15c2-11 and the SEC’s plan to change rule 15c2-11. It is the rule that requires brokers that make a market in an OTC stock to obtain and review information about the companies they are trading. In the settlement the SEC describes the rule:

Rule 15c2-11 promulgated under the Exchange Act prohibits a broker-dealer from publishing, or submitting for publication, any quotation for any security in any quotation medium, unless the broker has in its records certain documents and information about the issuer, as specified in the Rule, and reviews such information to form a reasonable basis under the circumstances for believing that such information is accurate in all material respects and is from a reliable source.

SEC settlement, page 4

There is an exception to rule 15c2-11 for unsolicited customer orders, but that exception did not apply when Vandham was trading in its own account. When Vandham went short in its own account prior to selling client shares and also when it would sometimes buy client shares in its own account at a discount and then sell those shares the unsolicited customer order exception did not apply even thought he ultimate purpose of those orders was to sell the client shares.

The third type of violation mentioned in the settlement is in my opinion the most important, and those are AML (anti-money laundering) violations, specifically failures to file SARs (Suspicious Activity Reports). Even though Vandham was trading on behalf of other US-based brokers (whose clients owned the shares being sold), it still had a duty to inquire about suspicious activity and file SARs about suspicious activity. Keep in mind that suspicious doesn’t mean illegal — much legal activity is suspicious, but financial institutions are bound by the Bank Secrecy Act to file SARs. What qualifies as suspicious? From the settlement:

The Bank Secrecy Act (“BSA”) and implementing regulations promulgated by Financial Crimes Enforcement Network (“FinCEN”) require that broker-dealers file SARs with FinCEN to report a transaction (or patter of transactions of which the transaction is a part) conducted or attempted by, at or through the broker-dealer involving or aggregating to at least $5,000 that the broker dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal activity or is conducted to disguise funds derived from illegal activities; (2) is designed to evade any requirement of the BSA; (3) has no business or apparent lawful purpose and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts; or (4) involves use of the broker-dealer to facilitate criminal activity. 31 C.F.R. §1023(a)(2) (“SAR Rule”)

SEC Settlement, page 5

Vandham’s AML policies described in detail red flags relating to “transactions involving penny stock companies.” These included issuers that have:

– “no business, no revenues, and no product;”
– “officers or insiders … associated with multiple penny stock issuers;”
– “undergo[ne] frequent material changes in business strategy or its line of business;”
– “officers or insiders … [with] … a history of securities violations;”
– “not made proper filings;”
– “been the subject of prior trading suspensions;” or
– been the subject of “chat room conversations indicative of suspicious activity.”

SEC Settlement, page 6

It appears to me that Vandham’s AML policies were appropriate to its business of liquidating large blocks of OTC stocks. However, according to the settlement, Vandham “failed to implement those policies so as to address the risks posed by its business model.” According to the settlement, “it was Vandham’s practice to refrain from asking its broker-dealer customers about the identity of the customers for whom those broker-dealer customers placed sell orders with Vandham.” In fact, despite having been sanctioned by FINRA in 2014 for AML failures, Vandham filed only one SAR from 2014 to April 2017 relating to a customer’s large volume of sales of an OTC stock and only four SARs in total.

Vandham Ignored Clearing Firm Warnings

According to the settlement, Vandham’s clearing firm expressed concerns about Vandham’s trading in one particular stock (referred to as “Issuer C”):

Vandham’s clearing broker informed Vandham that its trading in Issuer C, in just January 2017 alone, coincided with significant price volatility and a spike in trading volume in Issuer C’s stock. The clearing broker also informed Vandham that:
– “It appeared that [the seller] used [Broker-Dealer A, Vandham’s counterparty on the trades at issue] to immediately ‘dump’ the shares of [Issuer C] back into the market” after receiving, according to Forms 8-K filed by Issuer C, over 45 million shares of Issuer C from December 28, 2016 through January 17, 2017; and
– The owner of the selling entity, a Florida-based trading vehicle, “has been mentioned on multiple penny stock blogs and bulletin boards as a potential penny stock fraudster.”

SEC Settlement, page 9

And what did Vandham do? Nothing:

Vandham either ignored or did not learn of these facts prior to being informed thereof by the clearing broker because of, among other things, its practice to not inquire into the identity of and investigate the customers for whom its broker-dealer customers placed sell orders with Vandham. Even after these facts, which constituted additional red flags, were conveyed to Vandham, it still neither filed a SAR nor produced any written analysis or other records supporting the reasonableness of why SARs did not need to be filed.

SEC Settlement, pages 9-10

The Penalties

As is usual with SEC settlements, Vandham has to cease and desist from violating the law and is censured. The firm was also ordered to pay a civil monetary penalty of $200,000.

Other Details

As is usual with FINRA and SEC actions, there are some interesting details in the settlement. The two largest broker-dealer clients of Vandham (Broker-Dealer A & Broker-Dealer B) in its business of liquidating shares of OTC stocks both “focused primarily on thinly traded, low priced over-the-counter stocks.” Also, both were “headquartered in Utah,” according to the settlement. I will leave it to my readers to guess the identity of those brokerages.

Also, the settlement lists trading in four different stocks as being particularly suspicious and those details always make for fun reading. I will only quote the red flags with one of the four, “Issuer C” (already mentioned above in the warning from Vandham’s clearing firm):

32. From June 2016 through January 2017, Vandham facilitated the sale by customers of Broker-Dealer A of nearly one hundred million shares of Issuer C, a thinly traded microcap stock. During this period, Issuer C’s stock price fluctuated from a low of $0.0017 to a high of
$0.88 per share on an average daily volume of approximately 20 million shares. In the six months prior to June 2016, the average trading daily volume in Issuer C’s stock was less than 1,000 shares, and on many days during that period the stock did not trade at all. Vandham had no activity in the stock until June 2016.

33. For example, on 23 trading days during this period, Vandham bought from Broker-Dealer A and sold into the market approximately 96 million shares (split adjusted) of Issuer C’s stock. Vandham’s aggregate trading over these 23 days represented approximately 25% of the issuer’s most recently reported outstanding share amount. On four of these trading days, Vandham’s trading constituted more than 30% of the total trading volume in Issuer C for the day; on two of those days, it constituted over 40% of the day’s total trading volume.

34. Notwithstanding the foregoing circumstances, Vandham did not conduct any follow-up inquiry into the issuer, or the identity of the owners of the shares that were being sold into the market. Had Vandham done so, it likely would have identified additional red flags, including that Issuer C (a) was the subject of numerous internet promotional campaigns during the period in which its trading volume spiked; (b) was delinquent in its public filings; and (c) had an accumulated operating deficit exceeding $6 million as of May 2016, with increasingly minimal revenue since 2015; and (d) was experiencing a rapid and extreme dilution of its stock,
with outstanding shares increasing from 3.4 million following an October 2016 reverse split to 300 million as of December 31, 2016, an increase of nearly 10,000 percent.

SEC Settlement, pages 8-9

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

FINRA NAC reaches decision against C.L. King & Associates for supervisory and AML failings related to penny stock sales

On April 18, 2016 FINRA Enforcement filed a complaint (pdf) against C.L. King & Associates, Inc (hereafter referred to as C.L. King) and Gregg Alan Miller (CRD #4163500). At the times relevant to the complaint, Miller was C.L. King’s compliance manager and AMLCO (anti-money laundering compliance officer). Miller is still listed as working at C.L. King according to FINRA BrokerCheck as I write this. On September 6, 2017 a FINRA OHO extended hearing panel reached a decision (pdf) in the matter. C.L. King appealed the hearing panel decision to the National Adjudicatory Council (NAC) of FINRA, which rendered its verdict (pdf) on October 2, 2019. On November 4, 2019 that decision became final (per the firm’s detailed Brokercheck report).

There were two separate issues that the OHO extended hearing panel cited C.L. King for: survivor bonds and penny stocks. The NAC overturned the OHO extended hearing panel decision relating to survivor bonds (and they are outside the purview of this blog) so I will only discuss the penny stock issues. The NAC summary of the OHO extended hearing panel decision is a good place to start:

Separate from the firm’s survivor bond business line, CLK also sold penny stocks on behalf of two customers. One of these customers was a bank based in Liechtenstein (“PL Bank”), which sold over 41 million shares of 40 penny stocks from June 2009 through April 2014, generating proceeds of $4.87 million. The second customer, (“ABC Corp.”), sold more than 11 billion shares in 138 penny stocks from December 2012 to November 2013 and generated more than $14 million in proceeds. The Hearing Panel determined that CLK and the firm’s anti-money laundering (“AML”) compliance officer, Miller, failed to develop and implement an AML program reasonably designed to detect and report suspicious activity indicative of potential money laundering in connection with the firm’s penny stock business, as required by the Bank Secrecy Act (“BSA”). Further, the Hearing Panel found that CLK and Miller failed to conduct adequate due diligence and respond to red flags regarding the trading activities of PL Bank.

For the foregoing misconduct, the Hearing Panel censured the firm and fined it a total of $750,000. The Hearing Panel also suspended Miller for six months as a principal, fined him a total of $20,000, and ordered that he requalify as a principal before again acting in that capacity.

After reviewing the record, we reverse the Hearing Panel’s findings that CLK negligently made material misrepresentations and omitted to disclose material information to the issuers of debt securities. We otherwise affirm the Hearing Panel’s findings of liability. We also modify the sanctions as set forth in detail below.

NAC decision page 2

The NAC ended up reducing the fines somewhat and reducing Miller’s suspension, but for the most part upheld the OHO extended hearing panel’s findings:

We affirm the Hearing Panel’s findings that CLK violated NASD Rule 3010 and FINRA Rules 3110 and 2010 by failing to establish and maintain a supervisory system, including WSPs, reasonably designed to ensure compliance with the federal securities laws and FINRA rules in connection with the firm’s survivor bonds business. Accordingly, for this violation, we censure the firm and impose a $50,000 fine.

We also affirm the Hearing Panel’s findings that CLK and Miller failed to establish and implement a reasonable AML program designed to detect, investigate, and report potentially suspicious activity, and failed to conduct adequate due diligence and respond to red flags, in violation of NASD Rule 3011 and FINRA Rules 3310 and 2010. For these violations, the firm is censured, fined $292,000, and required to retain an independent consultant. Miller is suspended in all principal and supervisory capacities for three months, fined $20,000, and ordered to requalify as a principal before acting in any principal or supervisory capacity. The respondents are also ordered to pay, jointly and severally, hearing costs of $20,175.20.

NAC decision pages 57-58

In addition to the fines and the suspension for Miller, the NAC ordered C.L. King to hire a consultant to help them fix their processes and then report back:

We also order that CLK retain an independent consultant to recommend changes to the firm’s policies, procedures, and supervisory systems related to AML obligations and to review the process by which the firm enters into new lines of business. We order CLK to comply with the following procedures related to the retention of an independent consultant: CLK shall retain, within 60 days of this decision becoming FINRA’s final disciplinary action, an independent consultant, acceptable to Enforcement. The independent consultant shall conduct a review of the firm’s policies, procedures, and supervisory systems related to AML obligations and a review of the firm’s process by which it enters into new lines of business, including adopting procedures for vetting and supervising that new business. The independent consultant shall make recommendations of ways to improve these processes, policies, procedures, and systems. Once retained, CLK shall not terminate its relationship with the independent consultant without Enforcement’s written approval.

CLK shall require the independent consultant to submit to CLK and FINRA staff its report, which includes: (1) a description of the review performed and the conclusions reached; and (2) recommended changes or additions to CLK’s policies, procedures, and systems related to the firm’s AML obligations and process for vetting and supervising new lines of business. CLK shall provide to FINRA staff, within 60 days after receiving the independent consultant’s report, a written implementation report, certified by an officer of the firm, attesting to the firm’s implementation of the independent consultant’s recommendations.

NAC decision pages 56-57

C.L. King’s failures were at times quite comical:

On March 6, 2013, a CLK trader received an email from another broker-dealer, Knight Capital Americas LLC, that suggested PL Bank might be placing matched orders in CLDS. Knight asked CLK to confirm the legitimacy of the sell order. CLK’s trader forwarded the email to Miller asking, “You guys ok with me responding . . . that it’s a legitimate order?” Miller responded promptly, “Yes.” Miller acknowledged, however, at the hearing that he had not heard of the term, “matched trading.” But Miller testified that he understood that PL Bank was looking for buyers for its CLDS sell orders. The firm took no action other than to tell Swiss BD this was inappropriate. On March 6 and 7, 2013, PL Bank’s sales of CLDS constituted over 90 percent of the market volume.

NAC decision, pages 24-25

And at other times just stupefying:

For four years, Miller was oblivious to the fact that PL Bank was liquidating penny stocks for undisclosed subaccounts.

NAC Decision, page 49

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

The Last effective email stock promoter keeps up the fight with Rivex Technology Promotion (RIVX)

On Monday November 4th, 2019, two websites associated with the ‘tier 1’ or ‘Panamanian’ stock promoter as that promoter is referred to as by OTC Market Research started promoting Rivex Technology Corp (OTC: RIVX). This promoter has connections to the now-defunct promoter AwesomePennyStocks. I have previously written about this promoter and how OTC Markets’ Caveat Emptor Designation has not stopped them from promoting and making the price of the stocks they promote go up.

The two websites promoting RIVX are BlueChipPennyStockAlerts.com and PennyStockMarketNews.com. Both websites have been heavily advertising on Google over the last month. Also, both websites have apparently fake address information in their promotional emails. Per the FTC, marketing emails require a correct physical address.

At the bottom of its emails, PennyStockMarketNews.com lists the address 205 Dexter Ave Derry, NH 03038. According to Google Maps there is no Dexter Avenue (there is a Dexter Street). There is no 205 Dexter Street. BlueChipPennyStockAlerts.com lists its address as 1701 Walker Town Rd Castroville, CA 95012. According to Google Maps there is no Walker Town Road in Castroville, though there is a Walker Valley Road. There is no 1701 Walker Valley Road. I also believe the names of the analyst or editor of both sites are also fake (“Michael Griffins” for PennyStockMarketNews.com and “Louis Dalton” of BlueChipPennyStockAlerts.com). I have no evidence for these names being fake but there is also no evidence that they are real.

According to WHOIS data, BlueChipPennyStockAlerts.com was registered 10 June 2019 via NameCheap with contact information protected by WhoisGuard. PennyStockMarketNews.com was registered on 8 May 2019 via NameCheap with contact info protected by WhoisGuard.

Full PennyStockMarketNews.com disclaimer:

PennyStockMarketNews.com reports/releases/profiles are commercial advertisements and is intended for general information purposes only. We are engaged in the business of marketing and advertising companies for monetary compensation unless otherwise stated.  
PLEASE NOTE WELL: PennyStockMarketNews.com and its employees are not a Registered Investment Advisor, Broker Dealer or a member of any association for other research providers in any jurisdiction whatsoever and we are not qualified to give financial advice. PENNYSTOCKMARKETNEWS.COM WILL NEVER ACCEPT FREE OR RESTRICTED TRADING SHARES IN ANY COMPANIES MENTIONED at PENNYSTOCKMARKETNEWS.COM OR OUR EMAIL ADVERTISING PLATFORMS.
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COMPENSATION: PennyStockMarketNews.com was compensated $4,000 in cash via bank wire by Upforce Digital Advertising LLC for advertising Rivex Technology Corp. (RIVX).  PennyStockMarketNews.com does not own any shares of profiled companies. PennyStockMarketNews.com does not investigate the background of any third party. Any compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding profiled companies. The information contained in our newsletters are based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. PennyStockMarketNews.com encourages readers and investors to supplement the information in these reports with independent research and other professional advice. All information on featured companies is provided by the companies profiled through their website, news releases, and corporate filings, or is available from public sources and PennyStockMarketNews.com makes no representations, warranties or guarantees as to the accuracy or completeness of the disclosure by the profiled companies. Further, PennyStockMarketNews.com has no advance knowledge of any future events of the profiled companies which includes, but is not limited to, news & press releases, changes in corporate structure, or changes in share structure.
None of the materials or advertisements herein constitute offers or solicitations to purchase or sell securities of the companies profiled herein and any decision to invest in any such company or other financial decisions should not be made based upon the information provide herein. Instead PennyStockMarketNews.com strongly urges you conduct a complete and independent investigation of the respective companies and consideration of all pertinent risks. Readers are advised to review SEC periodic reports: Forms 10-Q, 10K, Form 8-K, insider reports, Forms 3, 4, 5 Schedule 13D. PennyStockMarketNews.com is compliant with the Can Spam Act of 2003.PennyStockMarketNews.com does not offer such advice or analysis, and PennyStockMarketNews.com further urges you to consult your own independent tax, business, financial and investment advisers. Investing in micro-cap and growth securities is highly speculative and carries and extremely high degree of risk. It is possible that an investor’s investment may be lost or impaired due to the speculative nature of the companies profiled.
The Private Securities Litigation Reform Act of 1995 provides investors a ‘safe harbor’ in regard to forward-looking statements.  Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumptions or future events or performance are not statements of historical fact may be “forward looking statements”. Forward looking statements are based on expectations, estimates, and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through use of words such as “projects”, “foresee”, “expects”, “will”, “anticipates”, “estimates”, “believes”, “understands”, or that by statements indicating certain actions “may”, “could”, or “might” occur. Understand there is no guarantee past performance will be indicative of future results. Past Performance is based on the security’s previous day closing price and the high of day price during our promotional coverage.
In preparing this publication, PennyStockMarketNews.com has relied upon information supplied by various public sources and press releases which it believes to be reliable; however, such reliability cannot be guaranteed. Investors should not rely on the information contained in this email and website. Rather, investors should use the information contained in this website as a starting point for doing additional independent research on the featured companies. The advertisements in this email and website are believed to be reliable; however, PennyStockMarketNews.com and its owners, affiliates, subsidiaries, officers, directors, representatives and agents disclaim any liability as to the completeness or accuracy of the information contained in any advertisement and for any omissions of materials facts from such advertisement. PennyStockMarketNews.com is not responsible for any claims made by the companies advertised herein, nor is PennyStockMarketNews.com responsible for any other promotional firm, its program or its structure.

Full disclosure from BlueChipPennyStockAlerts.com:

Bluechippennystockalerts.com
Bluechippennystockalerts.com reports/releases/profiles are commercial advertisements and is intended for general information purposes only. We are engaged in the business of marketing and advertising companies for monetary compensation unless otherwise stated.  
PLEASE NOTE WELL: Bluechippennystockalerts.com and its employees are not a Registered Investment Advisor, Broker Dealer or a member of any association for other research providers in any jurisdiction whatsoever and we are not qualified to give financial advice. BLUECHIPPENNYSTOCKALERTS.COM WILL NEVER ACCEPT FREE OR RESTRICTED TRADING SHARES IN ANY COMPANIES MENTIONED at BLUECHIPPENNYSTOCKALERTS.COM OR OUR EMAIL ADVERTISING PLATFORMS.
Our website and newsletter are for Entertainment purposes only.  This newsletter is NOT a source of unbiased information. Never invest in any stock featured on our site or emails unless you can afford to lose your entire investment. The disclaimer is to be read and fully understood before using our site, or joining our email list.
We encourage all to read the SEC’s INVESTOR ALERT at https://www.sec.gov/oiea/investor-alerts-bulletins/ia_newsletters.html before reading this Newsletter.
Release of Liability: Through use of this email and/or website advertisement viewing or using you agree to hold Bluechippennystockalerts.com, its operators owners and employees harmless and to completely release them from any and all liability due to any and all loss (monetary or otherwise), damage (monetary or otherwise), or injury (monetary or otherwise) that you may incur. Bluechippennystockalerts.com sponsored advertisements do not purport to provide an analysis of any company’s financial position, operations or prospects and this is not to be construed as a recommendation by Bluechippennystockalerts.com or an offer or solicitation to buy or sell any security.
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None of the materials or advertisements herein constitute offers or solicitations to purchase or sell securities of the companies profiled herein and any decision to invest in any such company or other financial decisions should not be made based upon the information provide herein. Instead Bluechippennystockalerts.com strongly urges you conduct a complete and independent investigation of the respective companies and consideration of all pertinent risks. Readers are advised to review SEC periodic reports: Forms 10-Q, 10K, Form 8-K, insider reports, Forms 3, 4, 5 Schedule 13D. Bluechippennystockalerts.com is compliant with the Can Spam Act of 2003.Bluechippennystockalerts.com does not offer such advice or analysis, and Bluechippennystockalerts.com further urges you to consult your own independent tax, business, financial and investment advisers. Investing in micro-cap and growth securities is highly speculative and carries and extremely high degree of risk. It is possible that an investor’s investment may be lost or impaired due to the speculative nature of the companies profiled.
The Private Securities Litigation Reform Act of 1995 provides investors a ‘safe harbor’ in regard to forward-looking statements.  Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumptions or future events or performance are not statements of historical fact may be “forward looking statements”. Forward looking statements are based on expectations, estimates, and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through use of words such as “projects”, “foresee”, “expects”, “will”, “anticipates”, “estimates”, “believes”, “understands”, or that by statements indicating certain actions “may”, “could”, or “might” occur. Understand there is no guarantee past performance will be indicative of future results. Past Performance is based on the security’s previous day closing price and the high of day price during our promotional coverage.
In preparing this publication, Bluechippennystockalerts.com has relied upon information supplied by various public sources and press releases which it believes to be reliable; however, such reliability cannot be guaranteed. Investors should not rely on the information contained in this email and website. Rather, investors should use the information contained in this website as a starting point for doing additional independent research on the featured companies. The advertisements in this email and website are believed to be reliable; however, Bluechippennystockalerts.com and its owners, affiliates, subsidiaries, officers, directors, representatives and agents disclaim any liability as to the completeness or accuracy of the information contained in any advertisement and for any omissions of materials facts from such advertisement. Bluechippennystockalerts.com is not responsible for any claims made by the companies advertised herein, nor is Bluechippennystockalerts.com responsible for any other promotional firm, its program or its structure.

Both disclaimers list the paying party as “Upforce Digital Advertising LLC” which likely does not exist in my opinion. It certainly has no web presence as a search for it on Google revealed no results whatsoever. I searched for business entities in all 50 States in the USA (clicking on the sites linked here) for “Upforce Digital Advertising” and found nothing close in any state.

RIVX was given Caveat Emptor designation by OTC Markets after the close on 4 November 2019 (the first day it was promoted). It dropped the next day but has since recovered.

RIVX daily chart

The prior promotion by this promoter, using the older website ProPennyStockAdvisors.com, was at least somewhat successful despite the early Caveat Emptor designation of the stock by OTC Markets, as the price did not drop substantially until 25 October, the day after I received the last promotion emails. ProPennyStockAdvisors.com was registered in the same manner as the two websites that promoted RIVX, with a registration date of 2 April 2019.

PXPP daily chart

Like with the newer promotion websites, the address given by ProPennyStockAdvisors.com does not appear to exist, at least according to Google Maps. That address is 516 Highway 159
Sekiu , WA 98326. Below is the disclaimer from the last PXPP promotion email I received.

PXPP disclaimer. Paying party disclosed as “Ontrackmedia Advertising Limited.”

One last thing to note: all the emails I have received in the last year from this promotion group have been sent by iContact. That is the same email service provider used by AwesomePennyStocks for most of that group’s existence.

Prior to publishing this post I sent an email requesting comment to all the emails from which I have received the stock promotion. I also sent an email to the iContact media email address requesting comment. Unsurprisingly, no one responded to my emails. If that changes I will update this post.

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

SEC settles with Canaccord Genuity for 15c2-11 violations

On August 14, 2019 the SEC settled with Canaccord Genuity over violations of Rule 15C2-11. The firm agreed to change its deficient procedures and pay a civil monetary penalty of $250,000. Read the order (pdf).

Violations of 15c2-11 are at issue in the recent SEC lawsuit against broker and market maker Spartan Securities. Also, the SEC recently proposed changing rule 15c2-11 to make it harder for firms that are not current on filing financials to be quoted by brokers.

Excerpts from the settlement:

Canaccord delegated to a compliance associate the responsibility to obtain and review the information required by Rule 15c2-11 and to fill out and sign the Form 211s, including placing the electronic signature of the designated principal on the filings. The compliance associate had no trading experience and no formal training to conduct the review required by the rule, such as training related to the analysis of financial statements
and other information.

the compliance associate generally placed the electronic signature of the designated principal on Canaccord’s Form 211 filings without having a reasonable basis to believe that the representations were accurate. In
addition, the compliance associate generally understood that the firm’s designated principal had not actually examined the form prior to its submission.

While Rule 15c2-11 files were maintained within the compliance department by the compliance associate, the files could not be independently accessed by the traders or the firm’s designated principal without requesting them from the compliance department. During the relevant period, the traders who intended to make a market in the security rarely, if ever, obtained or reviewed the required information contemplated under the Rule and Canaccord’s policies and procedures, and the firm’s designated principal rarely, if ever, reviewed or signed the Form 211s

In an unrelated action on 21 October 2019, Canaccord Genuity agreed to an Acceptance, Waiver, and Consent (AWC) with FINRA (pdf) for violations of Regulation SHO in its market making of OTC stocks.

Disclaimer: I have no positions in any stocks mentioned in this blog post. I have no relationship with any parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

SEC Trading suspension for Canal Capital (OTC: COWP & COWPP)

Yesterday just before the market open the SEC announced a trading suspension in the shares of Canal Capital (OTC: COWP and OTC: COWPP). Canal Capital had run up from under 1 cent to over $0.50 in under a month before falling in the days preceding the trading suspension.

SEC Trading suspension press release (pdf)
SEC Trading suspension order (pdf)

COWP daily price chart
COWPP daily price chart

The reason for the trading suspension from the suspension press release:

concerns about the adequacy of information in the marketplace about the company’s operations and operating status, if any, and due to recent potentially manipulative trading in the company’s stock.

The suspension order gives more detail and relates this action to the SEC’s recent spate of suspensions of trading in companies that have been delinquent in reporting to the SEC:

Canal Capital was a Delaware corporation with its principal executive offices purportedly located in Port Jefferson Station, New York. Canal Capital’s last filing with the Commission was a Form 15 purporting to suspend its duty to file reports with the Commission on December 6, 2012. However, due to the number of shareholders of record indicated on the Form 15, Canal Capital was not eligible to suspend its duty to file reports with the Commission under Sections 13 and 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). Canal Capital filed for dissolution with the Delaware Secretary of State, effective September 26, 2013.

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

FINRA Fines BNP Paribas Securities $15 million, in part for penny stock failings

On October 23, 2019 BNP Paribas Securities Corp. agreed to a $15 million fine and censure from FINRA for failings relating in part to accepting penny stock shares for deposit and liquidation. The 13-page Acceptance, Waiver, and Consent (AWC) (pdf) makes for some fun reading. Readers of this blog will be used to reports of fines from FINRA and the SEC for brokers that fail to do proper due diligence before allowing the liquidation of large blocks of shares of penny stocks or fail to file Suspicious Activity Reports (SARs), but the failings outlined in this AWC are among the worst I have seen in recent memory.

Following are excerpts from the AWC showing BNP Paribus’ failings with regard to penny stocks:

… BNP did not implement any systems or written procedures (“WSPs”) to determine whether resales of securities complied with Section 5’s registration requirements, even though a substantial portion of its business involved liquidating restricted shares of penny stocks deposited in certificated form.

As a result, BNP allowed the deposit of nearly 31 billion shares of penny stocks, with a notional value of approximately $338 million, without any review to determine whether the shares were restricted, qualified for an exemption from registration, held by control persons of the issuer, or otherwise eligible for re-sale. BNP also facilitated the removal of restrictive legends from 33.5 million shares of securities, with a total notional value of approximately $12.5 million, without conducting any review to determine whether the legends were eligible for removal.

It isn’t just that the review prior to removal of restricted legends was inadequate but that there was no review! Likewise, surveillance of penny stock transactions was not just inadequate — for a long time, there was no surveillance:

It did not conduct any surveillance targeting penny stock transactions, or transactions in securities trading outside of the traditional exchanges, until early 2016

Next, take a look at BNP’s failures to identify red flags that might have triggered the filing of SARs:

Because of these deficiencies in its AML Program, BNP did not identify red flags of potentially suspicious activity that may have required the filing of a suspicious activity report (“SAR”). For example, during the Relevant Period, BNP:
• did not identify 14 customer accounts that executed zero buy transactions while selling approximately 1 billion shares of low priced securities for proceeds of approximately $3.5 million;
• did not identify multiple accounts in which known toxic debt financiers engaged in sales of penny stocks representing more than 20% to 80% of the trading volume on the sale dates and involving securities that were the subject of negative news or suspicious promotional campaigns; and
• did not review at least 3,448 foreign currency wires representing a total value of more than $2.5 billion USD to determine whether they involved high-risk entities or jurisdictions, or represented the proceeds of potentially suspicious trading activity.

A retroactive review of penny stock transactions from April 2013 to April 2016 “identified more than one hundred instances where BNP did not reasonably detect and investigate potentially suspicious penny stock transactions that may have required the filing of a SAR.”

The AWC gives examples of suspicious wire transfer patterns that BNP did not review:

34 customer accounts that, during the period of February 2013 to May 2015, received more than 18 billion restricted shares of penny stocks and incoming wires totaling $40,344, while sending 220 outgoing wires that totaled more than $62 million during a 23-month period; and
• 44 customer accounts that, during the same period, executed zero buy transactions while depositing more than 17.8 billion shares of penny stock and wiring out more than $69 million in sale proceeds.

BNP Paribus was also slow to fix its problems even after they were identified internally:

In January 2014, the head of BNP’s Trading Operations advised senior management that BNP was “an outlier in the industry” in terms of its surveillance of microcap securities and recommended that BNP develop and implement specific policies, procedures and controls for penny stocks. In February 2014, BNP personnel raised additional concerns with BNP’s penny stock business and due diligence process after reviewing recent AML regulatory actions.

BNP did not act in a timely manner to address the deficiencies its personnel identified. BNP did not implement procedures relating to penny stocks or enhanced due diligence for physical certificates until March 2015, more than one year after the head of its Trading Operations identified the need.

In addition to the fine, BNP Paribus Securities Corp also consented to the imposition of a censure and a requirement to get its procedures up to an acceptable level within 90 days. I am actually a little surprised that BNP Paribus Securities Corp did not also exit the penny stock deposit business like Cor Clearing did in the wake of an SEC settlement a year ago.

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Criminal charges filed against Michael Starkweather, former CEO of penny stock Andiamo Corp

On October 21, 2019 a criminal complaint (pdf) against Michael Starkweather, former CEO of Andiamo Corp (OTC: ANDI), was unsealed in US District Court for the Eastern District of New York. The case is United States v. Starkweather (1:19-mj-00911). See the case docket. I previously reported on the SEC’s lawsuit against Starkweather and predicted criminal charges were coming. As the case has just been filed these are only allegations and have not been proven in a court of law.

Mike Caswell of StockWatch already wrote a good summary of the charges (though without linking to the complaint).

Starkweather was arrested in Ohio (see the Ohio case docket).

Excerpt from complaint / affidavit (do note that I had to OCR the complaint so that may have introduced errors):

I . The Defendant, the Publicly-Traded Company and Co-Conspirators
4. The defendant MICHAEL STARKWEATHER was a United States citizen who resided in North Ridgeville. Ohio. In or about and between November 2017 and September 2018. STARKWEATHER was Chief Executive Officer (“CEO”) of the Andiamo Corporation.
5. The Andiamo Corporation was a microcap or penny stock company whose shares traded publicly on the over-the-counter exchange under the ticker symbol ANDI (“ANDI”). In public statements that it issued at various times, ANDI purported to be involved in various businesses, as described in part below:
(a) In or about and between April 2016 and September 2016, ANDI purportedly entered into a joint venture with Peppermint Jim. a company in the business of marketing pure mint and essential oils, to help Peppermint Jim expand its business.
(b) In or about and between November 2016 and March 2017, ANDI purported to enter into the energy sector, whereby ANDI would create an on-demand hydrogen-producing unit designed to increase performance, reduce emissions and lower the cost of operations for vehicles.
(c) In or about and between November 2017 and June 2018, ANDI, through a merger with Utopya Innovations. Inc., purportedly began to develop a smartphone cellular device.
6. Cooperating Witness #1 (“CW #1”) was a stock promoter. In May 2016. CW # 1 pled guilty to conspiracy to commit securities fraud, in violation of Title 18. United States Code, Section 1349. pursuant to a cooperation agreement with the government.
7. Co-Conspirator # 1 (“CC #1”) was a former ANDI executive. Subsequent to the events described in this complaint. Co-Conspirator # 1 pled guilty to conspiracy to commit securities fraud, in violation of Title 18, United States Code, Section 371. pursuant to a cooperation agreement with the government.

Yet again we see the importance of cooperating witnesses in white collar criminal cases and here we have two cooperating witnesses (Co-Conspirator #1 and Cooperating Witness #1).

Further excerpt from the complaint:

17. In or about June 2018, STARKWEATHER met with C’C # 1 in Ohio to discuss the smartphone and STARKWEATHER told C’C # 1 that there was currently no smartphone.
18. In approximately November 2018, after the defendant MICHAEL STARKWEATIIER stepped down as CEO of ANDI, CC # 1 became CEO of ANDI. At that time, CC # 1 confirmed that no Utopya or Andiamo smartphone existed.
19. On February 28. 2019. the defendant MICHAEL STARKWEATHER met with CC # 1. The meeting was consensually recorded by CC # 1. During this meeting, CC # 1 told STARKWEATHER, “There is no phone there is no physical phones [sic] that I can sell right now.” STARKWEATHER replied: “There never was. What there was the ability for you to place an order for them [Utopya] to be the middleman. It always was a middleman scenario with software, but the software never got built. We paid Cycloids [the software company] and they never did anything. They never built anything…. They never built anything for us.” During that same conversation. CC # 1 stated. “I need a real phone that can be sold.” STARKWEATHER replied: “You’re not going to get one because it doesn’t exist until somebody puts in an order…. You have to put in an order before a real phone exists…. [T]hey [Utopya] have no money to pay for them to do the chip change over there, for the radio. They don’t have the money to pay for the radio….”
B. The Defendant MICHAEL STARKWEATHER received kickbacks from the purported sales of ANDI stock at artificially inflated prices
20. On or about January 18. 2018. the defendant MICHAEL STARKWEATHER met with CW # 1. The meeting had been arranged by CC # 1. and was consensually recorded by CW # 1. During the meeting, CW # 1 stated that he wanted to convert his ANDI notes into ANDI shares of common stock, and that STARKWEATHER needed to approve the conversion. STARKWEATHER told CW # 1 that if he sold such shares “profitably,” STARKWEATHER wanted “some sort of kickback” in return. STARKWEATHER later added that he wanted 50% of CW # 1’s profits and that STARKWEATHER could then “keep this thing [ANDI’s stock price] moving or at least hovering where it is now.

Disclaimer: No position in any company mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.