FINRA Enforcement files complaint against Lek Securities

Yesterday (November 26, 2018) FINRA Enforcement filed a complaint (pdf) against Lek Securities and Samuel Lek, the firm’s founder and CEO. Please note that this is a complaint from FINRA Enforcement and not a decision. In the future a FINRA officer from the Office of Hearing Officers (OHO) along with two industry panelists will hold a hearing on the issue and they will decide whether the firm violated FINRA rules and what penalties if any to levy. Read more about such proceedings. From the complaint:

1. Between January 2014 and December 2016 (the “Relevant Period”), Lek Securities Corporation (the “Firm” or “LSC”), acting through Samuel Frederik Lek (“Lek”),
failed to develop and implement a reasonable Anti-Money Laundering (“AML”) program and supervisory system for one of its lines of business, namely the deposit and trading of low-priced penny stocks (“microcap stocks”) by Firm customers.
2. As a result of these failures, the Firm, through Lek, did not establish and implement AML policies and procedures that could be reasonably expected to detect, investigate and report, where appropriate, potentially suspicious activity in microcap stocks, thereby violating FINRA Rules 3310(a) and 2010.
3. In addition, the Firm failed to comply with numerous other AML obligations,
including failing to conduct Financial Crimes Enforcement Network (“FinCEN”) 314(a) reviews in violation of FINRA Rules 3310(b) and 2010; failing to conduct reasonable AML testing in violation of FINRA Rules 3310(c) and 2010; and failing to provide reasonable AML training in violation of FINRA Rules 3310(e) and 2010.
4. The Firm, through Lek, also failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933, in violation of NASD Rule 3010 and FINRA Rules 3110 and 2010.
5. As a result, the Firm also facilitated the unlawful distribution of securities in contravention of Section 5 of the Securities Act of 1933 and thus in violation of FINRA Rule 2010

The end result of these failures, according to the complaint:

6. All of the violations described above occurred while the Firm allowed its account
owners to engage in millions of dollars of microcap stock deposit and trading, including accounts that were owned by individuals previously charged with regulatory violations, known toxic-debt financiers, and omnibus accounts established in foreign jurisdictions with unknown beneficial owners.
7. In total, these particular Firm accounts liquidated more than 56 billion shares of microcap stocks and generated approximately $100 million of proceeds, for which the Firm received approximately $1.6 million in commissions.

The complaint details Lek’s involvement in penny stock / microcap business (emphasis mine):

18. During the Relevant Period, the Firm generated approximately $110 million in
revenue through its independent order execution and clearing services, of which approximately $5.3 million was derived from microcap stock activity — $3.6 million attributable to microcap stock trading and $1.7 million from dematerializing microcap stock certificates (i.e., converting physical stock certificates into electronic book-entry form in order for those shares to be traded and settled on the Firm’s platform).

Companies mentioned in the complaint are Daniels Corporate Advisory Co (DCAC), Cherubim Interests LLC (CHIT), New Colombia Resources Inc (NEWC), US Stem Cells Inc (USRM), Cannabis Science Inc (CBIS), Zentric (ZNTR), and First Colombia Gold Corp (FCGD).

Interestingly, the trading of one of those stocks (CBIS) was in Lek UK Omnibus Account (LUO) which “was an omnibus account controlled by a Firm affiliate and utilized to conduct trading for underlying customers located outside the U.S.”

The six causes of action listed in the complaint are as follows (in parentheses after each cause of action is shows whether it applies to Lek Securities Corp “LSC” or Samuel Lek “Lek”):

  1. FAILURE TO ESTABLISH AND IMPLEMENT A REASONABLE AML PROGRAM
    Violation of FINRA Rules 3310(a) and 2010 (LSC and Lek)
  2. FAILURE TO SUPERVISE FOR COMPLIANCE WITH SECTION 5 OF THE SECURITIES ACT OF 1933 Violation of NASD Rule 3010, and FINRA Rules 3110 and 2010 (LSC and Lek)
  3. SALE OF UNREGISTERED SECURITIES Violation of FINRA Rule 2010 (LSC)
  4. FAILURE TO CONDUCT SEARCHES PURSUANT TO SECTION 314(A) OF THE PATRIOT ACT Violation of FINRA Rules 3310(b) and 2010 (LSC)
  5. FAILURE TO CONDUCT REASONABLE AML TESTING Violation of FINRA Rules 3310(c) and 2010 (LSC)
  6. FAILURE TO PROVIDE REASONABLE AML TRAINING Violation of FINRA Rules 3310(e) and 2010 (LSC)

It appears to me that FINRA and the SEC are continuing to focus on violations relating to the deposit and sale of microcap stocks and the proper supervisory procedures to prevent such violations. See my blog posts on FINRA and SEC actions against Chardan, ICBCFS, Aegis, and Cor.

 

 

Disclaimer: I have no position in any stock mentioned. I used to be a client of COR Clearing (through Speedtrader). I have no relationship with any other 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 wins default judgment against Axiom Holdings (AIOM) boiler room pumper Eric P. Lesak

I follow stock promotions (pump and dumps) closely and have traded them (mostly short, sometimes long) for over a decade now. But there are many pumps that I ignore or never notice in the first place — the promotion (such as boiler-room cold calls) is nothing I can observe and the volume is too low for me to find it while scanning for stocks to trade. A great example of this is the boiler-room pump and dump of Axiom Holdings, which took place between December 2015 and July 2017.

According to the SEC complaint (pdf) against Eric P. Lesak and his two companies, Global Research LLC (New York) and Global Research LLC (Pennsylvania), he used cold calls to get over 100 people to buy Axiom stock worth $2.8 million:

Lesak and Global pitched Axiom stock to more than 100 investors who bought Axiom stock between December 15, 2015 and June 20, 2017. These investors purchased more than 1.9 million shares of stock for approximately $2.8 million, which led to losses of more than $2.3 million by the time trading in Axiom was suspended by the Commission in June 2017.

In this case Lesak was being paid by a stock promotion firm (that was not named in court documents). According to court documents, “Between December 2015 and June 2017, pursuant to the Consulting Agreements, Defendants were paid a total of $767,115 to induce investors to purchase Axiom Stock. ”

Axiom Holdings daily stock chart (click to enlarge)

Yesterday on November 8, 2018, the court issued a default judgment (pdf) against Lesak. See the SEC’s press release about the judgment. The full case docket can be found on CourtListener.

The judgment against Lesak and his companies:

the defendants to pay, jointly and severally, disgorgement of $767,115 plus interest of $46,644. The judgment also orders Lesak to pay a civil monetary penalty in the amount of $184,767, Global to pay a civil monetary penalty in the amount of $923,831, and prohibits Lesak from participating in any offering of penny stock for twenty-five years.

Even with much fewer big money pump and dumps than there were years ago, a lot of little pumps add up and the gullible still lose lots of money on pump and dump scams.

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. 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.

 

Vitality Biopharma (VBIO) receives SEC trading suspension

This morning just prior to the market open the SEC issued a trading suspension for Vitality Biopharma (VBIO). As of the close yesterday ($1.69 per share) the company had a market cap of $38 million. The company was purportedly investigating the use of cannabis-derived compounds as medicines.

SEC trading suspension release (PDF)
SEC trading suspension order (PDF)

The reason given for the trading suspension:

questions regarding (i) the accuracy and adequacy of publicly available information in the marketplace about the company, including undisclosed control persons and concentrated beneficial ownership of Vitality Biopharma’s common stock; and (ii) potential market manipulation in Vitality Biopharma, Inc.’s common stock.

VBIO will resume trading on the grey market (no market makers) at the open on November 21st, 2018.

VBIO was apparently promoted via Twitter ads:

 

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. 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.

COR Clearing leaves penny stock deposit business

On September 28, 2018 the SEC filed an order resulting from an administrative proceeding against COR Clearing. COR offered a settlement that the SEC chose to accept.

COR Clearing SEC Press Release
COR Clearing Order (pdf)

The settlement is “for failing to report suspicious sales of penny stock shares totaling millions of dollars.” As a result of the settlement COR will pay $800,000 and substantially cease accepting deposit of penny stock shares.

From the press release (emphasis mine):

The Securities and Exchange Commission today announced settled charges against clearing firm COR Clearing LLC for failing to report suspicious sales of penny stock shares totaling millions of dollars.  As part of the settlement, COR has agreed to exit a key penny stock clearing business by significantly limiting the sale of penny stocks deposited at COR.

Broker-dealers are required to file Suspicious Activity Reports (SARs) for transactions suspected to involve fraud or with no apparent lawful purpose.  According to an SEC alert dated March 29, 2016, microcap securities are more susceptible to manipulation and it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies.  The SEC’s order finds that in 2016, COR ranked second among all broker-dealers in the total dollar value of sub-$1 penny stocks that it cleared, and from January 2015 to June 2016, COR cleared for sale a significant amount of penny stock on behalf of customers of its introducing broker-dealers.  The SEC finds that approximately 193 customer accounts deposited large blocks of low-priced securities, quickly sold these securities into the market, and then withdrew the cash proceeds.  The SEC further finds that in some instances the same customers engaged in this suspicious pattern with multiple securities.  According to the order, COR failed to file SARs with respect to a subset of the foregoing transactions and, as a result, violated the securities laws.

“SAR filings by both introducing and clearing brokers, especially those who transact in the microcap space, are critically important to the regulatory and law enforcement communities,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The penalty imposed and the limitation placed on COR’s business reflect how seriously we take the failure to file SARs in the face of numerous red flags.”

Without admitting or denying the SEC’s findings, COR agreed to a settlement that requires it to not sell penny stocks deposited at COR with certain narrow exceptions and pay an $800,000 penalty.  COR also consented to a censure and to cease and desist from similar violations in the future.

The SEC investigation was conducted by Jorge G. Tenreiro, Elizabeth Baier, Michael Fioribello, and Sandeep Satwalekar in the New York office with assistance from the Enforcement Division’s Bank Secrecy Act Review Group.  The case was supervised by Lara Shalov Mehraban.  The SEC’s examination that led to the enforcement action was conducted by Edward Janowsky, Stephen Bilezikjian, and Dennis Koval, and supervised by Steven Vitulano of the New York office.

 

According to the order:

RESPONDENT

COR is a registered broker-dealer headquartered in Omaha, Nebraska. COR was previously known as Legent Clearing, LLC (“Legent”), which changed its name to COR Clearing LLC following its acquisition by COR Securities Holdings, Inc. (“CORSHI”) in January of 2012. Originally as Legent, COR has been registered with FINRA since June 4, 2002. COR derives the majority of its revenues from clearing and settlement of fixed income and equity securities for approximately 79 introducing broker-dealers (“IBDs”).

FACTS

Background

1. COR’s practice of accepting low-priced securities for deposit and subsequent sale on behalf of the customers of its introducing broker-dealer clients predates CORSHI’s acquisition of Legent in 2012. COR continued clearing sales of low-priced security deposits after the acquisition. In 2016, for example, COR ranked second among all broker-dealers in terms of the dollar value of shares deposited with a price of $1 per share or less at The Depository Trust & Clearing Corporation.

Relevant Regulatory History

2. In 2013, COR settled a FINRA action that resolved findings from multiple FINRA exams of Legent (the “FINRA Action”) from prior years. The FINRA Action focused on operational issues preceding the acquisition, but identified certain shortcomings in Legent’s AML program as well, including a failure to devote adequate attention to AML surveillance and the failure to identify or report suspicious activity in 2009 and in early 2012.
3. Beginning in early 2012, COR’s new management began to take a number of steps to remediate the AML issues identified in the FINRA examinations that ultimately gave rise to the FINRA Action. These steps included expanding its AML-compliance staff, and implementing an automated suspicious activity software system provided by a third party vendor. As part of the settlement with FINRA, COR also hired a consulting firm to review the state of its AML compliance program and make recommendations. Subsequently, COR hired a second consulting firm (the “Consulting Firm”) to address and implement the recommendations arising from the first firm’s review.
4. Starting in early 2015 and through the issuance of a final report in January of 2016 (the “Consulting Report”), the Consulting Firm identified, among other things, a number of areas for COR to review and improve regarding the operation of the third party automated suspicious activity software licensed by COR and COR’s understanding of how this software worked.
5. For example, the third party automated suspicious activity detection software licensed by COR used 24 separate models to identify potentially suspicious activity for SAR-filing consideration (the “AML Software”). The Consulting Report identified potential problems with the AML Software, including the potential for data being loaded incorrectly or not loaded at all into the AML Software, and advised COR of the need to clearly understand the parameters that the AML Software used to identify suspicious activity.
6. Despite its efforts to implement the Consulting Firm’s recommendations between 2015 and 2016, COR experienced persistent difficulties with the operation of its AML Software relative to flagging deposit, sale, and withdrawal (“DSW”) transactions for review.

The order later goes into detail on COR’s failures to file SARs:

COR’s Failure to File SARs
12. COR cleared for sale a significant amount of penny stock that was originally deposited by its IBD’s customers. For example, between January 2015 and June 2016, approximately 193 accounts from COR’s IBDs deposited and sold blocks of low-priced securities and withdrew cash proceeds from the sale. Each DSW transaction occurred within 30 days and in amounts over $100,000, and involved multiple penny stock sales and outgoing money transfers. Nonetheless, unless another one of the modules of the AML Software flagged the transaction activity, the Software failed to alert COR’s AML staff to review a number of DSW transactions
due to the software issues described above in paragraphs 9 through 11.
13. Below are examples of customers of COR’s IBDs who engaged in multiple DSW transactions in the same account lacking any apparent business or lawful purpose.
14. COR did not file SARs identifying the patterns and transactions described below in paragraphs 15 through 17.
15. Customer Account A
a. Between January 2015 and April 2016, an account opened at a COR IBD (“Customer Account A”) engaged in a repeated DSW pattern in at least three different low-priced securities.
b. Between January 2015 and April 2016, Customer Account A received approximately 24 physical deposits of large blocks of a certain low-priced security issuer (“Security A1”), and engaged in over 150 sales of Security A1 in the days immediately following the deposits, for a total of over 306 million shares of Security A1 deposited and over 273 million shares of Security A1 sold within this time period.
c. Between January and November 2015, Customer Account A received approximately 28 physical deposits of large blocks of a second low-priced security issuer (“Security A2”), and engaged in over 80 sales of Security A2 in the days immediately following the deposits, for a total of over 1.2 billion shares of Security A2 deposited and over 1 billion shares of Security A2 sold within this time period.
d. Between April and December 2015, Customer Account A received three physical deposits of large blocks of a third low-priced security issuer (“Security A3”), and engaged in over 25 sales of Security A3 in the days
immediately following the deposits, for a total of over 2.1 million shares of Security A3 deposited and over 2 million shares of Security A3 sold within this time period
e. In 2015 alone, Customer Account A withdrew more than $11 million from the proceeds of this activity within a short period of time after the sales of blocks of these securities.

Perhaps the most important part of the order is the Undertakings section, which goes over the steps COR will take to prevent future violations (footnote omitted from quote):

UNDERTAKINGS
22. COR undertakes to not approve for open market sale any equity security that does not trade on a national securities exchange and trades at a price of less than $5 per share at the time it is submitted to COR for sale approval; provided, however, that COR may approve for sale on the open market any such security if:
a. COR obtains and retains a trade confirmation evidencing that the securities were purchased on the open market, as opposed to having been deposited at COR or another broker-dealer;
b. The securities are exempt from the Securities Act of 1933’s (“Securities Act”) registration requirements under Section 3(a)(2) or Section 3(a)(5) of the Securities Act, or the securities are defined as “government securities” under Section 3(a)(42) of the Exchange Act;
c. The security is an unsponsored American Depositary Receipt (“ADR”); or
d. The aggregate value of the sale of the securities of any particular issue is less than $10,000 and the customer has not availed itself of this exception within the last three months in any account in the name of the customer, in which the customer has a beneficial interest as defined in 31 CFR Section 1010.230, or over which the customer has trade or signatory authority

Basically, this means that COR cannot accept new shares of OTC stocks for deposit and sale unless the securities are exempt, government securities, unsponsored ADRs, or the value of the security is under $10,000 and the customer has not deposited any other OTC shares in the prior 3 months. This does not prevent clients of COR from buying and selling OTC stocks on the open market, just from depositing new shares that have not previously been traded.

Brokers’ failures to file SARs (particularly in relation to penny stocks) have been a big issue with the SEC and FINRA lately. For example, the SEC and FINRA fined Aegis Capital in March;  the SEC fined Chardan Capital in July; the SEC and FINRA fined ICBCFS in July; and the SEC fined Schwab in July (though Schwab’s failure to file SARs did not relate to penny stocks).

My apologies for being slow to blog about this! It is no longer news but is an important development in penny stock land so I wrote it up even though it is untimely.

Disclaimer: I have no position in any stock mentioned. I used to be a client of COR Clearing (through Speedtrader). I have no relationship with any other 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 Suspends trading in Onelife Technologies Corp (OLMM) as stock is promoted for second time this year

This morning prior to the market open the SEC supsended trading in Onelife Technologies (OLMM). Back in June I blogged about the boiler room promotion of OLMM at the beginning of the year. The stock was slapped with a caveat emptor warning by OTCMarkets on March 8, 2018 and after that appears to have been abandoned by the promoters.

The caveat emptor designation was removed on August 14th 2018 and two weeks later that was followed by another round of promotion that saw the stock start trading increased volume and the share price spike from $0.15 to $0.60.

 

SEC trading suspension release (PDF)
SEC trading suspension order (PDF)

The reason given for the trading suspension:

The Commission temporarily suspended trading in the securities of OLMM because of questions regarding the accuracy and adequacy of publicly available information in the marketplace and potential market manipulation in OneLife Technologies Corp.’s common stock.

OLMM will resume trading on the grey market (no market makers) at the open on October 23rd.

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. 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 Sues two more for involvement with Nonko Trading and both also criminally charged

While I failed to blog about the proprietary trading firm Nonko Trading that gave certain clients paper-trade accounts and then just took their money when they ‘lost’ it trading, the SEC recently sued two more people who were involved in that alleged fraud and sadly both of them are from my state of Michigan.

The original lawsuit by the SEC against Nonko Trading and many people who were involved in running it was SEC v. Chamroomrat. You can see the docket of that case on CourtListener. The SEC announced winning a final judgment in that case almost a year ago.

The final judgment, entered on September 18, 2017 by the Honorable Kevin McNulty of the U.S. District Court for the District of New Jersey, permanently enjoins Naris Chamroonrat, of Bangkok, Thailand, from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 15(a)(1) and 20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and orders him liable for disgorgement of $918,147.31, plus interest of $71,549.24, the payment of which is deemed satisfied by the restitution ordered in the parallel criminal case. Chamroonrat, who pled guilty in a parallel criminal case, is awaiting sentencing

The new lawsuit is against Jeffrey Goldman and Christopher Eikenberry. See the case docket on CourtListener. Read the complaint (pdf). In addition to the SEC lawsuit, Eikenberry and Goldman are facing criminal charges, just announced by the US Attorney’s Office for the District of New Jersey.

Excerpt from the SEC complaint:

1. This case concerns Defendants Goldman’s and Eikenberry’s participation in an illegal scheme to establish and operate an offshore broker-dealer, Nonko Trading (“Nonko”), without the necessary registration and later to defraud Nonko’s customers by providing them with fake trading accounts and stealing funds that these customers deposited with the firm. The scheme resulted in at least $1.4 million in net losses to over 260 investors in over 30 countries worldwide, including over 180 investors in the United States.
2. Between 2011 and early 2013, Goldman and Eikenberry, who both had extensive experience in day-trading operations, helped their associate Naris Chamroonrat (“Chamroonrat”) to establish Nonko as a purported offshore proprietary trading firm that would secretly cater to U.S.-based day-traders while also evading the U.S. broker-dealer registration requirements. Once Nonko was established, starting in late 2013, Goldman and Eikenberry worked with Chamroonrat and his Nonko associates to develop and execute a fraudulent scheme to pocket Nonko’s customer deposits by secretly providing certain customers with fake accounts instead of real ones.
3. As alleged in the SEC’s Amended Complaint against Chamroonrat and his Nonko associates Yaniv Avnon (“Avnon”), Ran Armon (“Armon”), and Adam Plumer (“Plumer”), as well as Avnon’s entity G Six Trading Y.R Ltd (“G6”) and Chamroonrat’s entity NKO Holdings Co. Ltd, the Nonko team lured investors to day-trade through Nonko with promises of generous leverage, low trading commissions, and low minimum deposit requirements. But instead of providing investors with access to a live securities trading platform, as it had promised, the Nonko team secretly provided certain investors with training accounts that merely simulated the placement and execution of trade orders. So when these investors sent funds to Nonko and proceeded to place what they believed were securities trade orders, the orders were never actually routed to the markets. Instead, the Nonko team simply stole the investors’ money, using it, among other things, to fund their personal expenses and to make Ponzi-like payments to those investors who asked to close their Nonko accounts.
4. As set forth below, Goldman and Eikenberry were knowing and substantial participants in the training accounts fraud, providing the rest of the Nonko team with extensive guidance and direction, including on the specific lies that the Nonko team should tell investors in order to evade detection. Goldman and Eikenberry also provided the Nonko scheme with operational and back-office support.
5. Goldman and Eikenberry deliberately concealed their involvement with Nonko by, among other things, avoiding direct contact with Nonko’s customers and inserting multiple intermediary entities, both offshore and domestic, between Nonko and themselves.
6. For their roles in the scheme, Goldman and Eikenberry collected an agreed-upon portion of the fraud’s proceeds, which they funneled to themselves through bank accounts of the intermediary entities.

See the announcement of criminal charges. Linked from that page are the Goldman indictment (pdf) and the Eikenberry information (pdf). From the announcement:

Christopher D. Eikenberry, 49, of Birmingham, Michigan, pleaded guilty before U.S. District Judge Jose L. Linares in Newark federal court to an information charging him with one count of conspiracy to commit securities fraud.

Jeffrey E. Goldman, 52, of West Bloomfield, Michigan, who was arrested today in Michigan, is charged by indictment with one count of conspiracy to commit securities fraud and one count of wire fraud. He is scheduled to appear today before U.S. Magistrate Judge David Grande in Detroit federal court.

The conspiracy count carries a maximum potential penalty of five years in prison and a $250,000 fine, or twice the gain or loss from the offense. The wire fraud count carries a maximum potential penalty of 20 years in prison and a $250,000 fine, or twice the gain or loss from the offense. Sentencing for Eikenberry is scheduled for Dec. 12, 2018.

I should point out that this kind of fraud would likely not have occurred were it not for the stupid pattern day trader (PDT) rule that prevents people with accounts smaller than $25,000 from making more than 3 day-trades in any five business-day period. Without that rule there would be little to no interest in offshore brokers and proprietary trading firms.

 

Disclaimer: I have no position in any stock mentioned above. I have no relationship with any parties mentioned above except that one of the trading platforms I use is DAS Trader Pro and that is owned by DAS which is the company that alerted the traders that the accounts they were using were paper-trading accounts. 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 Sues Ovations Holdings Inc (INOH) and its CEO for false press releases

On September 5th, 2018 the SEC announced a lawsuit against In Ovations Holdings, Inc (INOH) and the company’s CEO Mark Goldberg for filing allegedly false press releases from January 2015 to October 2015.

SEC v. In Ovations Holdings & Mark Goldberg complaint (pdf)

The lawsuit was filed in the Eastern District of New York in Federal Circuit Court. You can see the docket for free at CourtListener.

From the complaint, see the (alleged) facts of the case:

11. During the Relevant Period, Ovations issued at least seven false or misleading press releases about its business.
12. On information and belief, Goldberg, as Ovations’ CEO, generated each of these press releases himself and caused Ovations to issue them.
13. Goldberg did so to fraudulently induce investors to buy shares of Ovations stock so that one or more stock promoters could sell their Ovations shares in the market for a profit.
14. Goldberg knew or recklessly disregarded the falsity or misleading nature of each of these press releases.
15. On information and belief, Goldberg received approximately $250,000 in return from one or more stock promoters at least partly for Goldberg’s role in issuing Ovations’ false or misleading press releases.

This looks like a pretty standard false press release case. The only interesting thing is the use of the “on information and belief” for the alleged payment to Goldberg from stock promoters. Basically that phrasing indicates that the SEC doesn’t have clear evidence of the payment. It is unfortunate that the SEC doesn’t name the stock promoters but if they had to use the “on information and belief” language to state that they believe there was a payment then they certainly didn’t have enough information to name and sue any involved stock promoters.

 

Disclaimer: I have no position in any stock 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.

Avalon Holdings Corp Sues Mintbroker International and Guy Gentile

The story of MintBroker International buying up large stakes in microcap companies and quickly selling them continues. I previously wrote about MintBroker filings SEC forms 3 and 4 reporting large stakes in New Concept Energy (GBR), MER Telemanagement Solutions (MTSL), and Avalon Holdings Corp (AWX). In that post I speculated on the potential profit MintBroker might have made on those trades using the average prices for share sales and guesses on the average prices on the buys. My conservative estimate for the AWX trades was a loss of $963,037 for MintBroker. However, MintBroker filed a new SEC form SC 13D last night listing all the trades in AWX from July 24th to August 1st, 2018. The trades are in an attachment to the form SC 13D.

I copied and pasted the table of AWX trades by MintBroker into a Google Sheets spreadsheet that anyone can view (only I can edit it). Please do check out the spreadsheet and see if I have made any errors. I counted a total of 2,680,759 shares of AWX bought and 2,686,047 shares sold over that period, which leaves 5,288 more shares sold than bought. This is possibly an error on my part or MintBroker’s part or possibly they bought those shares prior to July 24th. Regardless of the reason for the missing 5,288 shares, they don’t substantially change the calculation of MintBroker’s profit on the trades. As you can see in the spreadsheet I calculated that the average price of shares bought was $4.10 while the average price of shares sold was $6.41. Using the number of shares bought I calculated a total profit (after trading fees reported by MintBroker) of $6,202,596.22 (with uncertainty of about $20,000 based on the 5,288 missing shares). Needless to say my estimate of profits was way off and I likely badly underestimated MintBroker’s profits on the GBR and MTSL trades as well.

One trader I know of plotted all the buys and sells in Tradervue charting / trade analysis software. I have not verified his analysis but it is worth looking at:

Besides calculating the profit, I was also able to easily calculate the number of shares held by MintBroker at the end of each day (by just adding up the shares in all the trades for each day). They are as follows:

July 24: 549,252
July 25: 1,142,961
July 26: 1,593,674
July 27: 1,721,628
July 30:  998,954
July 31:   197,354
August 1: -5,288

As you can no doubt tell by the negative position at the end of August 1st, my calculated MintBroker position at the end of each day is off by up to 5,288 shares.

Below is a daily chart of Avalon’s stock price:

As of August 3rd (per the company’s August 9th Form 10-Q) Avalon Holdings “had 3,191,100 shares of its Class A Common Stock and 612,231 shares of its Class B Common Stock outstanding.” On July 27th, 2018 at 5:47pm MintBroker filed an SEC Form 3 showing direct ownership of 1,922,095 shares with the “date of event requiring statement” being 7/27/2018. But by my calculations based on MintBroker’s own data filed in the form SC 13D yesterday they owned over 10% of the shares of Avalon Holdings as early as July 24th.

I did not mention it in my prior blog post about Avalon Holdings and the other companies whose stock was traded by MintBroker, but there is an SEC rule called the “short swing profit rule“. Here is Investopedia’s definition:

The short-swing profit rule is a Securities & Exchange Commission regulation that requires company insiders to return any profits made from the purchase and sale of company stock if both transactions occur within a six-month period. A company insider, as determined by the rule, is any officer, director or holder of more than 10% of the company’s shares.

Securities lawyer Brenda Hamilton has a more detailed explanation (pdf). From Hamilton’s article:

Q. What remedies exist for Section 16 violations?

A. If an Insider violates Section 16, he or she must surrender their profits to the company.

How does the company obtain the profits from the insider? From Legal And Compliance LLC (pdf):

Any “profit,” whether inadvertent or intentional, realized by matching a purchase and sale within a six-month period is recoverable by the company. If the company fails to recover such profit, any shareholder of the company may sue to recover it on behalf of the company. Forms 3, 4 and 5 filed with the SEC are publicly available and are routinely monitored by attorneys who make their living by threatening to file Section 16(b) suits on behalf of shareholders. In the event of a violation of Section 16(b) by an insider, these attorneys are generally able to compel the company and/or the offending insider to pay their fees and expenses if the company had not acted to obtain restitution of the deemed “profit” from the insider prior to receiving a communication from the attorney.

On August 13th, Avalon Holdings filed suit against MintBroker International and Guy Gentile (its owner). Read this article from The Business Journal Daily for details and quotes from the CEO of Avalon. The lawsuit is Avalon Holdings Corporation v. Gentile (1:18-cv-07291) in U.S. District Court, Southern District of New York. CourtListener has the docket and the complaint (pdf) available for free. The lawsuit’s second claim is for short swing trading profits. According to the suit, “Profits are estimated to exceed $5,000,000.” The first claim in the lawsuit is for “Williams Act Compliance.” According to the complaint:

28. MINTBROKER and the other defendants have at no time to the present complied with their reporting obligations by filing a Schedule 13D and amendments thereto from the actual date of first entry into a more-than-5% beneficial ownership position to the date of their claimed liquidation of their position.

29. AVALON has no adequate remedy at law and invokes the equity powers of this court to enjoin MINTBROKER, GUY GENTILE and the other defendants to make such filings forthwith including in such filings complete and truthful responses to all questions including a detailed enumeration of purchases and deemed purchases and sales and deemed sales.

MintBroker and Guy Gentile have not yet filed an answer to the complaint.

 

Disclaimer: I have no position in any stock mentioned above. I have no relationship with any parties mentioned above except that one of the trading platforms I use is DAS Trader Pro and it may be partially owned by Guy Gentile (I am not sure). 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.

Scottsdale Capital Advisors Sues me

Scottsdale Capital Advisors (referred to here and in many court filings as SCA) sued me personally and my company, MorningLightMountain LLC (referred to here and in many court filings as MLM), in The Kalamazoo County Circuit Court in Michigan. My lawyers removed it to federal court (Scottsdale Capital Advisors Corp. v. MorningLightMountain, LLC (1:18-cv-00533) U.S. District Court, W.D. Michigan) and then agreed with SCA’s lawyers to remand it back to state court. You can see all the initial filings and the filings that happened at the federal level for free at the Court Listener website:

https://www.courtlistener.com/docket/6627318/scottsdale-capital-advisors-corp-v-morninglightmountain-llc/

Full federal case docket
(Note that the links that are not PDFs are OCR text of the filings performed by CourtListener.com and will have errors):

1. May 11, 2018 Main Doc Notice of Removal Download PDF

Att 1 Exhibit 1 – Summons & Complaint Download PDF

Att 2 Exhibit 2 – First Amended Complaint Download PDF

Att 3 Exhibit 3 – State Court Register of Actions Download PDF

Att 4 Exhibit 4 – FINRA Amended Extended Hr’g Panel Decision Download PDF

Att 5 Exhibit 5 – Scottsdale Schedule of Commission & Fees Download PDF

Att 6 Exhibit 6 – Proof of Service for Notice of Removal Download PDF

2. May 14, 2018 Main Doc Notice Regarding Assignment of Case Download PDF

3. May 14, 2018 Main Doc Corporate Disclosure Statement Download PDF

4. May 18, 2018 Main Doc Stipulation and Order (Proposed-one document) Download PDF

 

Kalamazoo County Circuit Court does not yet allow the public electronic access to court records. To keep my readers updated, I will be posting a copy of the register of actions (docket) every so often as well as posting scans of all documents publicly available in the case.

The case is 2018-0153-CZ in the Civil Division of the Ninth Judicial Circuit Court of the State of Michigan.

Scottsdale Capital Advisors Corp.

v

Does 1-10
Michael Goode
MorningLightMountain, LLC

Michigan State case register of actions (2018-0153-CZ)

Register of Actions as of 11/19/2018 (PDF)
[All links below are to PDF files]

4/16/2018 – Summons and Complaint – Civil – New Filing
Service To: Defendant MorningLightMountain, LLC; Defendant Goode,
Michael; Defendant Does 1
10

4/17/2018 – Notice of Review by Business Court Judge

4/20/2018 – Amended Complaint
Party: Plaintiff Scottsdale Capital Advisors Corp.

5/11/2018 – Notice of Removal to Federal Court
Party: Plaintiff Scottsdale Capital Advisors Corp.; Defendant MorningLightMountainLLC; Defendant Goode, Michael; Defendant Does 110
[This is the same as the notice of removal filed in the federal case; the exhibits are not included in this scan because they were included with the federal case linked above]

5/25/2018 – Stipulation with Order Regarding:
Fixing Deadline to Response to First Amended Complaint

5/25/2018 – Substitution of Attorney and Order
Party: Plaintiff Scottsdale Capital Advisors Corp.

5/29/2018 – Court of Appeals- Supreme Court – Remand for:
Remanded from the Western Distict of Michigan

6/7/2018 –  Answer to Amended Complaint
Party:
 Defendant MorningLightMountain, LLC; Defendant Goode, Michael

6/7/2018 –  Motion for Summary Disposition
Party: Defendant MorningLightMountain, LLC; Defendant Goode, Michael
First Amended Complaintwith Brief in Support

6/7/2018 –  Praecipe

6/7/2018 –  Proof of Service

6/7/2018 –  Notice of Scheduled Proceeding
on Defendants Motion for Summary Disposition

6/27/2018 – Civil Proceedings Scheduling Order MCR 2.401
Party: Plaintiff Scottsdale Capital Advisors Corp.; Defendant MorningLightMountain, LLC; Defendant Goode, Michael

8/2/2018 – Stipulation
Stipulation to Amend Scheduling Order

8/14/2018 – Adjournment Stipulation and Order
Party: Plaintiff Scottsdale Capital Advisors Corp.; Defendant MomingLightMountain, LLC; Defendant Goode, Michael; Defendant Does 110
to Amend Scheduling Order

8/15/2018 –  Notice of Scheduled Proceeding

8/17/2018 –  Response to: (Specify)
Party: Plaintiff Scottsdale Capital Advisors Corp.
in Opposition to Motion for Summary Disposition of First Amended Complaint

8/17/2018 –  Proof of Service
Reply in support of Defendants’ Motion for Summary Disposition of First Amended Complaint

8/20/2018 –  Response to: (Specify)
Party: Defendant MomingLightMountain, LLC; Defendant Goode, Michael
Reply in support of Defendants‘ Motion for Summary Disposition of First Amended Complaint

8/20/2018 –  Proof of Service
on Plaintiffs Response in Opposition to Motion for Summary Disposition of First Amended Complaint

8/20/2018 –  Motion for Pro Hac Vice 
Plaintiffs Motion for Temporary Admission of Out of State Attorney, Nicholas A. Kurtz with supporting documentation

8/20/2018 –  Proof of Service
on Plaintiffs Motion for Temporary Admission of Out of State Attorney, Nicholas A. Kurtz with supporting documentation

8/21/2018 –  Order for Pro Hac Vice
as to Nicholas A. Kurtz

8/22/2018 – Motion for Summary Disposition (9:00 AM) (Judicial Officer: Lipsey, Alexander C.)
Events: 06/07/2018 Motion for Summary Disposition

9/14/2018 – Notice of Scheduled Proceeding
Amended Trial date – original set for the wrong date

9/18/2018 – Proof of Service
Plaintiffs First Set of Interrogatories to Defendants; Request for Production to Defendants

10/4/2018 – Opinion

10/9/2018 – Miscellaneous Filing
Notice of Withdrawal of Plaintiffs Counsel Nicholas A. Kurtz
10/09/2018

10/9/2018 – Proof of Service
of Notice of Withdrawal of Plaintiffs Counsel Nicholas A. Kurtz

10/22/2018 – Transcript
Motion for Summary Disposition Wednesday, August 22, 2018

10/22/2018 – List of Witnesses that may be Produced
Party: Plaintiff Scottsdale Capital Advisors Corp
.

10/22/2018 – Proof of Service
of Plaintiffs Witness List

10/22/2018 – Proof of Service
Served” Defendants’ First Interrogatories, and First Request for Records

10/22/2018 – Proof of Service
Defendant‘s Answers to Plaintiff’s First set of Interrogatories and Request for Production

10/25/2018 – Motion for Reconsideration Relief from Judgment
Party: Defendant
MorningLightMountain, LLC; Defendant Goode, Michael
with Proof of Service

10/25/2018 – Order Denying Motion for Reconsideration
Order Denying Defendants’ Motion for Reconsideration with proof of service

10/30/2018 – Return of Document
Party: Defense
Attorney Pinsky, H Rhett

11/13/2018 – Amended Complaint
Party: Defendant
MorningLightMountain, LLC; Defendant Goode, Michael
Defendants‘ Consent for Plaintiff to File Second Amended Complaint with Reliance on Jury Demand

11/13/2018
Proof of Service
of DefendantsConsent for Plaintiff to File Second Amended Complaint and Plaintiff’s Second Amended Complaint and Reliance on Jury Demand

11/15/2018 – Answer to Amended Complaint
Party: Defendant MorningLightMountain, LLC
; Defendant Goode, Michael
Answer to PlaintiffsFirst Amended Complaint with Affirmative and Other Defenses and
Reliance on Jury Demand

11/15/2018 – Motion for Summary Disposition
Party: Defendant MorningLightMountain, LLC
; Defendant Goode, Michael
of Second Amended Complaint

11/15/2018 – Brief – Memorandum
Supporting Motion for Summary Disposition of Second Amended Complaint

11/15/2018
Praecipe

11/15/2018 – Proof of Service
of Motion for Summary Disposition of Second Amended Complaint, Answer to Plaintiffs First
Amended Complaint with Affirmative and Other Defenses

11/15/2018 – Notice of Scheduled Proceeding
of Motion for Summary Disposition scheduled for December 6 @ 1:30 pm

12/06/2018  – Motion for Summary Disposition
(1:30 PM) (Judicial Officer: Lipsey, Alexander C.)
Events: 11/15/2018 Motion for Summary Disposition

2/6/2019 –  Settlement Conference (1:30 PM) (Judicial Officer: Lipsey, Alexander C.)
Events: 08/14/2018 Adjournment Stipulation and Order
12/26/2018 Continued to 02/06/2019 Stipulation and Order Scottsdale Capital Advisors Corp.; MorningLightMountain, LLC; Goode, Michael; Does 1-10

4/9/2019 –  Civil Jury Trial (9:00 AM) (Judicial Officer: Lipsey, Alexander C.)
Events: 08/14/2018 Adjournment Stipulation and Order
01/15/2019 Continued to 04/16/2019 Stipulation and OrderScottsdale Capital Advisors Corp.; MorningLightMountain, LLC; Goode, Michael; Does 110

 

 

[Filings and state case register of actions last updated 11/19/2018]

 

Due to the litigation I will not be providing my opinion on this case or on any of the parties involved so please do not ask.

 

Disclaimer: I and MorningLightMountain LLC of which I am the sole member are being sued for defamation and false light invasion of privacy by Scottsdale Capital Advisors. 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.