SEC sues alleged stock manipulators behind BlueFire Ethanol (BFRE) and other pump & dumps

BlueFire was one of the first pump and dumps I observed. Below is the chart. Guess where the pump and dump occurred.

bfre

Here is the summary from the SEC’s litigation release:

The Securities and Exchange Commission today filed a complaint against Blake Williams of Dallas, Texas, and registered representative Derek Lopez, of Torrance, California, and numerous entities that they controlled, alleging that they committed securities fraud by manipulating the markets of numerous microcap stocks from 2006 to 2008. The Commission alleges that the defendants sold stock in unregistered offerings and that their subsequent manipulation led to artificially high prices and volume, which allowed the defendants and others to sell their holdings for substantial gains. The complaint also alleges that Williams acted as an unregistered broker-dealer when he solicited purchases of stock and traded on behalf of investors who bought stock from him.

The Commission’s complaint alleges that Williams, using five entities that he controlled, and Lopez, using the entity Da Big Kahuna, LLC, engaged in a number of manipulative practices, including:

  • engaging in “bid support” by placing orders for shares at prices below the inside (highest) bid to absorb sell orders and create an artificial floor for the stocks;
  • trading in multiple accounts through multiple brokers to give the false impression that there was greater demand for the stocks than truly existed;
  • coordinating trading among a group of individuals for the purpose of maintaining stock prices; and
  • obtaining securities in unlawful, unregistered offerings and then selling the securities to investors and into the markets in similarly unregistered and unlawful transactions

Here are some details on which companies were affected, from the SEC’s legal complaint (pdf):

53. Williams and the Williams Entities participated in the manipulation of the stocks of at least a dozen issuers (Advanced Growing, Axium, Bluefire, Datascension, Interlink, Medirect Latino, National Automation, Packaged Home, Pet Ecology, Remote Surveillance, Riverdale, and Straight Up).
54. Lopez and Da Big Kahuna participated in the manipulation of at least eight stocks (Axium, Bluefire, Interlink, Packaged Home, Pet Ecology, Straight Up, National Automation, and Remote Surveillance).
55.
The defendants used a variety of methods to manipulate the markets for the targeted stocks including, “bid support,” controlling the float, coordinated trading, and trading in multiple accounts.

I find the details of how the alleged manipulation took place to be especially enlightening:

A. Bid Support
56. The defendants and others engaged in what they referred to as “bid support.” This conduct involved layering orders at or near the best bid and ask prices with the intent to stabilize or increase share prices.
57. The defendants placed buy orders for stock at prices immediately below the “inside,” or highest, bid price posted by the market makers. For example, if the highest bid posted by a market maker was $1.50, the defendants might place orders at $1.45, $1.40, and $1.35, often for small amounts of stock.
58. These orders had two purposes. First, the defendants intended to create an artificial floor price for the stock when there was increased selling in the market; the defendants expected that the supporting orders would absorb some of the sell orders so that the stock prices would not fall dramatically. Second, the defendants placed the orders through different brokerage firms so that market participants would see a substantial number of bids and conclude that there was greater demand for the stocks than truly existed.
B. Controlling the Float and Coordinating Trading
59. The overall manipulation strategy relied upon controlling the “float”—the total shares available for investors to trade for a particular stock. As part of the scheme to distribute shares in unregistered offerings, the defendants and others ensured that the majority of shares without restrictive legends were controlled by the group.
60. The defendants and other participants in the scheme controlled the float so that shares would not be “dumped” into the market indiscriminately while they were selling their shares into the market.
61. As described above, the individuals who bought shares from the Williams
Entities had their shares pooled for some initial period (typically 30 to 60 days) and Williams traded their shares during this lock-up period.
62. The defendants and others engaged in coordinated trading to deceive the markets and extract profits from artificially high stock prices. This was accomplished by, among other things, selling in times of increased volume and price and not selling in times of low prices and/or volume.
C. Trading in Multiple Accounts
63. The defendants traded through several different brokerage firms using multiple accounts. This practice gave the impression of market depth to those looking at the market on a “Level II” or “Level III” screen, which identifies the market makers that are originating bids. Additionally, trading spread over many brokerage firms might avoid “red flags” with brokerage houses if large amounts of stock were deposited via stock certificates, thus concealing the fraud.
64. Williams traded stock on behalf of the Williams Entities and in his own name through accounts at multiple brokerage firms. Williams often deposited shares across the numerous accounts to avoid scrutiny and purportedly to ease the “clearing process.”
65. For instance, in the case of Axium, Williams directed the transfer agent to issue stock certificates to TBeck Capital, Victoria Financial, Valek Investments, Warren Street, and himself. An email from another individual to Williams said, “distribute free trading stock to 3 brokerage firms. Remember that the small cert[ificate]s go out first. Don’t send Lampost [Brokerage] any Victoria shares since they think I am on too many accounts.” Valek Investments’ one million Axium shares were issued in twenty certificates of 50,000 shares each. As part of depositing these numerous certificates across all of the accounts, Williams told one of his brokers, “I thought I would deposit one 50,000 share cert[ificate] into each account to make sure y’all are comfortable before I drop the bigger ones in.”
66. Similarly, Lopez traded securities at both his employer and “away” from his employer (in accounts at other firms), and traded in both his own name and in the name of Da Big Kahuna. Lopez made efforts to hide his activities on behalf of Da Big Kahuna from his employer by not properly designating them as “related” accounts. Moreover, the accounts for Da Big Kahuna are listed in the name of one of Lopez’s relatives even though Lopez controlled the trading in those accounts.

Disclosure: No positions in any stocks 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.

0 thoughts on “SEC sues alleged stock manipulators behind BlueFire Ethanol (BFRE) and other pump & dumps

  1. From the above-quoted SEC legal complaint, why you should never rely solely on level 2 on OTC stocks:
    “A. Bid Support
    56. The defendants and others engaged in what they referred to as “bid support.” This conduct involved layering orders at or near the best bid and ask prices with the intent to stabilize or increase share prices.
    57. The defendants placed buy orders for stock at prices immediately below the “inside,” or highest, bid price posted by the market makers. For example, if the highest bid posted by a market maker was $1.50, the defendants might place orders at $1.45, $1.40, and $1.35, often for small amounts of stock.
    58. These orders had two purposes. First, the defendants intended to create an artificial floor price for the stock when there was increased selling in the market; the defendants expected that the supporting orders would absorb some of the sell orders so that the stock prices would not fall dramatically. Second, the defendants placed the orders through different brokerage firms so that market participants would see a substantial number of bids and conclude that there was greater demand for the stocks than truly existed.”

  2. I mean, if they were acting as market makers then that was a high level scam. This article seems to justify why I don’t trade these stocks- if you can’t even trust the way it’s trading then that is one more burden you have to deal with. That’s different than a sketchy company that is trading way above its valuation but all the trades are legitimate.

    But, I guess you have a system that works most of the time minus the occasional big loss.

  3. dang, this has been going on forever with 100’s in not 1000’s of names.

    nice to see the SEC has at least 1/2 a clue.

    who didn’t know this was going on?

  4. Nice post, This is a must-read, know your enemy, I think that a lot of people that plays these stocks don’t even know how the scammers manipulate these stocks. Damn, I’d never seen a chart like this nowadays.

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