Snitches get riches: Inform on stock fraudsters to make a lot of money

One question I always get asked is: “How can I make money in penny stocks?” The answer I always give is that outside of becoming a stock promoter (which I obviously do not recommend), the easiest way to get rich in penny stocks is to steal money from stock promoters and the insiders who put together companies for the sole purpose of being promoted. The most successful of those individuals almost invariably have secret overseas bank and brokerage accounts that they use to sell their shares and avoid detection. Obviously, my recommendation to steal from them is not serious. However, there is a perfectly legal and ethical way to take their money: inform on them to the government. The methods they use to conceal their fraud require more people to know about their fraud. Each bank or brokerage employee that knows about an account being used to liquidate large positions in a pump and dump is a potential whistleblower. And with the SEC’s new whistleblower program, those individuals can be well compensated for informing the SEC about stock fraud.

The SEC has indicated that it is making good use of its new power to compensate whistleblowers:

  Within the Miami office, Bustillo continued, the enforcement and examinations programs work in close collaboration—a partnership that has given rise to “many of our most important cases.” In addition, the office also handles a number of cases based on TCR—tips, complaints, and referrals.

In gearing up for the launch of its whistleblower bounty program, the commission established a single, searchable database system of records for the tips, complaints, and referrals it receives about possible securities law violations. Bustillo explained that the new TCR system was intended to allow staff to “connect the dots” more quickly as information comes into the system. As such, “what looked like a very small fraud cases can quickly be identified as a much larger scheme.”

TCRs “have quickly become a great source of … cases for all of our regional offices,” and for headquarters, Bustillo said.

Similarly, the whistleblower program has become a great source of sound, actionable information that is allowing enforcement staff much more quickly to identify cases that might otherwise have gone undetected—cases in which the fraud “is of such a nature that unless somebody actually points it out to us, is very difficult to recognize.”

(The above is from the Bloomberg Newswire article “Suits Against Gatekeepers Likely In Microcap Arena, Bustillo Says,” by Phyllis Diamond. Read more here.

Perhaps more useful for informers than the SEC whistle-blower program is the IRS whistle-blower program. Most individuals who commit stock fraud will also commit tax fraud because they will not report their income in overseas accounts that they use to sell their shares in promoted companies. The IRS has more manpower and resources than the SEC and fines for tax fraud are much higher. Consequently, awards to whistle-blowers can be quite high. So I encourage anyone with evidence of hidden insider selling of shares in promoted companies to find an experienced tax whistle-blower lawyer and file a claim/complaint with the IRS.

A recent example of an IRS tax fraud case against penny stock insiders is the case against Stephen Kerr and Michael Quiel, who were recently convicted of selling millions of shares of SEFE in foreign accounts and not reporting the proceeds to the IRS.

From the April 12th Justice Department press release:

A jury convicted Stephen M. Kerr and Michael Quiel yesterday on federal tax charges stemming from their failure to disclose secret offshore bank accounts in Switzerland, the Justice Department and Internal Revenue Service (IRS) announced. Kerr and Quiel, prominent Phoenix businessmen, were each convicted of two counts of filing false individual income tax returns for 2007 and 2008. Kerr was also convicted of two counts of failing to file a Report of Foreign Bank and Financial Accounts (FBAR). San Diego attorney Christopher M. Rusch had previously pleaded guilty to conspiracy to defraud the government and failing to file an FBAR on Feb. 6, 2013.

According to the evidence presented at trial, Kerr and Quiel, with the assistance of Rusch and others, including Swiss nationals, established nominee foreign entities and corresponding bank accounts at UBS AG and Pictet & Cie to conceal Kerr and Quiel’s ownership and control of stock and income that were deposited into these accounts. Rusch testified at trial, admitting that he and others caused the sale of the shares of stock through the undeclared accounts. Kerr also hired Rusch to facilitate the domestic sale of 11.4 million shares of stock held in the name of a foreign entity controlled by Kerr and to transfer the proceeds from the sale of the stock to an undeclared foreign account at UBS AG to conceal that the money was income to Kerr that should have been reported on his tax returns.

For more information, see:

IRS whistle-blower website
SEC whistle-blower website

Disclaimer: I have no position in any stock mentioned above and no relationship with any parties mentioned above. I have never acted as a whistle-blower for either the IRS or SEC and I do not know anyone who has. 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.

9 thoughts on “Snitches get riches: Inform on stock fraudsters to make a lot of money”

  1. Right on the money. On my website, I am pitching to another, broader group of potential tipsters: those who are approached with offers to participate in schemes “too good to be true,” often Ponzi schemes. The off-market frauds are often spread through churches, senior groups, county club’s etc. and there are always pleanty of people who are too smart to participate even if they don’t suspect the scheme is fraudulent. Those people have valuable information for the SEC, IRS, etc. because usually the representations made by the promoters can easily be proven to be false. In short, people who are approached and refuse to invest have critical information which is often sufficient to make the case. Moreover the likelihood that tips against on-going offering frauds pay-off for the whistleblower is fairly high. The SEC usually begins cases against on-going offering frauds seeking a TRO and asset freeze and generally result in judgments larger than $1 million, the threshold for recovery. Since they begin with frozen assets, there will a collection at the end of the case to measure the size of the whistleblower award.

    While your suggestion that people with knowledge of trading, or even overseas trading is a good one, the likelihood of those sorts of claims paying off is substantially lower. Off-shore money is much harder to collect, and almost by definition the promoters have hidden their loot through nominee accounts which may require additional lawsuits to collect. For these and other reasons, even good whistleblower tips about pumps and pumps may have little value.

    While I am not as familiar with IRS whistleblower rules as I am with the SEC’s, I believe that collect from the IRS they also have to collect on tax liabilities over $ 1 million. So you have the same collection problem with tips to the IRS. Go to my website if you want a more complete description of the SEC whistleblower process or get in touch with me.

    Alex Rue

    1. In the case of a scam company like SKTO I don’t think any person using public information could claim a whistle-blower award. Anyway, I am sure nodummy sent his research to regulators. It still boggles my mind that the stock is still trading.

  2. Over 90 percent penny stocks are scams. You guys need to get a daily pump to dump watch list… So you know which penny stocks to stay away from…

  3. Whistleblowers who provide the IRS evidence of unpaid taxes in excess of $2 million are entitled to collect up to 30% of the sum recovered. Rewards are smaller for cases involving less than $2 million.

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