OTC Pump & dumps are not dead: GESI pumped via Google Ads

With 340 million shares outstanding, General European Strategic Investments Inc (OTC: GESI) boasts a market cap of $1.6 billion. There are only 37 million unrestricted shares though so that limits how many can be dumped. As always, look at the volume on the chart to see when it started to get promoted (probably mid-April after some wash-trading early in the month).

Is the company in on the pump or do they not have a clue? There is even less chance of figuring that out than usual because the pump page I found doesn’t have a disclaimer to say who owns it or who paid for the pump.

You can find the pump page by searching Google for “penny stocks” and clicking advertisements, one of which will take you to https://world-financial-times.com/?p=3790 The pump page itself is bare bones with few details.

Screenshot of pump page

One nice little feature of the URL setup of The-FinancialNews.com is they can and do change the page number that the same pump page is located on. Back on April 25th the same pump page was located at https://www.the-financialnews.com/?p=3886 (which is now no longer a functioning link).

As usual, the eventual outcome of this is preordained: massive drop in the stock price that sees foolish buyers lose over 99% if they hold long-term.

OTCMarkets.com does not currently show that GESI is being promoted.

Disclaimer. No positions. I may close or add to positions at any time. 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.

Update on my trading computer

[Updated 2021-3-15 with picture with new monitor and update to CPU.] I last wrote about my trading computer back in 2016 and I just updated it so here is an updated post about it. Not much has changed but there are a few key improvements. The monitors are the same, except that I bought a Viewsonic 43″ monitor to replace my two right-most monitors. One problem with this specific monitor is the VESA mounting holes are towards the top of the monitor so if mounted in portrait mode it tends to tilt to the side (hence the books under it). Another downside of using such a large, flat monitor is that the far edges suffer some perspective distortion from me looking at them from an angle. I think perhaps the ideal setup would be four ultrawide curved monitors, such as this 49″ monitor from Monoprice.

While having more monitors and a faster computer can improve one’s efficiency, they matter not at all if a trader doesn’t have a good trading strategy and the ability to stick to that strategy. Keep that in mind! Beginning traders should not go out and buy a computer just for trading — anything that runs decently fast for basic computing should work fine for running one or two trading platforms.

I have 7 monitors, with the bottom center two monitors being the same ones from 7 years ago (24″ touchscreens); the rest of the monitors are 22″ to 24″ monitors of various makes. Frankly, monitor quality doesn’t matter for trading so a cheap monitor of decent quality is fine. My monitor stands are a hodge-podge and if I did this over again I would make the monitors all the same and put more thought into proper monitor stands. I have Ergotron quad-monitor stands holding the four bottom monitors. Each of the upper-row monitors is held by its own Atdec monitor pole (when I bought these they were half the price they are now; they are not the most stable).

Besides the monitors, the most important part of my computer (not shown) is the APC Pro 1000 UPS — If I lose power I want to be able to have enough time to close out day-trade positions. I have only two monitors and the CPU on the UPS. I have a separate UPS for my internet router and wifi access point. If my internet goes down I can turn my cell phone into a wifi hot spot to quickly reconnect.

As to the guts of the computer, I just upgraded from something that was way overpowered (a 14-core Xeon server processor) to something even more overpowered (AMD Ryzen 5900x). I did not need to upgrade the CPU but it is a good idea to do a clean install of Windows every few years so I used that as an opportunity to upgrade the hardware. Keep in mind that I do some things that are very CPU-intensive that most other traders never do. Here are the specs:

CPU: AMD Ryzen 9 5950x 16-core (MSRP $799) – All the current-generation AMD processors are in short supply and sell out in minutes whenever they are restocked. I first got an AMD Ryzen 9 5900X because it was all I could find but I have since sold that (used) for more than I paid. For more normal users, the Ryzen 7 5800x (MSRP $449) is a great deal and great processor and it is currently in stock at most stores. I was able to obtain my 5950x directly from AMD by following the Stock Drops Discord chat alerts (free). Current (5000) generation AMD processors use less power and have superior multi-threaded performance to all current generation Intel chips. For a trader like myself, lots of cores are important because I run tons of programs all the time.

Motherboard: MSI MPG X570 Gaming Pro Carbon WIFI ($260) – One of the cheaper X570 motherboards that support AMD’s socket AM4, it has built-in WIFI 6, room for two graphics cards, two M.2 slots, and plenty of USB ports.

CPU Cooler: Noctua NH-U12S SE-AM4 CPU cooler ($65) – I am a huge fan of Noctua CPU coolers and fans and they have worked great for me for years.

Storage: Samsung 980 Pro M.2 2280 1TB PCIE Gen4 NVMe SSD ($230) – M.2 is a far faster connection than SATA and modern SSDs benefit greatly from it. There are other good SSDs out there for a lot less but this is considered to be the best overall. I have found that it has very significantly increased boot speed and file load speed from the 950 Pro I used prior to my upgrade (and that I have in my second M.2 slot). I currently have no SATA drives in my computer other than a DVD drive. I have 8 terabytes of RAID 1 magnetic disk storage (WD Red 8TB drives) in a Synology DS218+ attached to my network.

RAM: HyperX Fury 64GB (4 x 16GB) DDR4 2133MHz DRAM – I just used the same RAM I bought 4 years ago because it is tested/approved for use with my new motherboard and faster/newer RAM would not give me any meaningful benefit.

Graphics cards: EVGA GeForce RTX 3060 XC GAMING, 12G-P5-3657-KR, 12GB GDDR6 – This is of course overkill for trading, but it is a good card and I like the low power usage of the RTX 3060 compared to other current-generation cards. If I do upgrade to 4 43″ monitors this one card could run all of them easily.

EVGA GeForce GTX 970 04G-P4-2974-KR 4GB SC GAMING w/ACX 2.0 – I have two of these graphics cards; I have had them since 2015; I just replaced one with the 3060 listed above while the other remains in my computer. I will keep the replaced card as a backup. They still work fine. If you want to be able to game as well as trade, the Nvidia GeForce 3060 Ti cards offer great performance and are reasonably priced if you can find them for sale (use Stock Drops to find any — they sell out in seconds whenever they are restocked).

Desk: EvoDesk 30″ x 72″ that I purchased 5 years ago when my previous sit to stand desk broke. If you have a lot of monitors pay attention to the weight capacity of your sit to stand desk — if I were purchasing a new desk today I would buy an EvoDesk Pro because they are more stable and have the highest weight capacity I have seen among sit to stand desks.

Computer Case: Antec Nine Hundred Black Steel ATX Mid Tower Case – This is the same case I have been using for six years. It works great. I replaced one of the front fans with a Noctua aftermarket fan. If you are in the market for a computer case, this Fractal Design Meshify C looks nice.

Power Supply Unit (PSU): Rosewill Fortress-750 750 watt active PFC Power Supply – This is the same power supply I have been using for the last 6 years. Get an 80 Plus Platinum power supply (or Titanium, which is even better though a lot more expensive) — the more efficient the power supply, the less waste heat generated. Learn more about the power supply efficiency ratings at Tom’S Hardware. Most importantly, go with a well-respected brand — a failed power supply or dirty electricity from a poorly made PSU can damage the rest of the computer.

Accessory: Elgato Stream Deck – This is a nice tool for those who have trouble remembering hotkeys. See the below tweet thread from me:


Computer Building Tips

Building a computer nowadays is easy! There are plenty of guides to do it so I won’t go into details, but following are the most important things that people frequently mess up:
1. Avoid static electricity!
2. Check at the motherboard manufacturer’s website to verify that the RAM you want to use has been verified to work with the motherboard.
3. Make sure you put your CPU cooler on, use thermal paste with it, and verify that all fans are working before you close up the case.
4. Prepare a Windows installation USB drive beforehand.

How to Save a lot of Money

Older high-end PC parts get sold off for pennies on the dollar. You can assemble a powerful computer by buying used CPUs / motherboard / RAM. For example, the Intel Xeon 14-core CPU I bought four years ago cost $1500 new (and costs $750 new now) and is available now for $150 used. Don’t buy used storage media though.

Disclaimer. I may or may not have positions in some of the stocks that are shown on my screen and I may close or add to those positions at any time. I may or may not still subscribe to the chatrooms and news services shown on my monitor. 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’ defamation lawsuit against me ends with a whimper

Summary: Scottsdale Capital Advisors settled their lawsuit against me (link is to settlement), I don’t pay them and they don’t pay me, everyone pays their own lawyers, and my blog posts remain unchanged.

It has been over two years since I first received a demand letter (dated 12 September 2017) from Charles Harder (destroyer of Gawker and personal defamation lawyer to President Trump) on behalf of his clients John Hurry and Scottsdale Capital Advisors (SCA). (See the demand letter on page 177 of my answer to the 3rd amended complaint.) SCA was the sole plaintiff in the eventual lawsuit against me and my company MorningLightMountain LLC. I have posted the full court docket as well as almost all the documents in the case in a post on my blog that I kept updated as the case progressed. The demand letter as well as the lawsuit that eventually came alleged that I had defamed SCA in four sentences across two blog posts.

The original complaint was filed on 4/16/2018; it lacked a copy of the allegedly defamatory blog posts and was quickly followed by the 1st amended complaint on 4/20/2018. That complaint alleged that four statements across two blog posts defamed SCA and were a false light invasion of privacy. My attorney filed to remove the case to federal court on 5/11/2018; by agreement of both parties the case was remanded back to Michigan state court (Kalamazoo County Circuit Court) on 5/29/2018. I filed an answer to the complaint and a motion for summary disposition on 6/7/2018. On 8/17/2018 SCA filed its response in opposition to the motion for summary disposition. My attorney filed a reply in support of the motion for summary disposition on 8/20/2019.

At the hearing on the motion for summary disposition of the 1st amended complaint on 8/22/2018, Judge Alexander C. Lipsey dismissed the complaint’s defamation allegations with respect to three of the statements (#1, #3, and #4) because he found that they were not adequately pleaded. He dismissed all the false light allegations because “Plaintiff Corporation would have no expectation of privacy.” See his opinion (published 10/4/2018) and the transcript of the hearing.

SCA filed a second amended complaint on 11/13/2018. This complaint only alleged that two statements in one blog post were defamatory (statements #1 and #2). My attorney filed an answer to that complaint and a motion for summary disposition (see brief supporting that motion) on 11/15/2018. On 12/3/2018 SCA filed its response in opposition to the motion for summary disposition. On 12/10/2018 my attorney filed a reply in support of the motion for summary disposition. Oral argument on the motion was heard on 12/14/2018 by Judge Lipsey. See the transcript (there was no separate order). Judge Lipsey dismissed the complaint for failure to state a claim while giving SCA an opportunity to file an amended complaint. (Note: The transcript incorrectly attributes Mr. Pinsky’s statements to Mr. Richotte on page 14 lines 11-16.)

On 1/11/2019 SCA filed its third amended complaint. This complaint alleged only one false and defamatory statement (statement #1). On 2/1/2019 my attorney filed my answer, motion for summary disposition, and a brief in support of the motion. On 3/20/2019 SCA filed its response in opposition to the motion for summary disposition. My attorney filed a reply in support of summary disposition on 3/22/2019.

The motion for summary disposition was heard by Judge Lipsey on 3/26/2019 (see transcript) and an order was issued denying the motion on 4/4/2019. At the hearing after Judge Lipsey announced his decision my attorney (Joseph Richotte) asked for a stay of the case pending appeal of the decision. Judge Lipsey granted the motion (transcript, pages 32-34).

Because Judge Lipsey’s decision was not a final decision (one that would normally end the case), I did not have the right to appeal — I had to ask the court for permission (leave) to appeal to the Michigan Court of Appeals. My attorney filed the application for leave to appeal on 4/25/219 (>1000 page pdf file). SCA filed its answer to the application for leave to appeal on 5/16/2019 and also filed a motion to strike on the same day. On 5/23/2019 my attorney filed an answer to the motion to strike and on 6/6/2019 he filed a reply to the answer to the application for leave to appeal.

On 9/13/2019 a panel of three judges from the Michigan Court of Appeals approved the application for leave to appeal and denied SCA’s motion to strike. My attorney filed the appeal brief on 11/8/2019. Following that the parties stipulated to extending the time for SCA to file its appeal brief and then discussed and reached a settlement. On 1/6/2020 the settlement was signed. The appeal was dismissed by stipulation on 1/10/2020. The lawsuit at the Kalamazoo County Circuit Court was dismissed by stipulation with prejudice on 1/16/2020.

There is no confidentiality clause in the settlement agreement so I uploaded it for everyone to read. The short summary of the agreement: SCA dropped all claims against me and my company MorningLightMountain LLC and I and my company agreed to give up the right to counter-sue (and any other potential claims I might have had). The lawsuit is dismissed, the blog posts stay as they are, nobody issues any apology, and everyone pays their own legal fees. I consider this to be a victory. Michigan does not have an anti-SLAPP law so even if I had won the appeal I believe it is very unlikely that I would have won any attorney fees.

Why did I fight this lawsuit in the first place? The logical choice for me would have been to accede to the initial demand letter. However, I did not believe I wrote anything untrue in my posts, and I came to realize that anyone can threaten litigation to force rewrites of unflattering coverage. This did not rest well with me so I resolved to fight the lawsuit.

Perhaps more importantly, I believed that caving to a demand to remove unfavorable coverage would make it more likely for others to use threats (both legal and physical) to get me to remove negative coverage. After all, this is not the first threat I have received for my blogging nor the most troubling. (The most troubling was six years ago, when I received a threat to kill my wife and daughter for calling out a trader for market manipulation.) I have written a lot about stock promotion, manipulation, and other ethically dubious behavior in microcap markets over the 15 years I have been blogging. Threats of various sorts are expected. If I were to cave to demands to remove truthful but unflattering posts then this blog would be a lot less useful.

I care about accuracy and my goal in blogging is to write useful, interesting, and–most importantly–true articles. No matter what, I am always open to being corrected when I am wrong. But I will not remove true and useful information just because it makes someone angry.

Where have all the lawyers gone?

In 2018 Charles Harder’s law firm (Harder Mirell & Abrams LLP) lost its two other name partners, Douglas Mirell and Jeffrey Abrams. Mirell did not have glowing words for the business: “I found myself increasingly uncomfortable with the docket of matters we were handling … They seemed irreconcilable with my core commitment to the defense of the First Amendment.” Jeffrey Abrams retired from the practice of law at the end of 2018, saying he would be “co-founding a new venture in the financial industry.” Abrams did have positive words about Harder, saying “I wish Charles Harder, my partner of six years, and longtime friend, all the best in his growing practice, and look forward to referring colleagues and friends to HARDER LLP in the future when they need help protecting their reputations.” At some point in 2018 the firm changed its name to Harder LLP.

Lawyers directly involved in the case left firms as well. Nicholas A. Kurtz, who argued for SCA at the hearing on the motion to dismiss the first amended complaint, left the firm shortly thereafter, becoming partner and founding a new Chicago office for Dunlap Bennett & Ludwig. H. Rhett Pinsky, who was the local (Michigan) lawyer for SCA and argued the motion for summary disposition of the second amended complaint for them, remains at his firm Pinsky, Smith, Fayette, and Kennedy, LLP. Margo Arnold, who argued the motion for summary disposition of the third amended complaint for SCA, remains at Harder LLP.

Jordan Susman, lead counsel for SCA in the case, left Harder LLP at the end of 2019 to become a partner at Nolan Heimann LLP. Andrew M. Friedman, who initially worked with me after I received the demand letter, left Butzel Long prior to the suit actually being filed. After a brief stent at Shulman Rogers he joined FINRA as a primary counsel of FINRA Enforcement in May 2019. Robin Luce-Herrmann remains the head of the media law group at Butzel Long. Joseph Richotte, who was lead counsel for me, remains at Butzel Long. Doaa Al-Howaishy, who assisted Richotte, left Butzel Long in 2019 to become an Asssistant Prosecuting Attorney in Wayne County, Michigan (in Detroit).

What’s next?

I will not stop writing about penny stocks. Scottsdale Capital Advisors and parties related to them, such as sister company Alpine Securities, and John Hurry and Justine Hurry (who are beneficiaries of the trusts that own the companies) are newsworthy. SCA itself stated that “only a handful of firms are still willing and able to process and clear sales of microcap securities…” (That is from a complaint SCA filed against FINRA in December 2018–see docket). FINRA won a quick dismissal of that lawsuit (read memorandum opinion), although that has been appealed by SCA. Also, according to the National Securities Clearing Corporation (NSCC), Alpine Securities was the clearing broker responsible for the majority (61%) of deposits of subpenny stocks in 2017. I think those are very good reasons why SCA and Alpine Securities are newsworthy.

SCA and Alpine Securities each have one big regulatory action pending that should be resolved soon. The SEC commissioners should reach a decision within 60 days on the SCA appeal to the SEC of the FINRA action against it that was the subject of my initial blog post . As for Alpine, its appeal of the SEC’s $12 million judgment (which was soon thereafter stayed pending appeal) against it will likely be heard by the US Court of Appeals for the Second Circuit the week of March 30th (per docket 100).

Disclaimer: I and MorningLightMountain LLC of which I am the sole member were sued for defamation by Scottsdale Capital Advisors. See my blog post about that lawsuit. That post shows the full court docket at the lawsuit. 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 blatantly promoted Rivex Technology (OTC: RIVX) after the pump ends

After just over two months of continual stock promotion by what is in my opinion the sketchiest stock promoter out there, the SEC commissioners finally found enough evidence to do their job and suspend trading in Rivex Technology (OTC: RIVX). Like with prior promotions by this stock promoter (referred to as the Tier 1 or Panamanian Promoter by OTC Market Research), OTC Markets had done its job by designating the stock ‘caveat emptor’ after the close on the first day of the promotion (November 4, 2019).

SEC Suspension press release (pdf)
SEC Suspension order (pdf)

The SEC mentioned the following reasons for suspending trading in the stock:

(1) questions about the accuracy and adequacy of information in the marketplace since at least November 4, 2019, including the accuracy of information in various third-party promotional materials; and
(2) questions about recent, unusual and unexplained market activity in the company’s common stock.

SEC Suspension PR
RIVX daily chart

RIVX should resume trading on the grey market after the open on January 24, 2020.

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 New Year brings new SEC action against ‘microcap fraud scheme’

For those who dislike microcap fraud 2020 started out right with three related SEC lawsuits and a related criminal complaint against two of the individuals that the SEC sued.

All the cases were filed in US District Court in the Southern District of New York. The case numbers below are linked to the case dockets on CourtListener.

The three civil cases:

Securities and Exchange Commission v. Ulrik Debo (1:20-cv-00006)
Complaint (pdf)
SEC Press Release

Securities and Exchange Commisison v. Steve M. Bajic, Rajesh Taneja, Norfolk Heights Ltd., Fountain Drive Ltd., Island Fortune Global Ltd., Crystalmount Ltd., Wisdom Chain Ltd., SSID Ltd., Sure Might Ltd., Tamarin Investments Inc., Kenneth Ciapala, Anthony Killarney, Blacklight S.A., Christopher Lee MicKnight, and Aaron Dale Wise (1:20-cv-00007)
Complaint (pdf)
SEC Press Release

Securities and Exchange Commission v. Kenneth Ciapala & Blacklight S.A. (1:20-cv-00008)
Complaint (pdf)
SEC Press Release

The criminal case is:
United States v. Kenneth Ciapala, Ulrik Debo, and Blacklight S.A. (1:19-cr-00874)
USAO Press Release

Because of how PACER & CourtListener deal with criminal cases, there are four different dockets on CourtListener (one for each defendant plus one for all defendants):
1:19-cr-00874 -GBD – All defendants
1:19-cr-00874-GBD-1 – Ciapala, Kenneth
1:19-cr-00874-GBD-2 – Debo, Ulrik
1:19-cr-00874-GBD-3 – Blacklight, S. A.

The indictment (pdf) was filed on December 5, 2019 and unsealed on January 2, 2020 after Ulrik Debo and Kenneth Ciapala were arrested in the United Kingdom. The US is currently seeking their extradition.

Read Mike Caswell’s summary of some of the charges at StockWatch (free registration required).

As always, the charges are only allegations until proven in a court of law.

Interestingly, the USAO press release includes a quote from FBI Assistant Director William F. Sweeney, Jr.:

“As a major facilitator of market manipulation schemes, Blacklight, S.A, allegedly enabled numerous ‘pump and dumps’ over the course of six years. Disrupting the orchestrators of illegal financial activity is a top priority for the FBI’s securities fraud team, and we consider today’s indictment of Blacklight, its founder and principal owner Kenneth Ciapala, and co-conspirator Ulrik Debo an important step in that mission.”

USAO Press Release

Summary from the USAO press release of the criminal charges:

As alleged, from at least 2013 through December 2019, CIAPALA and his firm, BLACKLIGHT, as well as others, conspired to defraud the investing public by orchestrating and facilitating the manipulation of multiple publicly traded stocks, commonly referred to as “pump and dump” schemes. The vast majority of the stocks that CIAPALA, BLACKLIGHT, DEBO, and their co-conspirators sought to manipulate were “penny” or “microcap” stocks that traded in the United States on the over-the-counter (“OTC”) market. In executing these pump and dump schemes, CIAPALA, BLACKLIGHT, DEBO, and their co-conspirators (i) secretly amassed beneficial ownership of all, or substantially all, of the stock of certain publicly traded companies; (ii) began manipulating the price and demand for these stocks through, among other means, the release of materially false information to the investing public and manipulative trading practices, thereby causing the share price of these stocks to become artificially inflated; and (iii) sold out of their secretly-amassed positions at artificially inflated values at the expense of the investing public.

CIAPALA, using his firm BLACKLIGHT, primarily furthered the stock manipulation scheme by helping other participants in the scheme to obscure their beneficial ownership and control of all or substantially all of the shares of companies whose securities they sought to manipulate. CIAPALA caused BLACKLIGHT to establish nominee entities that were registered in the names of various third parties to hold the shares that were, in reality, beneficially owned and controlled by the scheme participants. In order to obscure their ownership interests, CIAPALA, BLACKLIGHT, DEBO, and others typically caused these nominee entities’ holdings to be structured so as to ensure that no single nominee entity held more than five percent of the outstanding stock of any of the relevant companies.

CIAPALA also caused BLACKLIGHT to open bank accounts in the names of these nominee entities and to trade shares owned by these nominee entities through various brokerage accounts. Through BLACKLIGHT, CIAPALA exercised trading authority over these nominee entities’ shares, and CIAPALA directed brokers to execute trades on behalf of these nominee entities in furtherance of the stock manipulation scheme. After CIAPALA, BLACKLIGHT, DEBO, and others participating in the scheme had obtained control of all or substantially all of the shares of a company, the scheme participants manipulated the share price and trading volume of the stock of the company. This typically occurred through a promotional campaign and through certain manipulative trading practices.

With respect to the promotional campaign, CIAPALA, BLACKLIGHT, DEBO, and others participating in the scheme caused promotional materials to be distributed to the investing public that contained exaggerated and, at times, false claims about the company whose stock they sought to manipulate. The scheme participants concealed from the investing public that these promotional materials were financed and created at the direction of those who beneficially owned and controlled substantially all of the shares of the relevant company that was the subject of the promotion.

In addition, to drive investor demand and artificially inflate the share price, CIAPALA, BLACKLIGHT, DEBO, and other participants also engaged in manipulative trading activity in order to artificially increase the trading volume and share price of the issuers whose stock they sought to manipulate. This manipulative trading activity included “match” trades whereby the scheme participants caused multiple nominee entities they controlled to essentially trade with one another to create the false appearance of trading volume and demand for the stock.

USAO Press Release

According to the SEC complaint (pdf) against Ciapala & Blacklight S.A., Ciapala previously worked at “EuroHelvetia Trust Co., SA (‘EuroHelvetia’), a wealth administration firm based in Geneva, Switzerland. EuroHelvetia provided services to microcap fraudsters similar to those now provided by Blacklight.”

Stocks involved in the schemes

The SEC complaint against Bajic et al (pdf) alleges the group sold at least 7.2m shares worth $7.2m of stock in Blake Insomnia Therapeutics (OTC: BKIT) through the end of May 2017. The complaint does not discuss any actions after that date. Interestingly, after a name change (in June 2019 per OTC Markets), the same stock, now known as Biohemp International (OTC:BKIT), was suspended for two weeks by the SEC following a boiler-room pump and dump. I do not know if anyone mentioned in these complaints was selling shares into that stock promotion or if it was some new shareholder.

Other stocks sold by the group mentioned in the SEC complaint (pdf) against Bajic et al. are Pacificorp Holdings Ltd. (OTC:PCFP), Drone Guarder, Ltd (OTC: DRNG), VIBI, BLTO, GLBB, and SPRN.

The SEC complaint against Ulrik Debo (pdf) mentions only one company, Herbatech Life Inc. (OTC: EVTP). The SEC complaint (pdf) against Blacklight S.A. and Kenneth Ciapala mentions a different company, EMS Find Inc. (was OTC: EMSF, now OTC:INTV).

None of the companies that allegedly had their stocks manipulated were named as defendants in the suits.

Disclaimer: No position in any company mentioned. Aaron Wise is an acquaintance of mine and we have been to dinner together a few times over 5 years ago; the last time I know that we corresponded via email was in 2013. I have no relationship with anyone else 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.

Defunct broker Spencer Edwards gets fine more than quadrupled in appeal to 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.

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. “
2019-12-16 — changed title

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.