Author: Michael Goode

Former stock promoter Anthony J. Thompson Jr. sentenced to 1 year in jail

I have previously written about the SEC and criminal cases against Jay Fung, Anthony J. Thompson Jr., and Eric Van Nguyen for stock promotions run back in 2010 and 2011. Just last month Thompson was sentenced to 1 year in jail following his guilty plea. The SEC case continues against Thompson and on February 15, 2019 the SEC filed a motion for partial summary judgment against Thompson, using the criminal plea as evidence.

SEC v. Thompson docket
SEC motion for partial summary judgment (pdf)
Memorandum of law in support of partial summary judgment (pdf)

Thompson was sentenced on 1/4/2019 and it appears from the New York State court information website screen capture shown below that he is to report to jail on March 28th, 2019 (at the sentencing hearing the day for him to report to jail was given as 1/31/2019). The criminal case is 03853-2014 in Manhattan Supreme Court.

Some of the details of the sentencing were quite riveting to me — I found them in the transcript of the sentencing hearing filed by the SEC in the civil case. First, Thompson’s lawyer, Maranda Fritz of Thompson Hine, asked the judge for no jail time, but the judge appeared to order jail time in part because Thompson had not made any of his agreed-upon restitution payments:

THE COURT: Ms. Fritz, your client entered into a plea agreement. Did he enter into a plea agreement in which he agreed to make a certain amount of payment within a certain amount of time?

MS. FRITZ: Yes.

THE COURT: Has he made one payment? Has he paid even one dollar?

MS. FRITZ: He has not. And the issue is not — the issue before this Court is —

THE COURT: Is your client living in a shelter?

MS. FRITZ: No.

THE COURT: Okay, I don’t accept the proposition that your client has not been able to make a single payment in the period of one year, so to the extent you are arguing he’s literally unable to make any payment I do not accept that.

The prosecutor argued earlier at the hearing that Thompson did still have money but it was in a trust:

He’s apparently the victim of a divorce being attacked by teams of lawyers that are being motivated by believing it was bitterness. He couldn’t get a job because he was so humiliated and harmed emotionally by what was happening, all the while again while he’s living off this trust that’s supporting his lifestyle. And again, as illuminated or as discussed in our memo, our belief that that trust was funded by proceeds of the fraud.

The judge’s explanation of the sentence makes for interesting reading:

THE COURT: Mr. Thompson, I appreciate your words and I particularly appreciate your taking responsibility for the harm that you caused to the people who invested money in securities which were not what they purported to be and I think that it’s exceedingly important. I appreciate that because I think it’s critical for you to acknowledge that you stole money from people by your own free will. That you are a person who has been given many, many advantages that most people who come through this courthouse have not been given educationally, professionally, family-wise. You have been given tremendous opportunities and yet you and presumably your codefendants, even though I don’t know anything much about their cases, engaged in a scheme that was motivated by greed and a lack of consideration for the people who were going to be harmed by what you did.

I believed that the plea agreement you entered into was incredibly generous. I think that the plea agreements in this case were incredibly generous given the crimes that took place, which had tremendous financial consequences for many people and, as I said, were motivated by greed and a lack of consideration for what would happen to the person on the other side. I am of course sympathetic to the fact that it will be a tremendous hardship for your children if you go to jail and for you. And putting people in jail, despite my position, is my least favorite thing that I do at my job because it’s terrible for everybody’s family and every person to have to go to jail, but the fact is that you were given an incredibly reasonable, generous plea offer by the People. And there are — I understand that you’ve come upon financial hardship, but the fact that through this time there hasn’t been any effort to make any payments toward the goal to me speaks volumes about your motivation and your belief that you would get away with it.

So, I’m terribly sorry for your children that you will be absent from their lives for a period of time, however that is something that happens to anybody who commits a crime and is caught and has to answer for it. I have already told you that the — your lawyer that I will permit you to surrender yourself for sentence. The sentence of the Court on this case is going to be one year in jail on each count. The sentences will run concurrent with one another and you can let me know what’s a good date for your client to step in.

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

SEC Sues Spartan Securities Group and Island Stock Transfer for involvement in “Microcap Shell Factory Fraud”

The SEC and FINRA crackdown on brokers, transfer agents, and other ‘gatekeepers’ in the microcap markets continues with a new SEC lawsuit filed February 21st, 2019 in the US District Court for the Middle District of Florida. The case is US Securities and Exchange Commission v. Spartan Securities Group, Ltd et al (8:19-cv-00448). See the docket. The very detailed complaint (pdf) can be found on CourtListener. See also the SEC litigation release for a good summary.

Spartan Securities Group Ltd is a broker and market maker (OTC market maker ID: MICA). Read their FINRA BrokerCheck report. Spartan’s sole clearing firm according to its BrokerCheck report (PDF copy) is Cor Clearing. Cor was forced to stop accepting penny stocks for deposit and sale as part of its settlement with the SEC in October 2018.

Also included as defendants of this lawsuit are Island Capital Management LLC (dba Island Stock Transfer), which is under common ownership with Spartan Securities; Carl E. Dilley; Micah J. Eldred; and David D. Lopez. Dilley, Eldred, and Lopez “were common owners of the parent of both Spartan Securities and Island Stock Transfer, and principals of both Spartan Securities and Island Stock Transfer,” according to the complaint.

Below are the general allegations:

3. This action involves Defendants’ roles in one or two separate fraudulent schemes from approximately December 2009 through August 2014 to manufacture at least 19 public companies for sale fundamentally premised on a deceptive public float of purportedly “free-trading” securities: 14 by Alvin Mirman and Sheldon Rose (the “Mirman/Rose Companies,” identified in paragraph 30 below) and five by Michael Daniels, Andy Fan, and Diane Harrison (the “Daniels Companies,” identified in paragraph 102 below).

4. The fraudulent schemes depended on misrepresentations and omissions to, among others, the Commission, the Financial Industry Regulatory Authority (“FINRA”), and the Depository Trust Company (“DTC”) that the Mirman/Rose and Daniels Companies were legitimate small businesses with independent management and shareholders. In reality, both the management and shareholders were nothing more than nominees for control persons who always intended merely to sell all the securities of the companies privately in bulk for their own benefit. The essential value of these securities (each bulk sale realized proceeds of hundreds of thousands of dollars) was their false designation as “free-trading” with the ability to be sold immediately on the public market. If the truth had been known to the public, the securities would have been restricted from such sales and would have had little value.

5. Dilley and Eldred knew or were reckless in not knowing from the onset that the Mirman/Rose Companies and Daniels Companies, respectively, were pursuing their stated plans under false pretenses and instead being packaged for sale as public vehicles, and that the shareholders were mere nominees for the control persons. Nonetheless, Defendants took critical steps to advance the frauds.

6. Dilley schemed with Mirman and Rose, and Eldred schemed with Daniels, Fan and Harrison, to defraud the public that the Mirman/Rose Companies and Daniels Companies were operating businesses with independent management and shareholders, rather than undisclosed “blank check” companies (sometimes referred to as “shells” or “vehicles”) for sale. In furtherance of the Mirman/Rose scheme, Dilley signed false Form 211 applications submitted to FINRA, contributed to false DTC applications, found potential shell buyers, signed an escrow agreement and false attestation letters for shell buyers, and effectuated the bulk transfer of the entire deceptive public float of Mirman/Rose Companies to shell buyers. Eldred similarly schemed with Daniels, Fan and Harrison by filing false Forms 211 with FINRA, signing false securities deposit forms and executing trades in Spartan Securities’ proprietary account, all in support of the manufacture of undisclosed public vehicles – one of which Eldred expressly proposed to acquire himself while its Form 211 was pending.

7. A necessary step in both fraudulent schemes was for the issuer’s stock to be eligible for public quotation, which requires a broker-dealer to file a Form 211 application with FINRA to demonstrate compliance with Rule 15c2-11 under the Securities Exchange Act of 1934 (“Exchange Act”). FINRA typically raises specific concerns or seeks further information from the broker-dealer in one or more deficiency letters before clearing the application. Meanwhile, transfer agents perform a number of roles for issuers pertaining to their securities and shareholders, including recording changes of ownership, maintaining the issuer’s security holder records, canceling and issuing certificates, and resolving problems arising from lost, destroyed or stolen certificates.

8. Spartan Securities and Island Stock Transfer acted in tandem to provide these various services which were critical to the Mirman/Rose and Daniels/Fan/Harrison shell factories. For example, Spartan Securities filed the Form 211 application with FINRA in order for the securities of these 19 issuers to be publicly quoted. Spartan Securities, Dilley, and Eldred made materially false statements and omissions to FINRA regarding the purpose, management and shareholders of the Mirman/Rose Companies and Daniels Companies. Spartan Securities and its principals also had information that undermined any reasonable basis that the information required by Rule 15c2-11 was materially accurate and from a reliable source. Spartan Securities then initiated unpriced quotations for all the Mirman/Rose Companies and Daniels Companies (except PurpleReal) upon FINRA’s clearance of the Form 211.

One of the key allegations here is that Spartan “filed the Form 211 application with FINRA in order for the securities of these 19 issuers to be publicly quoted. Spartan Securities, Dilley, and Eldred made materially false statements and omissions to FINRA regarding the purpose, management and shareholders of the Mirman/Rose Companies and Daniels Companies.” For a stock to be quoted over the counter, a market maker has to file a form 211. According to FINRA, “Form 211 is the form which must be completed pursuant to FINRA Rule 6432 and submitted to the FINRA OTC Compliance Unit to initiate or resume quotations in the OTCBB, OTC Markets or any other quotation medium pursuant to SEC Rule 15c2-11.“

I wrote back in April 2018 in my blog post about the criminal charges against another OTC market maker and microcap broker, Delaney Equity Group, “the fact that the forms 211 are mentioned is a big deal for OTC Markets in my opinion– this could scare off market makers from filing these forms for any sketchy company in the future.” That is even more true now and I believe that this lawsuit against Spartan Securities Group will scare all other OTC market makers into doing much more due diligence before filing forms 211. This should result in fewer fraudulent shells being listed to trade.

The SEC complaint (pdf) goes into a lot of detail of how Spartan and its principals allegedly failed to do much due diligence before filing form 211 for different shell companies. There are 14 charges against the companies and individuals that are defendants of this lawsuit, although not every charge is against every defendant. The SEC is seeking a permanent injunction against all defendants from violating securities laws, disgorgement of all alleged “ill-gotten gains”, additional “civil money penalties”, and a penny stock bar against Spartan Securities, Dilley, Eldred, and Lopez (but not Island Stock Transfer).

Surprisingly to me, Spartan Securities put out a press release in response to the lawsuit. The full text of the press release follows:

Spartan Securities Group / Island Stock Transfer Statement Regarding Recent SEC Litigation
Thursday, February 21, 2019 4:15 PM
CLEARWATER, FL / ACCESSWIRE / February 21, 2019 / Spartan Securities Group, Ltd. (”Spartan”) and its affiliated company, Island Capital Management, LLC, doing business as Island Stock Transfer (”Island”), are disappointed in the decision by the U.S. Securities Exchange Commission (”SEC”) to file this Complaint.

Spartan, Island, and their principals vehemently deny any wrongdoing and look forward to taking this case to trial. Contrary to what is alleged and/or insinuated in the Complaint, neither Spartan nor Island (nor any of their employees) were involved in the creation or operation of any of the 19 named companies listed in the Complaint. Those 19 companies – which it is important to note represent a miniscule fraction of the thousands of legitimate issuers that Spartan and Island have worked closely with over the years – were, unbeknownst to Spartan and Island, operated by alleged fraudsters.

According to the SEC, those fraudsters went to great lengths to make everyone – including Spartan and Island, as well as the SEC itself – believe that they were real businesses with actual operations.
In fact, before Spartan or Island provided any services to any of these 19 companies, each company prepared and filed a registration statement with the SEC. In turn, each registration statement was declared effective by the SEC. The representations the companies made to the SEC in support of their respective registration statements – i.e., the representations on which the SEC relied and which it accepted – were the same those companies made to Spartan and Island, and the same ones on which Spartan and Island relied. In short, Spartan and Island – just like the SEC – were victims of the fraud that these individuals behind these 19 companies were committing, and not, as the Complaint alleges, themselves perpetrators of any fraud.

Spartan and Island appreciate all of the expressions and offers of support already provided by a multitude of our friends and colleagues, including law firms, other financial institutions and issuer clients alike. We have always strived to create and maintain a stellar reputation for service in our industry, and will continue to do so.

The micro-cap and small-cap industry has endured an inordinate amount of regulatory assaults over the last ten years. Alan Wolper, partner with Ulmer & Berne LLP in Chicago, longtime outside counsel for Spartan and Island, stated, ”My clients and I look forward to our day in court, as we are confident that any reasonable judge or jury will conclude that the SEC is unable to carry its burden of proof.”

Spartan and Island wish to reassure their clients that this litigation will not affect the services our 500+ issuer clients have come to expect and our services will continue with the same great staff that our clients have come to appreciate.
Media Contact:
Alan M. Wolper / Heidi VonderHeide
Ulmer & Berne LLP
312.658.6564

While I am sure it has happened previously, I cannot remember the last time a defendant in an SEC lawsuit issued a press release to announce that it will fight the charges. Also, the press release does not appear to me to assert that the SEC’s factual allegations are incorrect. The PR states in part, “Contrary to what is alleged and/or insinuated in the Complaint, neither Spartan nor Island (nor any of their employees) were involved in the creation or operation of any of the 19 named companies listed in the Complaint.” Yet after reading the whole complaint I did not get the impression that the SEC was even insinuating that Spartan was involved in the creation or operation of the shell companies. Instead, the SEC alleged the following actions as “Defendants’ roles in one or two separate fraudulent schemes “:

6. Dilley schemed with Mirman and Rose, and Eldred schemed with Daniels, Fan and Harrison, to defraud the public that the Mirman/Rose Companies and Daniels Companies were operating businesses with independent management and shareholders, rather than undisclosed “blank check” companies (sometimes referred to as “shells” or “vehicles”) for sale. In furtherance of the Mirman/Rose scheme, Dilley signed false Form 211 applications submitted to FINRA, contributed to false DTC applications, found potential shell buyers, signed an escrow agreement and false attestation letters for shell buyers, and effectuated the bulk transfer of the entire deceptive public float of Mirman/Rose Companies to shell buyers. Eldred similarly schemed with Daniels, Fan and Harrison by filing false Forms 211 with FINRA, signing false securities deposit forms and executing trades in Spartan Securities’ proprietary account, all in support of the manufacture of undisclosed public vehicles – one of which Eldred expressly proposed to acquire himself while its Form 211 was pending.

The complaint also mentions people who were allegedly involved in the creation and sale of the shell companies that are at issue in this lawsuit. Some of them have previously been sued by the SEC for the actions at the heart of the complaint, as listed in the quote below.

From the complaint:

18. Alvin Mirman, of Sarasota, Florida, was the undisclosed control person of Changing Technologies, Inc. (“Changing Technologies”) and an undisclosed control person, along with Rose, of On the Move Systems Corp. (“On the Move”), Rainbow Coral Corp. (“Rainbow Coral”), First Titan Corp. (“First Titan”), Neutra Corp. (“Neutra”), Aristocrat Group Corp. (“Aristocrat”), First Social Networx Corp. (“First Social”), Global Group Enterprises Corp. (“Global Group”), E-Waste Corp. (“E-Waste”) and First Independence Corp. (“First Independence”). Mirman was a defendant in SEC v. McKelvey et al., Case No. 15-cv80496 (S.D. Fla. 2015), in which the Court entered, by consent, a judgment of permanent injunction, officer and director bar and penny stock bar against Mirman. On August 19, 2016, Mirman pled guilty to a one-count Information charging him with conspiracy to commit securities fraud. U.S. v. Mirman et al., Case No. 16-cr-20572 (S.D. Fla.). Both the Commission and criminal actions included his misconduct in connection with the Mirman/Rose Companies. In 2007, without admitting or denying wrongdoing, Mirman consented to being barred by FINRA from association with any FINRA member.

19. Sheldon Rose, of Sarasota, Florida, was the undisclosed control person of Kids Germ Defense Corp. (“Kids Germ”), Obscene Jeans Corp. (“Obscene Jeans”), Envoy Group Corp. (“Envoy”) and First Xeris Corp. (“First Xeris”) and an undisclosed control person, along with Mirman, of On the Move, Rainbow Coral, First Titan, Neutra, Aristocrat, First Social, Global Group, E-Waste and First Independence. The Commission entered, by consent, a cease-and-desist order, officer and director bar and penny stock bar against Rose. In re Sheldon Rose et al., Exch. Act Rel. No. 78894 (Sept. 21, 2016). The Commission later ordered Rose to pay disgorgement and prejudgment interest in the amount of $2,973,916.18. In re Sheldon Rose, Exch. Act Rel. No. 80301 (Mar. 23, 2017). On November 9, 2016, Rose pled guilty to a one-count Information charging him with conspiracy to commit securities fraud. U.S. v. Kass et al., Case No. 16-cr-20706 (S.D. Fla.). Both the Commission and criminal actions included his misconduct in connection with the Mirman/Rose Companies.

20. Michael Daniels, of Palmetto, Florida, was the undisclosed control person of Dinello Restaurant Ventures, Inc., n/k/a AF Ocean Investment Management Co. (“Dinello/AF Ocean”), President, Chief Executive Officer, Chief Financial Officer, Treasurer and Chairman of the Board of Court Document Services, Inc., n/k/a ChinAmerica Andy Movie Entertainment Media Co. (“Court/ChinAmerica”), Principal Executive Officer, Secretary, Treasurer, Chairman of the Board and Chief Financial Officer of Quality Wallbeds, Inc., n/k/a Sichuan Leaders Petrochemical Co. (“Wallbeds/Sichuan”), Secretary, Chief Financial Officer, Treasurer, Director, and Chairman of the Board of Top to Bottom Pressure Washing, Inc., n/k/a Ibex Advanced Mortgage Technology Co. (“TTB/Ibex”), and undisclosed control person of PurpleReal.com Corp. (“PurpleReal”). On April 25, 2018, the Commission filed a Complaint against Daniels related to his conduct in connection with the Daniels Companies. SEC v. Harrison, et al., No. 8:18-cv-01003 (M.D. Fla.).

21. Diane Harrison, of Palmetto, Florida, was the Chief Financial Officer, Secretary, Treasurer and Director of Dinello/AF Ocean, Treasurer, Principal Accounting Officer and Director of Wallbeds/Sichuan, Director and Secretary of TTB/Ibex, and President, Director, and Chairman of the Board of PurpleReal. Harrison, an attorney, is the owner of the law firm Harrison Law, PA, which is based in Florida. Harrison, who is Daniels’ wife, is a defendant in the SEC v. Harrison case based on her conduct with respect to the Mirman/Rose Companies and the Daniels Companies.

22. Andy Fan, of Las Vegas, Nevada, was the President, Treasurer, Chief Executive Officer, Chief Financial Officer and Director of Dinello/AF Ocean and Court/ChinAmerica, and was the President and Director of Wallbeds/Sichuan and TTB/Ibex. The Commission entered, by consent, a cease-and-desist order, officer and director bar and penny stock bar against Fan, and ordered him to pay a civil money penalty of $140,000. In re Andy Z. Fan, Securities Act Rel. No. 10487 (Apr. 25, 2018). The Commission’s action related to Fan’s conduct with respect to certain of the Daniels Companies.


For a good overview of previous shell factory lawsuits by the SEC and criminal prosecutions of the same actions, see this article by the excellent pseudonymous penny stock researcher nodummy. That article lists all the companies and individuals involved.

I previously wrote about at least one of the companies involved in this case, Aristocrat Group (ASCC).

Updates and errata:
2019-2-22: Updated to include Spartan Securities Group press release and my opinion thereof.
2019-3-7: Typo corrected (“Thee” changed to “There”).
2019-3-24: Paragraph on my opinion of the strength of the case against Spartan deleted.

Disclaimer: I have no position in any stock mentioned. I am a big user of CourtListener. Otherwise, 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.

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).

Stocks 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).

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.