The Penny Stock boiler-room pump & dump lives on: Natural Health Farm Holdings (NHEL)

Disclosure: I am short NHEL. Even if I weren’t short, I would still advise against the stock. I am actively looking to increase my short position.

I have traded hundreds if not thousands of pump and dumps and blogged about many of them here over the last 12 years. While big email pumps and snail mail pumps are far rarer than they were 5 years ago, the pace of boiler-room pumps does not seem to me to have decreased. See my blog posts on recent boiler room pumps from October 2018, June 2018, and November 2017.

Today’s boiler-room stock promotion is Natural Health Farm Holdings (NHEL). I will only briefly touch on the fundamentals of the company, which are as usual absurd. Read the company’s SEC filings. The company has total assets valued at only $125,337 (per the most recent 10-Q). See NHEL’s company profile on OTCMarkets. A brief aside — I am sincerely impressed with the accumulation of small changes that OTCMarkets has made to their platform to bring transparency to the market. One nice feature is displaying share counts verified by the transfer agent — in the case of NHEL it is 161,859,500 shares as of 2/25/2019. With the stock at $1.25 as I write this, that gives the company a whopping $200 million market capitalization. Also, the company reports in its OTCQB certification (pdf) filed on 1/2/2019 that there are 30 million shares in the public float (some or all of these shares are being sold in the pump and dump). Another useful bit of info provided by OTCMarkets now is the shell risk disclosure displayed for NHEL. According to OTCMarkets:

The Shell Risk designation indicates that a company displays characteristics common to Shell Companies. This designation is made at OTC Markets’ sole and absolute discretion based on an analysis of the company’s annual financial data and may differ from issuers’ self-reported shell classifications in their own public filings.

One benefit for the stock promoters / insiders in a boiler-room pump and dump is that information about the pump is not easily available: there is no paper trail of promotions. A side effect of this is that OTCMarkets seems to me to be slower to mark a stock promoted by
a boiler-room as undergoing stock promotion (NHEL currently lacks that flag) or ‘caveat emptor’ (NHEL also lacks that flag). That being said, once OTCMarkets becomes aware of a boiler-room pump I believe they are more likely to give it the ‘caveat emptor’ tag than they would be to give a stock undergoing email promotion a ‘caveat emptor’ tag. In the past, boiler-room pumps have dumped right after receiving the caveat emptor tag. For example, OLMM was given the ‘caveat emptor’ tag on march 8, 2018 and the next day it gapped down from $1.34 to $1.19 and ended that day at about $0.4103. Comerton Corp (COCM) received the ‘caveat emptor’ designation from OTCMarkets on June 5th, 2018. The next day it gapped down from $0.97 to $0.91 and closed at $0.83. Two days later it closed at $0.31.

With an average daily volume of over 300,000 shares over the month NHEL has already done better than most boiler-room pumps.

Reports of the boiler-room pump of NHEL can be found on Twitter and on stock message boards such as Yahoo and InvestorsHub. See screenshots below:

Comments on NHEL on Yahoo Finance
More comments on NHEL on Yahoo Finance
Comment on NHEL message board on InvestorHub

Besides the ongoing boiler-room pump & dump, NHEL has more fun awaiting investors: a toxic financing deal with GHS Investment LLC (see S-1 registration statement for details). GHS will get shares for a nice 20% discount to the “lowest traded price of the Company Common Stock during the ten (10) consecutive trading days prior to the date the Drawdown Notice was submitted” (quote from S-1). Of course by the time the company can start to make use of this financing arrangement the stock will likely be 90% below where it currently trades.

Disclaimer: I am short Natural Health Farm Holdings (NHEL) and am trying to borrow more shares to short. I may trade around this position (cover and reshort) at any time and will not update this blog post as I do so. I have no positions in other stocks mentioned in this blog post. 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.

Tradelog incorrectly changes negative commissions to positive commissions when importing trades

I use Tradelog to track my trades for accounting and tax purposes. I have used it for probably a decade now and for the most part I have been very happy with it. However, when looking at my trades for last year I found some discrepancies in one of my accounts between the Tradelog data (which can be directly imported from the trade data statements generated by almost all brokers) and the broker’s 1099-B. But unlike most errors, which are rare and large (for example, a broker reporting the same trade twice or accounting for a share exchange in a weird way), I noticed lots of little errors — many trades were off by just a dollar or two. In the grand scheme of things the differences didn’t make a big difference (about $50 total), but I still wanted to fix the errors and understand why they were happening.

I looked at the CSV spreadsheet that I had downloaded from my broker’s website with all the 2018 trades; I had imported my trades to Tradelog directly from this CSV file. The stock prices on all the trades matched so I then looked at the commissions in the CSV file and Tradelog. There I found that on some of my trades, high ECN rebates had been larger than my commissions, leading to a negative commission on the trades. Every single trade with a negative commission was imported into Tradelog as having a positive commission with the same absolute value. So if the commission was ($1.25) then it became $1.25 in Tradelog.

Naturally I thought that there must have been some small error in the import filter from that specific broker. Instead, I was told the following:


TradeLog is limited when it comes to ECN Rebates because the commission has to be negative. If TradeLog were to import the commissions as negative whenever the broker reports them as negative, the resulting data import would be wrong for the vast majority of our users that do not receive rebates. In fact, TradeLog has a special warning to alert the user when inadvertently entering the commission as a negative number as this is in most cases incorrect. This special situation requires that the user make the appropriate adjustments manually:

Editing Multiple Trades 

If you have any further questions, please let us know.

This boggles my mind. I had to go back through my data file and edit around 50 different trades to correct the data (at least Tradelog does allow negative commissions although it complains each time you enter one).

I should mention that this problem is not going to affect most traders — you have to trade a lot to get a low enough commission rate that your ECN rebates can be larger than your commissions. But for those of us who do trade that much even small errors can take a lot of time to find and fix.

To fix this Tradelog should allow users the ability to allow the program to import trades with negative commissions (this could be done via a checkbox while keeping the same default behavior). Frequent traders such as myself have enough trouble with brokers often giving incorrect 1099s — we should not have to deal with accounting software that doesn’t import negative numbers.

Disclaimer: I have no position in any stock mentioned above. I have used Tradelog for about a decade and other than the above problem I am a satisfied customer. I have no other 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.

FINRA Fines broker TriPoint Global Equities LLC for penny stock-related failings

On March 5th, 2019 FINRA accepted an offer of settlement from TriPoint Global Equities LLC, Michael Boswell (TriPoint’s President and Chief Compliance Officer), and Andrew Kramer (TriPoint’s Head Trader). The summary from the settlement order is as follows:

1. During the period November 2011 through December 2015 (the “Relevant Period”), TriPoint Global Equities, LLC (“TriPoint” or the “Firm”) engaged in the penny stock business, effecting transactions for customers whose primary trading activity involved the deposit and prompt liquidation of low-priced securities (also known as “penny stocks” or “microcap stocks”). Nonetheless, throughout the Relevant Period, TriPoint, through AntiMoney Laundering (“AML”) Compliance Officer (“AMLCO”) and Chief Compliance Officer (“CCO”) Michael Boswell (“Boswell”), and Head of Trading (“Head Trader”) Andrew Kramer (“Kramer”), failed to establish and implement AML policies and procedures reasonably 3 designed to detect and report suspicious activity, including AML red flags, in connection with the Firm’s penny stock business.

2. Further, during the Relevant Period, Respondents TriPoint, Boswell, and Kramer failed to reasonably identify and address red flags of potentially suspicious activities presented by Customer EM’s deposits and liquidations of penny stocks. By virtue of this conduct, Respondents TriPoint, Boswell and Kramer violated FINRA Rules 3310(a) and 2010.

3. In addition, during the Relevant Period, TriPoint failed to comply with the registration requirements of Section 5 of the Securities Act of 1933 (the “Securities Act”) by engaging in the unlawful re-sales of approximately 16,907,900 shares of restricted securities of two penny stock issuers into the public market on behalf of Customer EM, in violation of FINRA Rule 2010.

4. Further, TriPoint failed to establish and maintain a supervisory system, including written supervisory procedures (“WSPs”), reasonably designed to achieve compliance with the registration requirements of Section 5 of the Securities Act of 1933 (the “Securities Act”) for the re-sales of restricted securities, in violation of NASD Rule 3010(a) and FINRA Rule 2010 for conduct prior to December 1, 2014 and in violation of FINRA Rule 3110(a) and FINRA Rule 2010 for conduct on or after December 1, 2014.

Order to accept offer of settlement (pdf)
FINRA complaint filed on 7 September 2018 (pdf)

Essentially all the firm’s failures identified in the settlement relate to trading by one customer, “EM”, who deposited and sold shares acquired through “‘toxic’ or ‘death spiral'” convertible notes. From the settlement:

C. Red Flags Involving Customer EM’s Deposits and Liquidation of Low-Priced Securities

32. In or about March 2015, Customer EM opened an account with TriPoint. 33. At all times, TriPoint, Boswell, and Kramer were aware that Customer EM’s business was the liquidation of low-priced securities obtained through convertible note investments. By contrast to a traditional convertible debt arrangement, in which the conversion formula is fixed, the conversion ratio for Customer EM’s transactions was based on fluctuating market prices to determine the number of shares of common stock to be issued. This market price-based conversion formula protected Customer EM against price declines. However, a market pricebased conversion formula can lead to dramatic stock price reductions and corresponding negative effects on both the issuer and its shareholders. Accordingly, as the SEC has explained, these types of convertible debt financing arrangements have colloquially been referred to as “toxic” or “death spiral” convertibles.

34. Eight of the issuers whose stock was deposited and liquidated by Customer EM through TriPoint presented red flags signaling potentially suspicious activity for penny stock companies. These red flags included several that the Firm’s AML Plan (and FIN RA’s Small 11 Firm Template) identified, such as limited or no revenues, large net losses and accumulated deficits, and material changes in business lines, names, and structures. In addition, although each of the issuers was an SEC reporting company, several failed to make the appropriate SEC disclosures or were delinquent in their regulatory filings. As discussed further herein, one company’s CEO had been the subject of a California State Court Desist and Refrain order relating to re-sales of another penny stock issuer of which he was an owner. Several of the issuers also released numerous press releases around the time of Customer EM’s deposits and liquidations. Publicly available information, including the issuers’ own SEC filings and a website that published newsletters and maintained message boards focused on microcap stocks, pointed to risks surrounding several of the issuers’ securities. Customer EM’s liquidations of the penny stocks amounted to a significant percentage of the TMV of these securities. At times, Customer EM’s liquidations represented over 90° o of the TMV. This information was readily available in public filings made by the issuers to the SEC and on the interne.

Per the company’s Brokercheck report, it currently clears through FolioFN Investments Inc. The settlement does not mention TriPoint having changed clearing firms so I think it likely that it cleared through FolioFN Investments at the time of the events covered by the settlement (November 2011 through December 2015, the “Relevant Period”).

The settlement calls for a 30-day suspension and $10,000 fine for Boswell and a 30-day suspension and $10,000 fine for Kramer. TriPoint Global Securities agreed to a censure, a fine of $100,000, the disgorgement of $34,001 in commissions, and a 12-month ban from receiving penny stocks for deposit except if the stock comes from an offering “in which TriPoint acted as a selling agent.”

Other recent FINRA actions against brokers involved in the penny stock business include the FINRA complaint against Lek Securities in November 2018 and the FINRA fine of ICBCFS (Industrial and Commercial Bank of China Financial Services LLC) in July 2018. Recent SEC actions against brokers involved in penny stocks include settlements with ICBCFS and Chardan Capital Markets in July 2018, the SEC settlement with COR Clearing in September 2018 that forced it to stop accepting penny stock deposits, and the February 2019 lawsuit against Spartan Securities Group.

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.

Beware the ATM: ARCA Biopharma (ABIO) Edition

It has been awhile since my last trading strategy post so I thought I would write one about something that I have been paying attention to recently. If you don’t know my core beliefs on trading strategy, read these classic blog posts first:

So you want to be a trader, Part 1
So you want to be a trader, Part 2: Finding a trading system & dealing with emotion

A good chunk of the money I make comes from day-trading. The most important thing when considering a day-trade is that fundamentals almost don’t matter — what matters is supply and demand for the stock. If you can identify situations where demand will drop throughout the day or supply will increase, or both, you will be able to profit from short-selling. Conversely, if you can identify decreasing supply or increasing demand, you can profit from buying.

Perhaps one of the most predictable sources of increased supply of stock is the company issuing shares through an already-existing ‘at-the-market’ offering, commonly known as an ATM. Now it is one thing to identify a situation where a company has an outstanding ATM facility and the company needs cash (as can be known by looking at the balance sheet and cash flow statement). That is certainly useful and many traders do that. But wouldn’t it be even better to spend the time to follow such situations prospectively and then identify how often and how much those ATMs were actually used?

This is what I am spending time and effort on right now: whenever I see a stock gapping up on news that I might want to short because the news isn’t really that great, I look for outstanding ATMs. Regardless of whether I trade the stock or not, I make a note to look back at the SEC filings in the future to see if the company actually did sell shares through the ATM on that and following days. By doing this I will get a better sense of how reliably companies will use their ATMs in these situations and this will help me better evaluate the risks of shorting these stocks.

The first stock I made a note to look back at was Arca Biopharma (ABIO). This makes for a perfect example because the company put out a 10-K soon after having a big spike on February 20, 2019, and the stock had very low volume prior to that spike. So let’s take a look. Below is the daily candlestick chart of ABIO for the year up until today.

Having identified the stock as worthy of interest and having an ATM on February 20th, we can now look at the filings to see if it used that ATM. On February 27nd, the company filed its 10-K for the year ended December 31st. On the first page we find this: “As of February 22, 2019, the Registrant had 18,355,111 shares of common stock outstanding.” The balance sheet lists 13,924,058 shares outstanding as of December 31st, 2018. So from January 1st to February 22nd, 201 ABIO issued 4.43 million shares, increasing the share count by 31.8%. Next we go to the section entitled “(7) Equity Financings and Warrants” — I knew to go there because I searched the document for “at the market” (if that doesn’t work search “at-the-market”. Unfortunately, that just describes the ATM usage for 2017 and 2018 — I want more recent issuance so I go to the “subsequent event(s)” section.

In January 2019, the Company amended the Sales Agreement to increase the maximum aggregate value of shares which it may issue and sell from time to time under the Sales Agreement by approximately $2.5 million, from $10.2 million to $12.7 million. Subsequent to December 31, 2018, the Company sold an aggregate of 4,431,053 shares of its Common Stock pursuant to the terms of the Sales Agreement, as amended, for aggregate gross proceeds of approximately $2.5 million. Net proceeds received in the period were approximately $2.4 million, after deducting initial expenses for executing the “at the market offering” and commissions paid to the placement agent. As of February 22, 2019, the Company has sold all shares available under its current prospectus to the Company’s registration statement on Form S-3 (No. 333-217450).

So between January 1st and February 22nd of 2019 Arca Biopharma sold 4.431 million shares through its ATM (which is now exhausted — the company will have to file an amended S-3 registration statement if it wishes to sell more shares) for gross proceeds of $2.5 million. Divide $2.5m by 4.431m shares to get an average price of $0.5642 per share. Given that prior to February 20th, the stock traded an average of under 200,000 shares per day and never traded over $0.45, it is a good bet that Arca Biopharma sold no shares during that time period. (Also, as of the amended prospectus on January 25th, the company said it had sold a total of $10,083,445 worth of stock through its ATM, while as of Frebruary 22nd that was $12.6 million, meaning the company sold no shares or almost no shares from January 1st to January 22nd.)

On February 20th, the stock opened at $0.90, hit a high of $0.97, and closed at the low of $0.508. Below is an intraday 5-minute candlestick chart of ABIO from that day. Note that the volume-weighted average price (VWAP) was $0.704 at the end of the day. The next day the VWAP was $0.487. So it is likely that the company sold a large number of shares over both days. The volume on February 20th was 25.94 million shares, and it was 7.14 million shares the next day. Over those two days the company likely sold 4.43 million shares, 13.4% of the total trading volume those days. It is important to look at the total trading volume like this and not just the increase in shares outstanding because if the number of shares sold by the company is small relative to the trading volume it is still possible for the stock to spike big. But here, with 13.4% of the volume being sales by the company through the ATM, that was not possible and it was all but inevitable that the stock would drop as it did.

(Two day 5-minute candlestick chart;click to enlarge)

For more on dilution, I recommend following AuspexResearch on Twitter. He is the one who got me to start looking at this stuff a couple years ago. Read a few of his Twitlonger posts.

Below is the full text of the February 20th press release that caused the stock to spike:

ARCA Biopharma Announces FDA Agreement for a Single Phase 3 Clinical Trial to Support Approval for the First Genetically-Targeted Cardiovascular Drug

GlobeNewswire•February 20, 2019
FDA Special Protocol Assessment agreement granted for PRECISION-AF clinical trial evaluating Gencaro as a potential treatment for atrial fibrillation in a heart failure population that has no FDA approved drug therapies 58% treatment benefit seen versus active comparator in Phase 2B for planned Phase 3 target population
Gencaro development program has FDA Fast Track designation
U.S. and European cardiovascular patents and regulations may provide commercial exclusivity for Gencaro for 10 years post approval
WESTMINSTER, Colo., Feb. 20, 2019 (GLOBE NEWSWIRE) — ARCA biopharma, Inc. (ABIO), a biopharmaceutical company applying a precision medicine approach to developing genetically-targeted therapies for cardiovascular diseases, today announced that it has reached agreement with the U.S. Food and Drug Administration (FDA) regarding a Special Protocol Assessment (SPA) on the design of a pivotal Phase 3 clinical trial, PRECISION-AF, to assess the safety and efficacy of GencaroTM (bucindolol hydrochloride) as a genetically-targeted treatment for atrial fibrillation (AF) in patients with a specific type of heart failure (HF). The target population for the planned Phase 3 clinical trial, partially identified by precision therapeutic phenotyping, currently has no FDA approved drug therapies. This SPA provides agreement that the Phase 3 protocol design, clinical endpoints, trial population and statistical analyses adequately address objectives that, if met, would support a regulatory submission seeking approval of Gencaro for the prevention of AF recurrence in a genotype-defined HF population.
If PRECISION-AF is successful and Gencaro gains regulatory approval, it has the potential to be unique in several aspects, including:
The first genetically-targeted cardiovascular therapy;
The only drug therapy indicated in HF patients with mid-range ejection fraction (HFmrEF); and,
The only drug therapy for AF approved against an active comparator.
The SPA process is designed to facilitate review and approval of drugs by allowing FDA to evaluate the proposed design and size of specific clinical trials that are intended to form the primary demonstration of a drug product’s efficacy and safety. FDA ultimately assesses whether the protocol design and planned analysis of the trial are acceptable to support regulatory approval of the product candidate for the indication studied. An SPA agreement can potentially reduce the regulatory risk of bringing a drug to market.
“Consistent with our mission to develop precision therapies on a pharmacogenetic platform, this SPA agreement with the FDA provides a clearly defined regulatory pathway for the Phase 3 development of Gencaro in a genotype-specific heart failure population that currently has no FDA approved drug therapy,” said Michael R. Bristow, MD, PhD, Chief Executive Officer of ARCA biopharma. “If the previous foundational therapeutic observations in the GENETIC-AF and BEST trials are confirmed in PRECISION-AF, we believe Gencaro could potentially provide a new standard of treatment for AF prevention for the estimated 2.5 million HFmrEF patients in the major markets in U.S., Europe and Japan.”
In accordance with the Company’s SPA agreement with FDA, PRECISION-AF is designed as a single, adequate and well-controlled Phase 3 clinical trial that may be sufficient to support an New Drug Application (NDA) submission for an AF indication if the objectives of the trial are achieved consistent with the requirements of the SPA. The trial is designed as a double-blind, active-controlled, multicenter, international study comparing Gencaro with Toprol-XL (metoprolol succinate) for the prevention of AF recurrence or all-cause mortality (ACM) in HFmrEF patients. HFmrEF is defined as HF with a left ventricular ejection fraction (LVEF) ≥ 40% and < 50%, which constituted approximately half of the enrolled population in the Phase 2 GENETIC-AF trial. PRECISION-AF is designed to enroll approximately 400 patients who have: HFmrEF, a recent AF event, and the genotype which responds most favorably to Gencaro. The primary endpoint of the trial will be time to first event of atrial fibrillation/atrial flutter (AF/AFL) or ACM during the 26-week Follow-up Period. In the recently completed GENETIC-AF trial, Gencaro showed a 58% treatment benefit compared to Toprol-XL in reducing AF recurrence in the HFmrEF population targeted for Phase 3 (hazard ratio = 0.42; 95% CI: 0.21, 0.86; p = 0.017). With 400 patients (200 per arm) the trial will have 90% power at a p-value of 0.01 to detect a 45% treatment benefit for Gencaro compared to Toprol-XL. Subject to securing additional financing, ARCA anticipates initiating PRECISION-AF in the fourth quarter of 2019.
About Special Protocol Assessment (SPA)
An SPA is an agreement with the FDA that the proposed trial protocol design, clinical endpoints and statistical analyses are acceptable to support regulatory approval. For further information regarding the SPA process, please visit the FDA website, www.fda.gov. A SPA agreement is not a guarantee of approval, and there are no assurances that the design of, or data collected from, the planned Gencaro clinical trial (PRECISION-AF) will be adequate to obtain the requisite regulatory approvals for the marketing of Gencaro.
About Atrial Fibrillation (AF)
AF, the most common sustained cardiac arrhythmia, is a serious disorder in which the normally regular and coordinated contraction pattern of the heart’s two small upper chambers, or the atria, becomes irregular, rapid and uncoordinated. AF can cause distressing symptoms that significantly impact quality of life and can also bring potentially serious medical consequences, including increasing the risk of stroke and serious cardiovascular complications. AF is considered an epidemic cardiovascular disease and a major public health burden. In 2015, there were approximately 5.2 million patients who had been diagnosed with AF in the United States. It is estimated that AF costs the U.S. economy about $6.0 billion annually.
About ARCA biopharma
ARCA biopharma is dedicated to developing genetically-targeted therapies for cardiovascular diseases through a precision medicine approach to drug development. ARCA’s lead product candidate, GencaroTM (bucindolol hydrochloride), is an investigational, pharmacologically unique beta-blocker and mild vasodilator being developed for the potential treatment of atrial fibrillation in heart failure patients with mid-range ejection fraction. ARCA has identified common genetic variations that it believes predict individual patient response to Gencaro, giving it the potential to be the first genetically-targeted AF prevention treatment. The Gencaro development program has been granted Fast Track designation by FDA. ARCA is also developing AB171, a thiol-substituted isosorbide mononitrate, as a potential genetically-targeted treatment for heart failure and peripheral arterial disease (PAD). For more information, please visit www.arcabio.com.
Safe Harbor Statement
This press release contains “forward-looking statements” for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, potential future development plans for Gencaro, ARCA’s ability to complete any Phase 3 clinical trial, the likelihood for PRECISION-AF results to satisfy the requirements of the SPA, ARCA’s ability to raise sufficient capital to fund the PRECSION-AF trial and its other operations, the expected features and characteristics of Gencaro, including the potential for genetic variations to predict individual patient response to Gencaro, Gencaro’s potential to treat AF and/or HFmrEF, future treatment options for patients with AF and/or HFmrEF, and the potential for Gencaro to be the first genetically-targeted AF prevention treatment. Such statements are based on management’s current expectations and involve risks and uncertainties. Actual results and performance could differ materially from those projected in the forward-looking statements as a result of many factors, including, without limitation, the risks and uncertainties associated with: ARCA’s financial resources and whether they will be sufficient to meet its business objectives and operational requirements; ARCA may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of Gencaro or to otherwise continue operations in the future; an FDA SPA agreement does not guarantee approval of Gencaro or any other particular outcome from regulatory review; results of earlier clinical trials may not be confirmed in future trials; the protection and market exclusivity provided by ARCA’s intellectual property; risks related to the drug discovery and the regulatory approval process; and, the impact of competitive products and technological changes. These and other factors are identified and described in more detail in ARCA’s filings with the Securities and Exchange Commission, including without limitation ARCA’s annual report on Form 10-K for the year ended December 31, 2017, and subsequent filings. ARCA disclaims any intent or obligation to update these forward-looking statements.
Investor & Media Contact:
Derek Cole
720.940.2163
[email protected]
A photo accompanying this announcement is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/af496e97-20da-420a-bf93-e51b3a3ed740

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.

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).

I encourage my readers to read the complaint in full. The SEC has what appears to me to be damning evidence (as shown in the complaint, including emails). I am obviously not a lawyer so take this with a grain of salt, but in my opinion the defendants have little chance of winning this suit.

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: Typo corrected on 2019-3-7 (“Thee” changed to “There”).

Disclaimer: Post edited on 2/22/2019 to include Spartan Securities Group press release and my opinion thereof. 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.