Never ever trust online reviews of mattresses or trading services

I just read this excellent story on Casper and the world of online mattress review websites and that made me of course think of stock trading services and what happens if you try to find reviews of them. Unlike with mattresses, where a $50 affiliate commission is quite common on sales, with stock trading services commissions of 25% to 33% are common and they can go much, much higher. Also, with mattresses, even if you end up not particularly happy (as I am not that happy with my Helix Sleep mattress) at least you end up with a functional, new mattress. If you sign up for many trading services you will end up trying to learn to trade from somebody who fakes their own trades or lied about their own trading record. Even if you find a trading service that has a good track record and the person running it knows how to trade successfully, the odds still favor you losing money — because trading successfully is very hard.

Did you read the article on Casper and Sleepopolis at Fast Company yet? If not, do so now. The problem with the mattress review world (and I think this is a general problem for any product where online reviews can make or break them) is that the incentive for mattress companies is to do whatever is necessary to get to the top of rankings, no matter how. They can do that by incentivizing the reviewer with higher affiliate payouts or by giving the reviewer extra payments, such as a consulting agreement or some other payment scheme. The reviewer is incentivized to direct more people to the company giving him or her the highest payouts. The result is that the reviews for mattresses become completely untrustworthy — some review sites might be slightly biased, others might be totally biased, but it is hard to tell the difference. Of course the solution to this is to get a subscription to Consumer Reports which doesn’t have these conflicts of interest (I’m a happy subscriber and have been for a decade). Here are their mattress recommendations.

Unfortunately, Consumer Reports does not rate trading services or Twitter traders. Tim Sykes started Investimonials.com for the purpose of getting traders’ reviews of trading services but really that site never took off and never got much beyond the penny stock niche. And of course user reviews can be gamed, most obviously on Amazon.com. Even without monetary payments, a service provider can urge satisfied users to write reviews and thus increase their rating. Still, there is useful information in user reviews sites like Investimonials (or Yelp) — the user just needs to expect a positive bias and seek out both positive and negative reviews and read them in detail. If there are no negative reviews then that is a red flag — even the best businesses leave some customers unhappy.

And of course, this is just talking about half the problem — service providers offering reviewers inducements for positive reviews. They can also threaten libel lawsuits to eliminate negative reviews. Or they can pay the review website to remove negative reviews. This is quite possibly a worse problem and will cause the most negative reviews to tend to disappear from the internet. It is impossible to know how big of a problem this is.

Of course, one way to get around the problem of fake or gamed user reviews and the threat of lawsuits is to have a convicted felon with a huge judgment hanging over his head that he can never hope to pay write trading website reviews. But such a site (which exists, but I won’t link to it for reasons I explain below) can still suffer from the tendency to give positive reviews to services that then advertise with it. And the specific website I’m thinking of, while doing a pretty good job of identifying many frauds, seems to think that some legitimate (in my eyes) services are complete frauds. For that reason I won’t link to or even name Emmett’s website.

Why don’t I write reviews of various trading services? I learned a bunch from Tim Sykes and a couple other trading services and I obviously wouldn’t be able to be bias free. That is why I have not reviewed trading services that I have tried; the only times I have written about trading services is when I recommended them (at some point), or had some other reason to write about them (such as when a trading service was owned by stock promoters).

What can you, an aspiring trader, do? First, never trust claims of good performance. Anybody can claim that they turned $3,000 into $10 million. Ask to see some sort of real proof. Even more, look at a person’s trades and verify that they were possible and weren’t in illiquid stocks. No matter how positive your initial impression of a trading service, search out negative opinions (luckily, there are plenty of those on Twitter about everyone) and weigh those against the positive opinions you see. There are plenty of invalid criticisms as well as valid criticisms out there.

Unfortunately, there are so many people looking to get rich through trading that you likely will have no luck if you ask for account statements or tax returns to prove a guru’s performance (but I have some). Even after looking at a number of trades, it can be hard to tell if someone is a good trader — particularly over a short period of time a trader can be successful just because of the niche they are in. In a crazy bull market most swing traders will look great. Caveat emptor and do your own research. Most importantly, never blindly follow another trader — no matter what guru you follow, even if he or she is talented, you are likely to lose money just due to slippage.

Unfortunately, the only way to decide with high confidence if a trading service is worthwhile is to subscribe to it for months and assiduously track the trades of the guru to confirm that they are realistic and that they are consistently profitable. I even subscribed to Anthony Davian’s trading service for two months before concluding that he likely knew less than I did. In addition to that, you need to analyze their trading strategy to determine that it makes sense and that you could conceivably implement it yourself.

 

Disclaimer: I have a long and deep business relationship with Tim Sykes; see my full disclosure. I own a Helix Sleep mattress and subscribe to Consumer Reports. I have left a number of reviews on Investimonials but haven’t written any in years. No position in any stock mentioned and I have no relationship with anyone else 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 Micheal A. Skerry for allegedly pumping and dumping and scalping shares of Success Holding Group International

On September 29, 2017 the SEC filed suit against Michael A. Skerry of British Columbia for “an alleged scheme to manipulate the shares of a penny stock.” The penny stock in question was Success Holding Group International Inc. (SHGT).

This appears to be a standard scalping case: Skerry allegedly bought shares from Success Holding Group International and then allegedly sold those shares at the same time he was was promoting the stock (without disclosing his ownership or share sales). This kind of case has been rare for over a decade — many stock promoters switched to being paid in cash to reduce the risk of getting sued for this. Of course the most famous case of scalping was Tokyo Joe back in 2001.

From the SEC press release:

The SEC’s complaint alleges that Micheal A. Skerry, of New Westminster, British Columbia, Canada, illegally profited by manipulating the price and demand of Success Holding Group International, Inc., a penny stock whose securities were quoted on OTC Link, through a practice known as “scalping.” The SEC alleges that he entered into agreements with Success Holdings to provide investor relations services and to purchase shares of Success Holdings stock at a discount. Skerry allegedly paid $36,000 to Success Holding in exchange for 360,000 shares of Success Holding stock and immediately began taking steps to generate interest in the company through a fraudulent campaign to drive up public demand for Success Holding stock. Among other things, the SEC’s complaint alleges that Skerry posted misleading messages on public websites and sent blast emails to potential investors urging them to buy Success Holding stock without telling them that he owned the stock and intended to sell it at the earliest opportunity. The SEC alleges that Skerry sold all his shares of Success Holding stock to the public for a profit of over $950,000. Skerry’s sales allegedly made up more than 60% of the trading volume during the period, including 100% of the trading volume on certain days.

The SEC’s complaint charges Skerry with violating Sections 5 and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The SEC seeks a permanent injunction, a penny stock bar, disgorgement, pre- and post-judgment interest, and a civil penalty.

See also SEC Complaint.

Related to this complaint, Success Holding Group International Inc agreed to settle with the SEC for a total of $139,737, without admitting or denying the allegations that it “sold shares of its stock in an unregistered transaction to Skerry while knowing that he planned to immediately resell the shares to the public, and with failing to file Forms 10-Q or Forms 10-K for any periods since the period ended June 30, 2015”

 

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.

Eros International PLC (EROS) Sues large number of short sellers

On September 29th, 2017 the Indian film distribution company Eros International PLC (EROS) filed a complaint in New York state supreme court against many different short sellers who have criticized the company.

Below is the text of the company’s press release:

ISLE OF MAN, United Kingdom–(BUSINESS WIRE)–Oct. 3, 2017– Eros International Plc (NYSE: EROS) (“Eros”), a leading global company in the Indian film entertainment industry, today announced that it has filed a lawsuit in New York County Supreme Court against Mangrove Partners, Manuel P. Asensio, GeoInvesting, LLC, and numerous other individuals and entities. The lawsuit alleges the defendants and other co-conspirators disseminated material false, misleading, and defamatory information about Eros and are engaging in other misconduct that has harmed the Company. The lawsuit also names various “John Doe” defendants who will be identified and joined as the case unfolds.

The complaint alleges that Mangrove Partners and many, if not all, of its co-conspirators held substantial short positions in Eros stock and profited when its share price declined in response to their multi-year disinformation campaign. Eros seeks damages and injunctive relief for defamation, trade libel, civil conspiracy, and tortious interference, including but not limited to interference with its customers, producers, distributors, investors, and lenders.

The filing of this lawsuit marks another important step in Eros’ vigorous defense of itself and the Company’s stakeholders. On 25 September, 2017, Eros also reported that the United States District Court for the Southern District of New York dismissed a putative securities class action, with prejudice, that was originally filed in November 2015 and arose from a series of baseless accusations that the Eros complaint alleges were disseminated by short sellers.

The Company previously announced that it retained Michael J. Bowe, a partner of Kasowitz Benson Torres LLP, to investigate and pursue all available legal remedies against those responsible for these blatant attempts at market manipulation. Counsel is continuing its investigation. Anyone with information about those responsible for the dissemination of this disinformation can submit that information confidentially at (212) 506-1777.

The case is 653096/2017 at the New York County Supreme Court. The complaint (pdf) is 115 pages long. First, I’ll start with the defendants, some of whom are well-respected short sellers. I have grouped the defendants below according to firm and employee/employer relationships.

  1. Mangrove Partners and Nathaniel August
  2. Manuel Asensio, Asensio & Company Inc, and Mill Rock Advisors Inc
  3. Geoinvesting, LLC, Christopher Irons, Daniel David, FG Alpha Management LLC, FG Alpha Advisors, and FG Alpha, LP
  4. ClaritySpring Inc, ClaritySpring Securities LLC, and Nathan Anderson
  5. John Does 1 to 30

As many of the alleged negative comments at issue were only posted on Twitter, I have linked defendants to their Twitter accounts below:

  1. Alpha Exposure on SeekingAlpha (allegedly Mangrove Partners); @Alpha_Exposure
  2. @Asensiocom (Manuel Asensio)
  3. @Geoinvesting,@DanGeoinvesting (Dan David), @dan_fgalphamgmt (FG Alpha Management LLC / Dan David),  @QTRResearch (Chris Irons)
  4. @ClarityToast (Nathan Anderson)
  5.  The most prominent John Doe is @Unemon1. Other John Does are @HindenburgRes, Spotlight Research (writer on SeekingAlpha), and Orange Peel Investments (writer on SeekingAlpha).

Here is a full listing of all the John Does (from the complaint; emphasis added by me):

34. Defendant John Doe No. 1 refers to the individual or entity, whose identity is
presently unknown to Eros, behind the pseudonym “Spotlight Research.”
35. Defendant John Doe No. 2 refers to the individual or entity, whose identity is
presently unknown to Eros, behind the pseudonym “Orange Peel Investments.” Orange Peel
Investments purports to be a “family office” (or “family fund”) based in New York, New York.
36. Defendant John Doe No. 3 refers to refers to the individual or entity, whose
identity is presently unknown to Eros, behind the pseudonym “Parke Shall,” a purported
employee in the retail and consumer goods division of Orange Peel Investments and an
“anonymous contributor” for Orange Peel Investments’ two Seeking Alpha articles on Eros.
37. Defendant John Doe No. 4 refers to the individual or entity, whose identity is
presently unknown to Eros, behind the pseudonym “Thom Lachenmann,” a purported employee
in the technology division of Orange Peel Investments and an “anonymous contributor” for one
of Orange Peel Investments’ Seeking Alpha articles on Eros.
38. Defendant John Doe No. 5 refers to the individual or entity, whose identity is
presently unknown to Eros, behind the pseudonym “Unemon.”
39. Defendant John Doe No. 6 refers to the individual or entity, whose identity is
presently unknown to Eros, behind the pseudonym “Hindenburg Research.”
40. Defendants John Does Nos. 7-9 refer to Mangrove’s or August’s affiliate(s), or
any related investment fund(s) owned in whole or in part by Mangrove or August, that Mangrove
or August used between January 1, 2015 and the present to short Eros’ stock, whose identities
are presently unknown to Eros.
41. Defendants John Does Nos. 10-12 refer to the Asensio Defendants’ affiliate(s), or
any related investment fund(s) owned in whole or in part by the Asensio Defendants, that the
Asensio Defendants used between January 1, 2016 and the present to short Eros’ stock, whose
identities are presently unknown to Eros.
42. Defendants John Does Nos. 13-15 refer to the GeoInvesting Defendants’
affiliate(s), or any related investment fund(s) owned or in whole or in part by the GeoInvesting
Defendants, that the GeoInvesting Defendants used between 2013 and the present to short Eros’
stock, including but not limited to F.G. Alpha Management, LLC, FG Alpha Advisors, LLC and
FG Alpha, L.P., whose identities are presently unknown to Eros.
43. Defendants John Does Nos. 16-18 refer to the ClaritySpring Defendants’
affiliate(s), or any related investment fund(s) owned in whole or in part by the ClaritySpring
Defendants, that the ClaritySpring Defendants used between January 1, 2017 and the present to
short Eros’ stock, whose identities are presently unknown to Eros.
44. Defendants John Does Nos. 19-30 refer to other individuals or entities, whose
identities are presently unknown to Eros, who work with or at the direction of Defendants.

Below are references to pseudonymous or anonymous Twitter accounts in the complaint (emphasis added by me):

10. Defendants, in a tactic they used repeatedly throughout their conspiracy, created
an “echo chamber” for Asensio, Spotlight Research and Orange Peel Investment’s lies using the
social media site Twitter. Defendants exploited Twitter’s ability to disperse attention-grabbing
sound bites and buzzwords to a global Internet audience, and they created anonymous Twitter
shell accounts to multiply and spread their false and misleading allegations even further.

56. To further their scheme, Defendants used Twitter, which has a number of features
that make it the ideal platform for Defendants’ disinformation. Twitter allows its users to post
anonymously, and thus escape repercussions for false content. Twitter also allows its users to
publish posts, called “tweets,” that are public to any Internet user (not just those registered with
Twitter). Other users can then republish those tweets, called “re-tweeting.” Further, Twitter
allows users to “like” a tweet; the total number of “likes” and identities of the users who “liked”
a tweet are displayed at the bottom of each tweet. Users can thus take advantage of these
features, as Defendants have done, to create the appearance of more interest in a particular story
than there actually is, thus constructing an echo chamber.

215. Moreover, the Asensio Defendants fabricated Twitter aliases to further
reverberate their false, misleading and highly offensive themes. One such alias, “Forest Gump,”
joined Twitter in June 2016, at the precise time period Defendants re-commenced their short and
distort scheme. Forest Gump has only ever published 12 tweets. All of his tweets except for one
were negative commentary on Eros; in his standalone non-Eros tweet, Forest Gump reached out
to anonymous short-seller “Unemon” with the cryptic request, “Can you follow please.” A
sample of Forest Gump’s 11 Eros-related tweets, which all respond to pro-Eros tweets, reveals
that he attempted to spread salacious falsehoods about Eros’ management and to defend Asensio
under the guise of an independent twitter user.
216. Further, an anonymous user acting under the guise of the alias “Market Farce” resurfaced
on Twitter to hype Asensio’s and other conspirators’ lies, including during phases when
those defendants laid dormant. Market Farce’s false and defamatory tweets include, among
other fictions, the baseless assertion that Eros’ accounting practices warrant SEC scrutiny:

288. Defendants, in coordinated fashion, again amplified the baseless concerns they
touted in articles and blog posts using Twitter, including through new anonymous aliases such as
“Lolwut02” and “mboom1991.”

293. Moreover, Defendants fabricated Twitter aliases to further reverberate their false,
misleading and highly offensive themes. One such alias, “Lolwut02,” joined Twitter in May
2017. Lolwut02 has only ever published six tweets, all on May 23, 2017 and related to Eros. In
one tweet, Lolwut02 responds to Unemon’s derisive tweet concerning a securities filing by Eros
International Media with the mocking question, “[t]hey do this every year?” In another tweet,
Lolwut02, purports that it is “getting kind of nervous” at the baseless prognosis of the
Company’s looming liquidity crisis. Another alias, “mboom1991,” joined Twitter in June 2017.
Since then, mboom1991 has published zero tweets of his own but consistently rubber-stamps
Unemon’s negative tweets about Eros by “liking” them.

I cannot find Forest Gump on Twitter. Here is the link to Market Farce. Lolwut02 is on Twitter but shows no tweets. Mboom1991 has two tweets and 106 likes.

Regarding this assertion from the complaint: “Market Farce’s false and defamatory tweets include, among
other fictions, the baseless assertion that Eros’ accounting practices warrant SEC scrutiny:” I present without comment the report from ProbesReporter (John Gavin) on his inquiry into an SEC investigation into Eros.

Read the full ProbesReporter report on Eros (pdf).

One of the interesting things about this suit is how Eros used FOIA requests to purportedly identify Mangrove Partners / Nathaniel August as being behind Alpha Exposure:

67. Specifically, Alpha Exposure disclosed in a June 21, 2013 Seeking Alpha article
that it submitted a FOIA request letter to the SEC concerning Uni-Pixel, Inc. (“Uni-Pixel”).
Alpha Exposure’s article hyperlinked to a partially redacted response letter from the SEC, which
redacted its true identity, but did not redact the fact that the SEC received Alpha Exposure’s
request on June 10, 2013 and denied it in full.
68. The SEC, in turn, keeps public FOIA “logs” that record metadata for the FOIA
requests that it receives. FOIA logs are public and available on the SEC’s website.2 The
metadata recorded by FOIA logs reflect information such as the requestor’s name, the subject of
the request (e.g., company name), the date the SEC receives a request, the date it closes a request
and its final disposition.
69. Here, the SEC’s public FOIA records could not be clearer about the identity of
“Alpha Exposure.” The log dated FY 2013 reveals that the SEC received a FOIA request
concerning Uni-Pixel on June 10, 2013, the same date that the SEC received Alpha Exposure’s
request, and that the request was made by someone named “August, Nathaniel” of “Mangrove
Partners.” The log further reveals that August’s request was “[d]enied in full” and closed on
June 21, 2013, which again conforms to the SEC letter that Alpha Exposure hyperlinked in its
June 21, 2013 Seeking Alpha article.
70. Moreover, the same SEC log shows that the only FOIA request concerning UniPixel
in all of FY 2013 was from “August, Nathaniel” of “Mangrove Partners.” This irrefutable
fact, coupled with Alpha Exposure’s June 21, 2013 article, amount to conclusive proof that
August and Mangrove are, in fact, “Alpha Exposure.”
71. “Alpha Exposure” again leaked its identity through a slipshod admission in a
November 19, 2015 post on its blog (https://alphaexposure.wordpress.com/). In that post, Alpha
Exposure, after publicizing a FOIA letter it had sent the SEC demanding information on Eros,
divulged that its “last” FOIA request to the SEC concerned Uni-Pixel – which, as the SEC’s
FOIA log reveals, was made by none other than August himself

After reading this I would warn anyone considering submitting a FOIA request to not submit it in their own name but have an attorney submit it for them.

I will not rehash the details of the short sellers’ accusations against Eros International other than to say that there are many different accusations of impropriety. Here is a listing of all of the negative articles published about Eros referenced in the complaint (that I found). Please note that I take no position on whether any of these articles or the allegations in them are true or not.

Unemon1 blog posts on SeekingAlpha

EROS Is Everything But The Netflix Of India. I Honestly Believe This Company Is Going Down! (3/30/2017)
Eros Worldwide Pledged Shares In Eros Intl Media As Collateral Last Week: Liquidity Problems And Lack Of Alternatives Never Seemed So Real To Me (4/6/2017)
LIQUIDITY CRISIS AT EROS INTERNATIONAL IS REAL: HERE COMES THE PROOF! (5/10/2017)
EROS: Desperately Raising Cash And At The Same Time Buying Assets From Insiders. How Messed Up Is That? IMO: A LOT! (6/28/2017)

Alpha Exposure articles on SeekingAlpha

Unlike The Name, Investors Should Not Love EROS (10/30/2015)
Eros: Return Of The Short Seller (2015) (11/10/2015)
Eros: Is The Game Finally Over? We Think So (11/13/2015)
Eros: Revising Our TopCo Analysis (11/20/2015)
Eros: Roll The Credits (8/14/2017)

Manuel P. Asensio articles on SeekingAlpha

EROS’s ‘Dozen Unknown’ Unaudited Subsidiaries Out-Earn ‘Big Name’ Grant Thornton ‘Audited’ Parent (6/8/2016)
Eros Backs Away From Skadden’s Independent Review (6/8/2016)
ErosNow’s ‘Fullerton Deal’ Brings ‘New Round Of Questions’ (6/9/2016)
EROS: Prem’s Dilemma (7/18/2016)

Hindenburg Investment Research articles on SeekingAlpha

Eros Earnings Review: An Abundance Of Red Flags (8/2/2017)
Eros International: New Receivables Accounting Red Flags (8/24/2017)

Orange Peel Investments articles on SeekingAlpha

Continue To Avoid Eros After Terrible Earnings (2/18/2016)
New Red Flags About Eros Raised (6/9/2016)
Eros Stock Bump With Lack Of Cash Generation Makes It Attractive Short (7/4/2016)
Eros: Shelf Indicates Possible Coming Equity Issuance, Continued Pressure On Stock
(8/2/2017)
Eros: Take Rumors With A Grain Of Salt (8/7/2017)

Geoinvesting articles on Geoinvesting.com

Eros’ Failed Bond Offering, S&P Downgrade, Could Signal a Very Real Liquidity Crisis (3/16/2017)
Eros Associated Execs Admit on Hidden Camera They Will Launder Money Through Films (3/29/2017)
Eros International (EROS): Critical Warning Signs Ahead of Upcoming Annual Report? (7/14/2017)

Spotlight Research articles on SeekingAlpha

EROS’s Secret: Undisclosed Related Party Links In The UAE? (6/9/2016)
Globus: EROS’s Elephant In The Room (8/18/2016)

Eros, not content to hit back with a simple libel/defamation suit, alleges in its lawsuit that the short sellers conspired against it. In the complaint the word “conspire” is used three times while “cabal” is used twice, “conspiracy” is used 13 times, and “conspirator” is used 32 times. I read through most of the complaint and I really don’t understand how any of the evidence provided supports the conspiracy claims.

The first two counts in the lawsuit are the expected (defamation per se and defamation, against all defendants). Count three is against all defendants and is for commercial disparagement (this is a new one to me — basically it is unfairly disparaging a business). Count four is false light (under Pennsylvania law) against Geoinvesting defendants only. Counts five and six are tortious interference and tortious interference with contract, against all defendants. Count seven is the big one, civil conspiracy, against all defendants. Now I am not a lawyer, but I do believe that Eros included the claim of civil conspiracy to be able to expand the scope of discovery and litigate all the claims against the various defendants in one suit, rather than having to file separate suits against each defendant.

The main lawyer for Eros International is Michael J. Bowe of Kasowitz Benson Torres LLP. Michael Bowe, besides having a sense of humor like mine, is most well known (at least among investors/traders) for representing Fairfax Financial against short sellers (this case lasted over a decade). The Fairfax Financial case also involved allegations of a conspiracy of short sellers.

One last note: this case has a couple defendants (Chris Irons and the Clarity Spring defendants) who wrote no articles or blog posts but only tweeted about Eros. Below is a screenshot of the complaint showing Irons’ tweets:

Perhaps the scariest part of this complaint is the following:

86. Irons, using his “Quoth the Raven” alias, defamed and disparaged Eros, including
by redistributing false information about Eros on Twitter.

In other words, Eros International and its lawyers are asserting that merely spreading information on Twitter (commonly done through a retweet rather than an URL link) can qualify as defamation.

If Eros is victorious in its lawsuit (or even if this just drags on for years) this could have a chilling effect on criticism of controversial companies, online in general and in particular on Twitter.

Post updated on 10/4/2017 with links to more articles, more excerpts from complaint on John Doe defendants, and link to ProbesReporter report.

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post except that I follow some of them on Twitter and respect their work. 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 Jason McDiarmid & Kenneth George Cedric Telford for allegedly pumping & dumping Interactive Multi-Media Auction Corp (IMMA)

On September 29, 2017 the SEC filed suit against Jason McDiarmid & Kenneth George Cedric Telford for their alleged involvement in the pump and dump of Interactive Multi-Media Auction Corp (IMMA). See the SEC press release.

Excerpt:

According to the complaint, McDiarmid and Telford incorporated IMMA and took it public through a 2013 Form S-1 registration statement, registering a public offering of the company’s common stock by selling shareholders, including two of McDiarmid’s and Telford’s nominees. IMMA’s Form S-1 and its amendments allegedly falsely claimed that IMMA’s chief executive officer, McDiarmid’s friend who had no corporate experience, ran the company, when in fact it was secretly run by McDiarmid and Telford. The complaint also alleges that the S-1s also included lies that certain selling stockholders purchased their shares in IMMA through private placements, which were sham transactions. The complaint also alleges that, after learning that the SEC had subpoenaed testimony from the sister of IMMA’s CEO, who was one of the parties in the sham transactions, McDiarmid suggested a “script” for her testimony, which included false information about her relationship with Telford.

The complaint further alleges that once the Form S-1 went effective, McDiarmid repeated these lies, along with others, to a market maker for IMMA’s stock, who included them in its successful application to obtain clearance from FINRA to quote IMMA’s stock, which was needed for the company to be publicly traded.

According to the complaint, McDiarmid and Telford opened brokerage accounts in the names of nominees in order to sell their stock and, when they deposited IMMA shares into the accounts, they lied about how much stock they owned, how they obtained it, and the relationship of the nominees to them. McDiarmid and Telford also prepared IMMA’s periodic filings made with the SEC, which largely repeated the same lies in the Forms S-1. The complaint further alleges that McDiarmid and Telford organized and implemented a promotional campaign, including email blasts and a boiler room that targeted senior citizens. IMMA’s stock price increased, from $0.93 per share on September 30, 2014 to $1.62 per share on May 1, 2015, during which time McDiarmid and Telford dumped their shares through the nominees, earning them net illegal profits of about $3.1 million.

See the SEC’s complaint (pdf).

From the complaint:

Lastly, from October 2014 to May 2015, McDiarmid and Telford
organized and implemented a promotional campaign, including email blasts and a
boiler room to target senior citizens. As a result of their campaign, IMMA’s stock
price increased significantly, from $0.93 per share on September 30, 2014 to $1.62
per share on May 1, 2015, during which time McDiarmid and Telford dumped their
shares through their nominees for net proceeds of about $3.1 million.

See also the Stockwatch article about the suit (full text available only to subscribers).

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 alleged boiler room operators involved in New Generation Energy (NGEY) pump & dump

On September 27th, 2017 the SEC sued individuals and companies that it alleges illegally sold shares in multiple penny stock companies through boiler rooms. From the SEC press release:

The Securities and Exchange Commission has charged six unregistered broker-dealers located in California and Colorado with illegally selling securities in penny stock companies.

The SEC’s complaint alleges that brothers David H. Welch and Marc J. Bryant, both located in southern California, and John C. Knight, located in Colorado, sold securities in New Global Energy Inc., its predecessor company, Global Energy Technology Group, Inc., and other companies in unregistered transactions using sales agents located in boiler rooms, both nationally and internationally, raising over $10 million from investors over four years. Welch, Bryant and Knight used various entities, including Defendants Bio-Global Resources, Inc., Diversified Equities Inc. (DEI), and Diversified Equities Development Inc. (DED), to make these illegal sales. In addition, according to the complaint, all of the defendants, including New Global and its CEO, Florida attorney Perry D. West, sold securities without filing a registration statement with the SEC.

See the SEC’s legal complaint (pdf). Excerpt from the complaint:

This case involves numerous individuals and entities acting as brokerdealers
– including operating a boiler room “cold-calling” operation – despite failing
to register with the SEC in violation of Section 15(a) of the Exchange Act. In
addition, all of the Defendants, operating through a web of controlled entities, sold
stock in two successive companies to the public in unregistered transactions in
violation of Sections 5(a) and 5(c) of the Securities Act, thereby depriving investors
of important and legally required information. Through their illegal plan the
Defendants effected millions of dollars of securities transactions in the stock of two
entities: Global Energy Technology Group, Inc. (“Global Energy”) and Defendant
New Global Energy, Inc. (“New Global”).

From their sales of the securities of Global Energy and New Global, the
Welch, Bryant, Knight, Bio-Global, DEI and DED raised over ten million dollars
from more than 500 investors. As a result of conduct alleged in this Complaint, these
Defendants violated the broker-dealer registration provisions of Section 15(a)(1) of
the Exchange Act, 15 U.S.C. § 78o(a)(1)

New Global Energy (NGEY) was the stock that is mentioned in the complaint. Below is the weekly candlestick chart.

The case is Securities and Exchange Commission v. David Howard Welch, et al, No. 17-cv-01968. It was filed in the Central District of California.

 

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.

Jason Napodano of Zacks Small Cap Research sued by SEC (and settles with them) and charged with criminal stock fraud for insider trading

Yesterday the SEC sued Jason Napodano of Zacks Small Cap Research as well as two other men, Bilal Basrai and Bryce Stirton. All three settled the civil suit without admitting or denying the allegations. See the SEC press release. In addition, the employer of all three men, LBMZ Securities (owner of Zacks), agreed to “pay a $240,000 penalty without admitting or denying the SEC’s findings that the firm failed to enforce policies and procedures designed to prevent its employees from misusing nonpublic information.”

The Securities and Exchange Commission today charged a stock market analyst with insider trading prior to the publication of research reports and articles he authored with the false disclaimer that he wasn’t trading in the companies being covered.  He agreed to settle the charges and be barred from trading in penny stocks for the rest of his life.

The SEC alleges that Jason Napodano, who headed a division called Zacks Small Cap Research within a larger investment research firm, misled investors in penny stocks by representing that he wasn’t trading or holding positions in the companies he was writing about while secretly trading the same stocks based on nonpublic information about the publication date of his research.  In an effort to evade detection, Napodano allegedly limited his profits from each illegal trade by taking small positions and closing the positions shortly after his reports and articles were published.

In addition to a permanent penny stock bar, Napodano agreed to pay full disgorgement of his insider trading profits totaling $143,865.48 plus interest of $17,620.87 and a penalty of $143,865.48.  The settlement is subject to court approval.

Basrai agreed to settle the charges by paying disgorgement of his insider trading profits of $39,668.37 plus interest of $4,617.89 and a penalty of $39,668.37.  Stirton agreed to settle the charges without admitting or denying the allegations by paying disgorgement of his insider trading profits totaling $2,218.87 plus interest of $257.43 and a penalty of $2,218.87.  Basrai and Stirton also agreed to be barred from trading penny stocks and from working in the securities industry, with Stirton having the right to reapply after five years.

The parallel criminal charges (one count each of stock fraud) were filed in the Northern District of Illinois (press release) against Napodano and Basrai. Stirton was not criminally charged. From the press release about the criminal charge:

JASON NAPODANO, a former Managing Director of a Chicago investment research firm, used material, non-public information he obtained while preparing equity research reports about companies to purchase and sell stock in those companies, according to a criminal information filed in federal court in Chicago. The illegal trading profits netted Napodano approximately $143,000, the information states.

In a related case, BILAL BASRAI, a former Managing Director of a Chicago investment banking firm, used material, non-public information to earn approximately $37,157 in illegal profits from the purchase and sale of stock in three companies.  Through his legal counsel, Basrai authorized the U.S. Attorney’s Office to disclose that Basrai has cooperated with the government’s investigation and intends to plead guilty to the charge contained in the information.

This case seems to signal increasing aggressiveness on the part of the SEC — while I do know that the SEC is more aggressive against insider trading than many other violations of securities laws, I cannot recall any other time that the settlement (for anything) has included a complete ban from trading penny stocks as opposed to just a bar from participating in penny stock offerings (“barred from trading in penny stocks for the rest of his life.”).

According to the Charlotte Observer, Jason Napodano is currently running a biotech newsletter called Bio5C:

According to LinkedIn, Napodano worked at Zacks from 2003 to 2015. He then came to Charlotte, where he started a company called BioNap Consulting, then Bio5C. His biography says he “has significant experience as a pharmaceutical and biotechnology stock analyst,” as well as degrees from Virginia Tech and Wake Forest.

The “code of conduct” page on the Bio5C web site includes this statement without attribution: “I have made terrible mistakes in the past when it comes to disclosure and personal trading. For these mistakes, I am truly ashamed and sorry. My mistakes, although now just public, were between 2013 and 2015. I learned a tough lesson. I’m committed to impeccable disclosure and ethics on Bio5C.”

 

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.

Some belated updates on John Babikian, Awesome Pennystocks, Jay Fung, Eric Van Nguyen, & Anthony Thompson

I haven’t kept up with John Babikian (evidently the man behind Awesomepennystocks.com, perhaps the most successful stock promoter of its time) for the last couple years as not much has happened with him. But I did notice a few things have happened that I had not recorded on this blog, so here they are.

Babikian’s (now ex-) wife dropped her suit against Babikian in LA Superior Court three years ago. I have no clue what happened to the divorce proceedings (those are normally sealed in Quebec).

Request to drop suit (pdf)
Order dropping suit (pdf)

In October 2016 Jean-François Cloutier of Journal de Montreal wrote about Babikian’s former associate Robert Kalfayan and his alleged attempts to remove money from Canada to allegedly escape seizure by the tax authority (article in French). See previous article on Revenue Québec getting a lien on Kalfayan’s home.

Meanwhile, the SEC’s case against Anthony Thompson, Jay Fung, and Eric Van Nguyen (associated with Awesomepennystocks predecessor websites) continues. That case is:

1:14-cv-09126-KBF Securities and Exchange Commission v. Thompson et al
Katherine B. Forrest, presiding
Date filed: 11/17/2014

Currently the case is stayed pending the resolution of the parallel criminal case against Thompson, Fung, and Nguyen and the CEOs of five penny stock companies. If the criminal case (supposed to go to trial on September 27, 2017) does not immediately go to trial the civil case may continue per request of Thompson’s attorneys (docket 70; PDF copy). Below is the judge’s decision (hand-written on the last page of docket 70)

The criminal matter is New York State Court (Manhattan Supreme Court) case 3853/14. See the press release about the original indictment.

Back on May 16th, 2016 the judge ordered a bunch of the charges dropped, including larceny charges, because they were deemed not to fit the crime. The order described in that article can be found on Justia.

I should mention that while the promoters were the ones who became infamous, they were not the alleged mastermind(s). Instead, that was allegedly Kevin Sepe (who was not charged in the case). From the statement of facts in the order I linked above:

STATEMENT OF FACTS

The indictment arises from 9 alleged fraudulent “penny stock” “pump and dump” schemes. A penny stock is one which trades for less than $5 per share, is not listed on the NASDAQ and requires limited disclosure, making investments more risky and volatile. The company shares in this case traded for pennies or fractions of pennies but the conduct here also involved millions of shares. Those companies and their ticker symbols (the symbols which designated the companies on the market) were: Blast Applications (BLAP), Blue Gem Enterprises (BGEM), Recyle Tech (RCYT), Hydrogenetics (HGYN), Xynergy Holdings (XYNH), Mass Hysteria Entertainment Company Inc. (MHYS), Lyric Jeans (LYJN), SunPeaks Ventures (SNPK) and Smart Holdings (SMHS) (hereinafter sometimes referred to as the “subject companies”).

The architect and orchestrator of the scheme was Kevin Sepe. The remaining defendants, as described infra, were either affiliates of Kevin Sepe or stock promoters who worked with him to implement the alleged frauds. The Defendants’ work with the companies followed a similar pattern. A publicly traded “shell” company (a company with no substantial business) would be [*3]identified and Mr. Sepe and his affiliates would then act to merge a private company they controlled into the shell company. This allowed the shares of the new company to be freely traded without a waiting period. Money would be loaned to the company and then the loan would be converted into equity through the receipt of shares of the company stock as a substitute for the repayment of the debt. A stock promotion would then take place. Typically, there would have been very little trading in the company’s stock prior to the promotion. Immediately prior to the beginning of the promotion, however, some shares might be leaked into the market so that regulators would not see that a company went immediately from having no shares traded to a large trading volume.

The shares held by Sepe and his affiliates would rise in value following the promotion. Sepe and his affiliates would sell the shares at huge profits. The promotional campaign would then end. The share price would then rapidly decline. Kevin Sepe and his affiliates knew, in advance, that the stocks would follow this pattern pursuant to the beginning and end of internet marketing campaigns and scheduled and coordinated their stock sales accordingly. In each case, the sales and profits followed the pre-arranged pattern.

A key part of the scheme was to conceal the fact that Kevin Sepe controlled a vast portion of the trading shares. To conceal his ownership, his shares were placed in the names of multiple loyal nominees including Defendants Luz Rodriguez and Joseph Dervali who then sold their shares and split the profits with Kevin Sepe. In addition to concealing his ownership and control, having shares held by these nominees allowed Sepe to evade requirements that persons who held more than 5% of the shares of a company be disclosed.

Kevin Sepe was sued by the SEC back in 2012 for his involvement in the pump and dump of Recycle Tech and HydroGenetic and he settled that case. “Sepe agreed to disgorgement of $1,416,466.16, prejudgment interest of $126,761.86, and penalties of $185,000 as well as a permanent bar from participating in an offer or sale of penny stocks.” As with most SEC settlements, Sepe neither admitted nor denied the allegations in the settlment.

 

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.

 

Another day, another Bitcoin-related penny stock trading suspension: American Security Resources Corp $ARSC

Just yesterday trading in First Bitcoin Capital Corp was suspended by the SEC. Today, the SEC suspended trading in American Security Resources Corp (ARSC).

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 ARSC because of questions
that have arisen regarding publicly available information about the company in press releases on
OTCMarkets.com, dated August 1, and August 8, 2017, concerning, among other things, the
company’s business transition to the cryptocurrency markets and early adoption of blockchain
technology.

Following are links to and excerpts from the above-mentioned press releases:

American Security Resources Corp. (OTC PINK: ARSC) Officially Changes Name to Bitcoin Crypto Currency Exchange Corporation (August 1st, 2017)

HOUSTON, TX / ACCESSWIRE / August 1, 2017 / American Security Resources Corporation (OTC PINK: ARSC) is pleased to announce that the Company has officially changed its name to Bitcoin Crypto Currency Exchange Corporation in Nevada, the State of incorporation, as it prepares to enter the booming Crypto currency markets.

“We have decided to make this change to better reflect the new activities of our company. We have already taken steps to bring the company into compliance with OTC Markets and expect to have more announcements soon,” said CEO Frank Neukomm.

He further added, “The Company, today, has appointed Jay Jordon, Michel Beaulieu, and Duncan Brown to its Advisory Board as they have more than 50 years of combined experience in emerging digital technologies. We believe the Company is now positioned to aggressively pursue crypto-currencies and Bitcoin opportunities, and have changed our name to accurately reflect our new direction.”

Bitcoin Crypto Currency Exchange Corporation (OTC PINK: ARSC) Announces the Acquisition of Kachingpay.com

HOUSTON, TX / ACCESSWIRE / August 8, 2017 / Bitcoin Crypto Currency Exchange Corporation (OTC PINK: ARSC), formerly known as American Security Resources Corporation, announces today that it has acquired 100% of Kachingpay.com Incorporated (“KaChing”), in a cash and stock transaction. KaChing will be merged in to ARSC as a wholly owned subsidiary.

About Kachingpay.com:

KaChing is a smartphone-based payment and money transfer system created by Prometheus Software. KaChing is fast, free, and failsafe. KaChing recognizes that current user fees and charges with existing payment and money transfer systems are excessive. Today’s payment transactions and systems are burdened by their complexity and cost.

KaChing will drive down user fees and charges so that purchase payment processing will become a low cost, commodity utility. Using the free KaChing mobile app, consumers purchase tokens for their digital wallet. KaChing gift card tokens are then used for purchases with merchants. Consumers do not need credit cards, debit cards or specialized hardware. Merchants use existing hardware as well: computers, smartphones or tablets. KaChing uses Apple iOS and Android mobile devices for payment.

Management considers this acquisition significant as it provides a mobile front end on iOS and Android to the BitcoinMWallet mobile exchange platform for crypto currencies, which will be created by the Company.

 

ARSC will resume trading on the grey market (no market makers) at the open on September 11th.

 

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.

 

 

 

First Bitcoin Capital Corp $BITCF receives SEC trading suspension

This morning just prior to the market open the SEC issued a trading suspension for First Bitcoin Capital Corp (BITCF), which has a market cap of $545 milliion as of the most recent close of $1.79.

SEC trading suspension release (PDF)
SEC trading suspension order (PDF)

The reason given for the trading suspension:

because of concerns regarding the accuracy and adequacy of publicly available information about the company including, among other things, the value of BITCF’s assets and its capital structure.

My bet is that the news from August 2nd of BITCF preparing to pay a dividend in an illiquid cryptocurrency (TeslaCoilCoin) was one of the primary reasons for the trading suspension. The record date for that dividend was to be September 12th which is why I think the SEC acted now. After first posting this article Jacob Ma-Weaver mentioned that BITCF had issued a cryptocurrency version of its own stock and he thought that was the reason for the suspension. I had missed this initially and now agree with Jacob. From the company’s recent PR about the dividend, “We may also from time to time pay dividends in our own common shares in their crypto form which trades under the crypto symbol $BITCF on various foreign cryptocurrency exchanges.”

BITCF will resume trading on the grey market (no market makers) at the open on September 8, 2017.

While I did not follow $BITCF closely, there were plenty of red flags. Besides the usual lack of assets ($673,000 including their cryptocurrency holdings), there was having Anthony M. Santos as legal counsel. I didn’t recognize his name at first but he was attorney for NevWest, a key broker that processed the illegal sales of billions of shares of stock in CMKM Diamonds.

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. New information was added to this post later on the day it was first published to give more reasons why BITCF may have been suspended. 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.

 

Environmental Packaging Technologies Holdings $EPTI to resume trading on July 13th after SEC trading suspension

Not long (13 days) after I blogged about the hard mailer promoting Environmental Packaging Technologies Holdings (EPTI) and uploaded a scan of the mailer, during premarket trading on June 28th the SEC suspended trading in the stock. It will resume trading on the grey market (no market makers) at the market open on July 13th, likely gapping down 90% or so.

SEC trading suspension release (PDF)
SEC trading suspension order (PDF)

The reason given for the trading suspension:

concerns regarding: (i) the accuracy and adequacy of publicly available information in the marketplace
since at least June 9, 2017 regarding statements in third party stock promotion materials pertaining to Environmental Packaging’s 2016 revenues, projected 2017 revenues, and the company’s buyout potential; and (ii) recent trading activity in the security that potentially reflects manipulative or deceptive activities.

While I would love to take credit for the SEC suspension of EPTI, that “The Commission acknowledges FINRA’s assistance in this matter” means that some broker(s) likely submitted SARs (suspicious activity reports) about potentially manipulative trading and that was the prime reason for the suspension.

 

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.