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.

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.

SEC Sues Alpine Securities, continuing a run of bad news for owner John Hurry

As I wrote back in April, FINRA fined Scottsdale Capital Advisors $1.5 million for doing a really poor job at preventing illegal sales by penny stock insiders (FINRA Rule 2010). The owner, John J. Hurry, was barred from the industry. The full 111-page FINRA decision can be found on their website. Unfortunately FINRA prevents direct-linking so you need to go to http://disciplinaryactions.finra.org/Search/ and then enter “John Hurry” as the name. I have downloaded a copy of the decision in case they delete it.

From the FINRA report:

The Respondent firm violated FINRA Rule 2010 by selling securities without
registration and without an exemption, in contravention of Section 5 of the
Securities Act of 1933. The firm’s owner, Respondent John Hurry, also
violated Rule 2010, because he engaged in activities designed to enable the
unlawful transactions and evade regulatory scrutiny.

The Respondent firm and its Chief Compliance Officer, Respondent Timothy
DiBlasi, violated NASD Rules 3010(a) and (b) and FINRA Rule 2010 by
failing to establish and maintain a supervisory system, including written
supervisory procedures, reasonably designed to ensure that the firm
complied with Section 5 of the Securities Act.

The Respondent firm and its President, Respondent Michael Cruz, violated
NASD Rule 3010(b) and FINRA Rule 2010 by failing to supervise and failing
to respond appropriately to numerous red flags indicative of unlawful
unregistered distributions.

The Respondent firm is fined $1.5 million. Hurry is barred in all capacities.
He would also be fined $100,000, but, in light of the bar, the fine is not
imposed. DiBlasi is suspended for two years and fined $50,000. Cruz is
suspended for two years and fined $50,000. In addition, Respondents are
ordered to pay costs, for which they are jointly and severally liable.

From the same FINRA report, John “Hurry is a threat to the investment public.” The SEC must agree because on June 5, 2017 they sued Alpine Securities, which is another broker specializing in penny stocks owned by John Hurry.

The FINRA report on Scottsdale and Hurry describes the close relationship among them, Alpine Securities, and CSCT, which was based in the Cayman Islands.

Respondent Hurry thus owns and controls all three firms involved in the transactions at
issue in this proceeding-Scottsdale, Alpine, and CSCT. In fact, the three firms were almost a
self-contained system for processing and distributing microcap securities. CSCT did all its
business through Scottsdale, and Scottsdale in turn did all its business with Alpine. Alpine’s
current CEO described Alpine as a small”boutique” clearing firm with a focus on the kind of
business brought to it by CSCT. No independent third party was involved in preparing,
approving, or clearing the deposits of stock certificates by CSCT at Scottsdale for resale.

SEC litigation release against Alpine Securities
SEC complaint against Alpine securities (PDF)

From the litigation release against Alpine Securities:

Securities and Exchange Commission v. Alpine Securities Corporation

Civil Action No. 7:17-CV-4179 (S.D.N.Y., filed June 5, 2017)

SEC CHARGES BROKERAGE FIRM WITH FAILING TO COMPLY WITH ANTI-MONEY LAUNDERING LAWS

Washington D.C., Jun. 5, 2017 – The Securities and Exchange Commission today charged a Salt Lake City-based brokerage firm with securities law violations related to its alleged practice of clearing transactions for microcap stocks that were used in manipulative schemes to harm investors.

To help detect potential securities law and money-laundering violations, broker-dealers are required to file Suspicious Activity Reports (SARs) that describe suspicious transactions that take place through their firms. The SEC’s complaint alleges that Alpine Securities Corporation routinely and systematically failed to file SARs for stock transactions that it flagged as suspicious. When it did file SARs, Alpine Securities allegedly frequently omitted the very information that formed the bases for Alpine knowing, suspecting, or having reason to suspect that a transaction was suspicious. As noted in the complaint, guidance for preparing SARs from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) clearly states that “[e]xplaining why the transaction is suspicious is critical.”

The SEC’s complaint charges Alpine Securities with thousands of violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8.

From the complaint, the SEC alleges:

This case concerns Alpine’s practices relating to filing Suspicious Activity
Reports (“SARs”) with the U.S. Treasury Department’s Financial Crimes Enforcement Network
(“FinCEN”). Alpine acts as a clearing firm for many microcap over-the-counter (“OTC”) stock
transactions. Since 2011, Alpine has cleared thousands of deposits of microcap securities, most
of them involving Scottsdale Capital Advisors Corp. (“Scottsdale”) as the introducing broker,
and many of which were used as part of various stock manipulation and other schemes

Alpine’s alleged failures with regard to filing suspicious activity reports (SARs) seem egregious:

Systematically omitting from at least 1,950 SARs material, “red-flag” information of
which it was aware and was required to report under its own BSA Compliance
Program, such as a customer or issuer’s criminal or regulatory history, evidence of
stock promotion, or whether a customer was a foreign financial institution, including
at least 1,150 SARs which included only the customer name, date of deposit, dollar
value of deposit, and the name of the security deposited;
• Filing SARs only on the deposit of stock in approximately 1,900 instances in which
the stock was subsequently liquidated, but failing to file required SARs on subsequent
related transactions such as the liquidation, or transfer of funds resulting from the
liquidation, even though it had identified the deposit of the security as suspicious; and
• Failing to file at least 250 SARs within the required 30 days after the date the
suspicious activity was detected.

Alpine has previously been investigated and cited by FINRA for inadequate SARs in 2012 and 2015.

Lest anyone think that these are just minor paperwork deficiences with no real consequences, I remind you that one pump and dump alone, Biozoom (BIZM), led to over $17 million in fraudulent profits for manipulators / insiders, and many of their accounts were at Scottsdale Capital Advisors.

One interesting thing I noticed: this lawsuit against Alpine Securities came on June 5th, which is exactly the day that the bar against a couple employees of Scottsdale Capital Advisors began. From the FINRA complain from April (emphasis mine):

V. CONCLUSION

The Firm, Scottsdale Capital Advisors, violated FINRA Rule 2010. Accordingly, it is
ordered to pay a fine of$ 1.5 million. John J. Hurryviolated FINRA Rule 2010. For his
misconduct he is barred from association with any FINRA member in any capacity. He would be
fined $100,000, but, in light ofthe bar, the fine is not imposed. Timothy B. DiBlasi violated
NASD Rules 3010(a) and (b) and FINRA Rule 2010. For his misconduct, he is suspended for
two years from association with any FINRA member in any capacity and fined $50,000. D.
Michael Cruz violated NASD Rule 3010(b) and FINRA Rule 2010. For his misconduct, he is
suspended for two years from association with any FINRA member in any capacity and fined
$50,000.

Respondents are also ordered to pay costs in the amount of$22,124.29, which includes a
$750 administrative fee and $21,374.29 for the cost of the transcript. If this decision becomes
FINRA’s final disciplinary action, Hurry’s bar will take immediate effect. DiBlasi’s and Cruz’s
suspension will begin with the opening of business on June 5, 2017 The fines and assessed costs
shall be due on a date set by FINRA, but not sooner than 30 days after this decision becomes
FINRA’s final disciplinary action in this proceeding.

 

Disclaimer. I have no position in any stock mentioned above. I was long BIZM when trading in it was suspended by the SEC and lost money because of that. 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.

 

 

 

 

 

 

 

Sung Hong & Hyun Joo Hong arrested for allegedly defrauding churches and others in purported forex trading scheme

Quoting from the DoJ press release:

          According to records filed in the case, the HONGs recruited investors using religious organizations and shared religious beliefs. The couple claimed that LAURENCE HONG privately invests money for wealthy Korean families and that GRACE HONG holds a Series 65 securities license and previously worked for a large international investment firm. None of these statements appear to be true. Nor was LAURENCE HONG’s past history disclosed. The couple sent potential customers misleading and false investment prospectuses that contained an inaccurate record of their past investment performance and other plagiarized investment outlooks. They further misled investors as to the advisor fees they would charge and the amount of their funds that would be at risk.

The HONGs used investor funds for their own benefit. One church in California invested $1 million with the HONGs and lost about $300,000 on a single trade. Still, despite the steep losses and a fee arrangement based on investment gains, the HONGs withdrew almost $150,000, ostensibly as advisor fees, from the church’s account. Another couple allowed the HONGs to manage their $180,000 in retirement funds only to lose $100,000 within less than a year. After meeting with the HONGs, that couple then invested their remaining retirement funds in the HONGs’ hedge fund, only for those funds to be redirected into GRACE HONG’s personal account. The HONGs used those funds to pay credit card bills and other personal expenses, including a $16,000 payment to a resort in the Bahamas for a HONG family vacation.

Investigators have identified over $2 million in additional losses in several other investor accounts managed by the HONGs. The financial investigation to date has revealed investor money was used to pay for the HONGs’ extravagant lifestyle, which included a 9,000 square foot rental home in Clyde Hill; a 45-foot yacht; multiple high-end vehicles, such as BMWs, a Maserati, and a Lamborghini; and lavish vacations.

See more details:
DoJ Western District of Washington press release
Commodity Futures Trading Commission (CFTC) press release

This is another case where a modest amount of due diligence would have protected the investors. The Sung Hong was previously arrested for fraud. I remember the first time I looked to invest in a company and my minimal due diligence revealed that the CEO William Telander had spent three years in prison for stock fraud (involving alchemy!). Needless to say I did not invest. Google is your friend. Also, if considering investing, make sure to read the fine print, make sure that the money is held at an independent custodian, and make sure that the money manager is licensed or otherwise legally allowed to manage money.

Caveat emptor, as always.

 

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.