FINRA Enforcement files complaint against Lek Securities

Yesterday (November 26, 2018) FINRA Enforcement filed a complaint (pdf) against Lek Securities and Samuel Lek, the firm’s founder and CEO. Please note that this is a complaint from FINRA Enforcement and not a decision. In the future a FINRA officer from the Office of Hearing Officers (OHO) along with two industry panelists will hold a hearing on the issue and they will decide whether the firm violated FINRA rules and what penalties if any to levy. Read more about such proceedings. From the complaint:

1. Between January 2014 and December 2016 (the “Relevant Period”), Lek Securities Corporation (the “Firm” or “LSC”), acting through Samuel Frederik Lek (“Lek”),
failed to develop and implement a reasonable Anti-Money Laundering (“AML”) program and supervisory system for one of its lines of business, namely the deposit and trading of low-priced penny stocks (“microcap stocks”) by Firm customers.
2. As a result of these failures, the Firm, through Lek, did not establish and implement AML policies and procedures that could be reasonably expected to detect, investigate and report, where appropriate, potentially suspicious activity in microcap stocks, thereby violating FINRA Rules 3310(a) and 2010.
3. In addition, the Firm failed to comply with numerous other AML obligations,
including failing to conduct Financial Crimes Enforcement Network (“FinCEN”) 314(a) reviews in violation of FINRA Rules 3310(b) and 2010; failing to conduct reasonable AML testing in violation of FINRA Rules 3310(c) and 2010; and failing to provide reasonable AML training in violation of FINRA Rules 3310(e) and 2010.
4. The Firm, through Lek, also failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933, in violation of NASD Rule 3010 and FINRA Rules 3110 and 2010.
5. As a result, the Firm also facilitated the unlawful distribution of securities in contravention of Section 5 of the Securities Act of 1933 and thus in violation of FINRA Rule 2010

The end result of these failures, according to the complaint:

6. All of the violations described above occurred while the Firm allowed its account
owners to engage in millions of dollars of microcap stock deposit and trading, including accounts that were owned by individuals previously charged with regulatory violations, known toxic-debt financiers, and omnibus accounts established in foreign jurisdictions with unknown beneficial owners.
7. In total, these particular Firm accounts liquidated more than 56 billion shares of microcap stocks and generated approximately $100 million of proceeds, for which the Firm received approximately $1.6 million in commissions.

The complaint details Lek’s involvement in penny stock / microcap business (emphasis mine):

18. During the Relevant Period, the Firm generated approximately $110 million in
revenue through its independent order execution and clearing services, of which approximately $5.3 million was derived from microcap stock activity — $3.6 million attributable to microcap stock trading and $1.7 million from dematerializing microcap stock certificates (i.e., converting physical stock certificates into electronic book-entry form in order for those shares to be traded and settled on the Firm’s platform).

Companies mentioned in the complaint are Daniels Corporate Advisory Co (DCAC), Cherubim Interests LLC (CHIT), New Colombia Resources Inc (NEWC), US Stem Cells Inc (USRM), Cannabis Science Inc (CBIS), Zentric (ZNTR), and First Colombia Gold Corp (FCGD).

Interestingly, the trading of one of those stocks (CBIS) was in Lek UK Omnibus Account (LUO) which “was an omnibus account controlled by a Firm affiliate and utilized to conduct trading for underlying customers located outside the U.S.”

The six causes of action listed in the complaint are as follows (in parentheses after each cause of action is shows whether it applies to Lek Securities Corp “LSC” or Samuel Lek “Lek”):

  1. FAILURE TO ESTABLISH AND IMPLEMENT A REASONABLE AML PROGRAM
    Violation of FINRA Rules 3310(a) and 2010 (LSC and Lek)
  2. FAILURE TO SUPERVISE FOR COMPLIANCE WITH SECTION 5 OF THE SECURITIES ACT OF 1933 Violation of NASD Rule 3010, and FINRA Rules 3110 and 2010 (LSC and Lek)
  3. SALE OF UNREGISTERED SECURITIES Violation of FINRA Rule 2010 (LSC)
  4. FAILURE TO CONDUCT SEARCHES PURSUANT TO SECTION 314(A) OF THE PATRIOT ACT Violation of FINRA Rules 3310(b) and 2010 (LSC)
  5. FAILURE TO CONDUCT REASONABLE AML TESTING Violation of FINRA Rules 3310(c) and 2010 (LSC)
  6. FAILURE TO PROVIDE REASONABLE AML TRAINING Violation of FINRA Rules 3310(e) and 2010 (LSC)

It appears to me that FINRA and the SEC are continuing to focus on violations relating to the deposit and sale of microcap stocks and the proper supervisory procedures to prevent such violations. See my blog posts on FINRA and SEC actions against Chardan, ICBCFS, Aegis, and Cor.

 

 

Disclaimer: I have no position in any stock mentioned. I used to be a client of COR Clearing (through Speedtrader). I have no relationship with any other parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

SEC wins default judgment against Axiom Holdings (AIOM) boiler room pumper Eric P. Lesak

I follow stock promotions (pump and dumps) closely and have traded them (mostly short, sometimes long) for over a decade now. But there are many pumps that I ignore or never notice in the first place — the promotion (such as boiler-room cold calls) is nothing I can observe and the volume is too low for me to find it while scanning for stocks to trade. A great example of this is the boiler-room pump and dump of Axiom Holdings, which took place between December 2015 and July 2017.

According to the SEC complaint (pdf) against Eric P. Lesak and his two companies, Global Research LLC (New York) and Global Research LLC (Pennsylvania), he used cold calls to get over 100 people to buy Axiom stock worth $2.8 million:

Lesak and Global pitched Axiom stock to more than 100 investors who bought Axiom stock between December 15, 2015 and June 20, 2017. These investors purchased more than 1.9 million shares of stock for approximately $2.8 million, which led to losses of more than $2.3 million by the time trading in Axiom was suspended by the Commission in June 2017.

In this case Lesak was being paid by a stock promotion firm (that was not named in court documents). According to court documents, “Between December 2015 and June 2017, pursuant to the Consulting Agreements, Defendants were paid a total of $767,115 to induce investors to purchase Axiom Stock. ”

Axiom Holdings daily stock chart (click to enlarge)

Yesterday on November 8, 2018, the court issued a default judgment (pdf) against Lesak. See the SEC’s press release about the judgment. The full case docket can be found on CourtListener.

The judgment against Lesak and his companies:

the defendants to pay, jointly and severally, disgorgement of $767,115 plus interest of $46,644. The judgment also orders Lesak to pay a civil monetary penalty in the amount of $184,767, Global to pay a civil monetary penalty in the amount of $923,831, and prohibits Lesak from participating in any offering of penny stock for twenty-five years.

Even with much fewer big money pump and dumps than there were years ago, a lot of little pumps add up and the gullible still lose lots of money on pump and dump scams.

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

 

Vitality Biopharma (VBIO) receives SEC trading suspension

This morning just prior to the market open the SEC issued a trading suspension for Vitality Biopharma (VBIO). As of the close yesterday ($1.69 per share) the company had a market cap of $38 million. The company was purportedly investigating the use of cannabis-derived compounds as medicines.

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

The reason given for the trading suspension:

questions regarding (i) the accuracy and adequacy of publicly available information in the marketplace about the company, including undisclosed control persons and concentrated beneficial ownership of Vitality Biopharma’s common stock; and (ii) potential market manipulation in Vitality Biopharma, Inc.’s common stock.

VBIO will resume trading on the grey market (no market makers) at the open on November 21st, 2018.

VBIO was apparently promoted via Twitter ads:

 

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

COR Clearing leaves penny stock deposit business

On September 28, 2018 the SEC filed an order resulting from an administrative proceeding against COR Clearing. COR offered a settlement that the SEC chose to accept.

COR Clearing SEC Press Release
COR Clearing Order (pdf)

The settlement is “for failing to report suspicious sales of penny stock shares totaling millions of dollars.” As a result of the settlement COR will pay $800,000 and substantially cease accepting deposit of penny stock shares.

From the press release (emphasis mine):

The Securities and Exchange Commission today announced settled charges against clearing firm COR Clearing LLC for failing to report suspicious sales of penny stock shares totaling millions of dollars.  As part of the settlement, COR has agreed to exit a key penny stock clearing business by significantly limiting the sale of penny stocks deposited at COR.

Broker-dealers are required to file Suspicious Activity Reports (SARs) for transactions suspected to involve fraud or with no apparent lawful purpose.  According to an SEC alert dated March 29, 2016, microcap securities are more susceptible to manipulation and it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies.  The SEC’s order finds that in 2016, COR ranked second among all broker-dealers in the total dollar value of sub-$1 penny stocks that it cleared, and from January 2015 to June 2016, COR cleared for sale a significant amount of penny stock on behalf of customers of its introducing broker-dealers.  The SEC finds that approximately 193 customer accounts deposited large blocks of low-priced securities, quickly sold these securities into the market, and then withdrew the cash proceeds.  The SEC further finds that in some instances the same customers engaged in this suspicious pattern with multiple securities.  According to the order, COR failed to file SARs with respect to a subset of the foregoing transactions and, as a result, violated the securities laws.

“SAR filings by both introducing and clearing brokers, especially those who transact in the microcap space, are critically important to the regulatory and law enforcement communities,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The penalty imposed and the limitation placed on COR’s business reflect how seriously we take the failure to file SARs in the face of numerous red flags.”

Without admitting or denying the SEC’s findings, COR agreed to a settlement that requires it to not sell penny stocks deposited at COR with certain narrow exceptions and pay an $800,000 penalty.  COR also consented to a censure and to cease and desist from similar violations in the future.

The SEC investigation was conducted by Jorge G. Tenreiro, Elizabeth Baier, Michael Fioribello, and Sandeep Satwalekar in the New York office with assistance from the Enforcement Division’s Bank Secrecy Act Review Group.  The case was supervised by Lara Shalov Mehraban.  The SEC’s examination that led to the enforcement action was conducted by Edward Janowsky, Stephen Bilezikjian, and Dennis Koval, and supervised by Steven Vitulano of the New York office.

 

According to the order:

RESPONDENT

COR is a registered broker-dealer headquartered in Omaha, Nebraska. COR was previously known as Legent Clearing, LLC (“Legent”), which changed its name to COR Clearing LLC following its acquisition by COR Securities Holdings, Inc. (“CORSHI”) in January of 2012. Originally as Legent, COR has been registered with FINRA since June 4, 2002. COR derives the majority of its revenues from clearing and settlement of fixed income and equity securities for approximately 79 introducing broker-dealers (“IBDs”).

FACTS

Background

1. COR’s practice of accepting low-priced securities for deposit and subsequent sale on behalf of the customers of its introducing broker-dealer clients predates CORSHI’s acquisition of Legent in 2012. COR continued clearing sales of low-priced security deposits after the acquisition. In 2016, for example, COR ranked second among all broker-dealers in terms of the dollar value of shares deposited with a price of $1 per share or less at The Depository Trust & Clearing Corporation.

Relevant Regulatory History

2. In 2013, COR settled a FINRA action that resolved findings from multiple FINRA exams of Legent (the “FINRA Action”) from prior years. The FINRA Action focused on operational issues preceding the acquisition, but identified certain shortcomings in Legent’s AML program as well, including a failure to devote adequate attention to AML surveillance and the failure to identify or report suspicious activity in 2009 and in early 2012.
3. Beginning in early 2012, COR’s new management began to take a number of steps to remediate the AML issues identified in the FINRA examinations that ultimately gave rise to the FINRA Action. These steps included expanding its AML-compliance staff, and implementing an automated suspicious activity software system provided by a third party vendor. As part of the settlement with FINRA, COR also hired a consulting firm to review the state of its AML compliance program and make recommendations. Subsequently, COR hired a second consulting firm (the “Consulting Firm”) to address and implement the recommendations arising from the first firm’s review.
4. Starting in early 2015 and through the issuance of a final report in January of 2016 (the “Consulting Report”), the Consulting Firm identified, among other things, a number of areas for COR to review and improve regarding the operation of the third party automated suspicious activity software licensed by COR and COR’s understanding of how this software worked.
5. For example, the third party automated suspicious activity detection software licensed by COR used 24 separate models to identify potentially suspicious activity for SAR-filing consideration (the “AML Software”). The Consulting Report identified potential problems with the AML Software, including the potential for data being loaded incorrectly or not loaded at all into the AML Software, and advised COR of the need to clearly understand the parameters that the AML Software used to identify suspicious activity.
6. Despite its efforts to implement the Consulting Firm’s recommendations between 2015 and 2016, COR experienced persistent difficulties with the operation of its AML Software relative to flagging deposit, sale, and withdrawal (“DSW”) transactions for review.

The order later goes into detail on COR’s failures to file SARs:

COR’s Failure to File SARs
12. COR cleared for sale a significant amount of penny stock that was originally deposited by its IBD’s customers. For example, between January 2015 and June 2016, approximately 193 accounts from COR’s IBDs deposited and sold blocks of low-priced securities and withdrew cash proceeds from the sale. Each DSW transaction occurred within 30 days and in amounts over $100,000, and involved multiple penny stock sales and outgoing money transfers. Nonetheless, unless another one of the modules of the AML Software flagged the transaction activity, the Software failed to alert COR’s AML staff to review a number of DSW transactions
due to the software issues described above in paragraphs 9 through 11.
13. Below are examples of customers of COR’s IBDs who engaged in multiple DSW transactions in the same account lacking any apparent business or lawful purpose.
14. COR did not file SARs identifying the patterns and transactions described below in paragraphs 15 through 17.
15. Customer Account A
a. Between January 2015 and April 2016, an account opened at a COR IBD (“Customer Account A”) engaged in a repeated DSW pattern in at least three different low-priced securities.
b. Between January 2015 and April 2016, Customer Account A received approximately 24 physical deposits of large blocks of a certain low-priced security issuer (“Security A1”), and engaged in over 150 sales of Security A1 in the days immediately following the deposits, for a total of over 306 million shares of Security A1 deposited and over 273 million shares of Security A1 sold within this time period.
c. Between January and November 2015, Customer Account A received approximately 28 physical deposits of large blocks of a second low-priced security issuer (“Security A2”), and engaged in over 80 sales of Security A2 in the days immediately following the deposits, for a total of over 1.2 billion shares of Security A2 deposited and over 1 billion shares of Security A2 sold within this time period.
d. Between April and December 2015, Customer Account A received three physical deposits of large blocks of a third low-priced security issuer (“Security A3”), and engaged in over 25 sales of Security A3 in the days
immediately following the deposits, for a total of over 2.1 million shares of Security A3 deposited and over 2 million shares of Security A3 sold within this time period
e. In 2015 alone, Customer Account A withdrew more than $11 million from the proceeds of this activity within a short period of time after the sales of blocks of these securities.

Perhaps the most important part of the order is the Undertakings section, which goes over the steps COR will take to prevent future violations (footnote omitted from quote):

UNDERTAKINGS
22. COR undertakes to not approve for open market sale any equity security that does not trade on a national securities exchange and trades at a price of less than $5 per share at the time it is submitted to COR for sale approval; provided, however, that COR may approve for sale on the open market any such security if:
a. COR obtains and retains a trade confirmation evidencing that the securities were purchased on the open market, as opposed to having been deposited at COR or another broker-dealer;
b. The securities are exempt from the Securities Act of 1933’s (“Securities Act”) registration requirements under Section 3(a)(2) or Section 3(a)(5) of the Securities Act, or the securities are defined as “government securities” under Section 3(a)(42) of the Exchange Act;
c. The security is an unsponsored American Depositary Receipt (“ADR”); or
d. The aggregate value of the sale of the securities of any particular issue is less than $10,000 and the customer has not availed itself of this exception within the last three months in any account in the name of the customer, in which the customer has a beneficial interest as defined in 31 CFR Section 1010.230, or over which the customer has trade or signatory authority

Basically, this means that COR cannot accept new shares of OTC stocks for deposit and sale unless the securities are exempt, government securities, unsponsored ADRs, or the value of the security is under $10,000 and the customer has not deposited any other OTC shares in the prior 3 months. This does not prevent clients of COR from buying and selling OTC stocks on the open market, just from depositing new shares that have not previously been traded.

Brokers’ failures to file SARs (particularly in relation to penny stocks) have been a big issue with the SEC and FINRA lately. For example, the SEC and FINRA fined Aegis Capital in March;  the SEC fined Chardan Capital in July; the SEC and FINRA fined ICBCFS in July; and the SEC fined Schwab in July (though Schwab’s failure to file SARs did not relate to penny stocks).

My apologies for being slow to blog about this! It is no longer news but is an important development in penny stock land so I wrote it up even though it is untimely.

Disclaimer: I have no position in any stock mentioned. I used to be a client of COR Clearing (through Speedtrader). I have no relationship with any other parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

SEC Suspends trading in Onelife Technologies Corp (OLMM) as stock is promoted for second time this year

This morning prior to the market open the SEC supsended trading in Onelife Technologies (OLMM). Back in June I blogged about the boiler room promotion of OLMM at the beginning of the year. The stock was slapped with a caveat emptor warning by OTCMarkets on March 8, 2018 and after that appears to have been abandoned by the promoters.

The caveat emptor designation was removed on August 14th 2018 and two weeks later that was followed by another round of promotion that saw the stock start trading increased volume and the share price spike from $0.15 to $0.60.

 

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

The reason given for the trading suspension:

The Commission temporarily suspended trading in the securities of OLMM because of questions regarding the accuracy and adequacy of publicly available information in the marketplace and potential market manipulation in OneLife Technologies Corp.’s common stock.

OLMM will resume trading on the grey market (no market makers) at the open on October 23rd.

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

SEC Sues Ovations Holdings Inc (INOH) and its CEO for false press releases

On September 5th, 2018 the SEC announced a lawsuit against In Ovations Holdings, Inc (INOH) and the company’s CEO Mark Goldberg for filing allegedly false press releases from January 2015 to October 2015.

SEC v. In Ovations Holdings & Mark Goldberg complaint (pdf)

The lawsuit was filed in the Eastern District of New York in Federal Circuit Court. You can see the docket for free at CourtListener.

From the complaint, see the (alleged) facts of the case:

11. During the Relevant Period, Ovations issued at least seven false or misleading press releases about its business.
12. On information and belief, Goldberg, as Ovations’ CEO, generated each of these press releases himself and caused Ovations to issue them.
13. Goldberg did so to fraudulently induce investors to buy shares of Ovations stock so that one or more stock promoters could sell their Ovations shares in the market for a profit.
14. Goldberg knew or recklessly disregarded the falsity or misleading nature of each of these press releases.
15. On information and belief, Goldberg received approximately $250,000 in return from one or more stock promoters at least partly for Goldberg’s role in issuing Ovations’ false or misleading press releases.

This looks like a pretty standard false press release case. The only interesting thing is the use of the “on information and belief” for the alleged payment to Goldberg from stock promoters. Basically that phrasing indicates that the SEC doesn’t have clear evidence of the payment. It is unfortunate that the SEC doesn’t name the stock promoters but if they had to use the “on information and belief” language to state that they believe there was a payment then they certainly didn’t have enough information to name and sue any involved stock promoters.

 

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

Two Unrelated stock manipulation schemes foiled by one cooperating witness & the FBI

On July 23rd the US Attorney’s Office for the Southern District of California issued a press release about eight defendants that were indicted in pump and dump schemes. I already blogged about the indictment of Luke Zouvas for “laundering money he believed to be proceeds of stock fraud schemes.”

Besides the Zouvas indictment, there were two other indictments announced in the same press release. The two indictments share no defendants or stocks but both mention a cooperating witness (“CW-1”), described identically in each indictment as “a resident of California, and worked as a stock promoter.” One of the most talented stock scam researchers I know (the anonymous ‘nodummy’) wrote that he believes Michael Forster is the cooperating witness.

The two cases are:

United States v. Gannon Giguiere & Oliver Lindsay (3:18-cr-03071) US District Court, S.D. California
Indictment (thanks to Promotion Stock Secrets for uploading this)
Docket on CourtListener.com

United States v. Andrew Hackett, Annetta Budhu, Vikram Khanna, Kuldeep Sidhu, & Kevin Gillespie (3:18-cr-03072) US District Court, S.D. California
Indictment (thanks to Promotion Stock Secrets for uploading this)
Docket on CourtListener.com

In addition to the two criminal indictments, the SEC filed a civil suit against five of the individuals:

SEC Litigation Release
SEC Complaint (pdf)

The case is:
Securities and Exchange Commission v. Gannon Giguiere, Oliver-Barret Lindsay, Andrew Hackett, Kevin Gillespie, & Annetta Budhu (3:18-cv-01530) US District Court, S.D. California
Docket on CourtListener.com

Simply because I cannot easily copy and paste from the indictments due to formatting issues I have quoted relevant parts of the SEC complaint below (emphasis mine):

2. The three fraudulent schemes netted more than $10 million in illicit proceeds.
Scheme #1 – KVMD
3. The first scheme concerned KVMD, a purported medical-device business. Beginning in approximately June 2016, Giguiere, a stock promoter and KVMD’s undisclosed control person, caused KVMD to issue three million shares of its common stock to one of his associates, who in turn sold two tranches of 1.5 million shares to each of two nominee entities he and Lindsay, the owner and operator of a Cayman Islands-based broker-dealer, controlled.
4. Giguiere deposited one tranche of 1.5 million shares into a U.S. brokerage account he opened in the name of his nominee, and Lindsay deposited the second tranche of 1.5
million shares into an account in the name of his nominee at his Cayman Islands broker-dealer.
5. Between November 29, 2017 and January 26, 2018, Giguiere, Lindsay, and an associate conducted a matched trading scheme in KVMD’s stock, whereby they coordinated
Giguiere’s sales of his 1.5 million shares of KVMD to Lindsay, who was buying those shares in his own brokerage accounts and customer accounts at his Cayman Islands broker-dealer.
6. Unbeknownst to Giguiere and Lindsay, the associate with whom they conducted the scheme was a witness cooperating with the Federal Bureau of Investigation (“FBI”), who
was recording their phone calls and preserving their encrypted email and text message communications.
7. By January 26, 2018, as a result of their scheme, Giguiere and Lindsay had netted approximately $1.57 million in proceeds and had increased KVMD’s share price from zero to $1.20.
8. Soon thereafter, Giguiere began promoting KVMD’s stock on TheMoneyStreet.com (“TheMoneyStreet”), a stock promotion website he controlled, in anticipation of his and Lindsay’s sales of their second tranche of 1.5 million shares of KVMD into the buying volume generated by the promotion.
9. Giguiere and Lindsay’s plan to liquidate the second tranche of 1.5 million shares was stymied, however, on March 19, 2018, when the Commission suspended trading in KVMD’s securities for a period of ten business days.

Scheme #2 – ASNT
10. The second fraudulent scheme concerned ASNT, a purported digital media company.
11. In early 2017, Gillespie, ASNT’s chief executive officer, Budhu, a purported adviser to the company, and Hackett, a purported lender to ASNT, began laying the groundwork for a “pump and dump” of ASNT’s stock. [citation omitted]
12. In February 2017, Gillespie caused ASNT to enter into a purported “Advisory Agreement” with Budhu, under which she was paid 200,000 shares of ASNT stock for her
“consulting services.” ASNT issued the stock to Budhu in March 2017, and in August 2017 she sold the shares to Hackett at a significant premium to its then trading price.
13. Gillespie then caused ASNT to issue to Hackett a sham $300,000 convertible promissory note that would allow Hackett to convert the debt into 750,000 shares of ASNT stock. The group planned to have Hackett ultimately sell these 950,000 shares in connection with the pump and dump and then split the proceeds among the group’s members.
14. In October 2017, the group approached the cooperating witness about promoting ASNT’s stock on TheMoneyStreet in connection with their planned pump and dump. Unbeknownst to them, the cooperating witness was recording their phone calls and preserving the encrypted email and text message conversations that they sought to hide from, among others, law enforcement.
15. In December 2017, after he ultimately declined to promote ASNT, the cooperating witness introduced Hackett to an individual claiming to be the ringleader of a network of corrupt stockbrokers who would buy stock that Hackett was selling in the open market in their customers’ accounts—and without their customers’ knowledge—in exchange for a 30% kickback. Unbeknownst to Hackett, the purported ringleader of the corrupt broker network was an undercover FBI agent (“UC”).
16. Hackett agreed, and between December 22, 2017 and January 12, 2018 he sold more than 14,000 shares of ASNT in matched trades with the UC that he coordinated with the
cooperating witness in record ed phone calls and preserved encrypted text messages.

Scheme #3 – ESSI

17. The third fraudulent scheme concerned ESSI, a purported technology company focused on the cannabis industry.
18. Beginning in December 2015, Giguiere, who was acting as the company’s undisclosed control person, arranged for a transfer of control of ESSI to two nominal officers.
19. Giguiere then caused the company to enter into an agreement with one of his nominee entities, under which the nominee entity promoted ESSI’s stock on TheMoneyStreet. In exchange, ESSI paid the nominee entity millions of purportedly free trading shares of ESSI stock that the company issued pursuant to two faulty Form S-8 registration statements.
20. Throughout 2016 and into January 2017, Giguiere liquidated the shares of ESSI stock paid to his nominee entity while he was concurrently promoting ESSI’s stock on
TheMoneyStreet without adequately disclosing to investors his active liquidation of his own shares. As a result of the scheme, Giguiere earned more than $8.5 million in illicit proceeds.
Looking at the sentences I emphasized in the large quoted text above it seems to me like the cooperating witness must be someone who worked for or with Giguiere at TheMoneyStreet.
The second person named in the first indictment, Oliver Lindsay (named as Oliver-Barret Lindsay in the SEC complaint), is described in that complaint as “the principal of CMGT Capital Management (“CMGT”), a Cayman Islands-exempt broker-dealer registered with the Cayman Islands Monetary Authority.” The Cayman Compass wrote an article about these cases and gives a few more details about Lindsay and CMGT Capital Management. That article also mentions that Lindsay is the “owner of Lindsay Capital Corp. SEZC, an investor relations services firm based in Cayman Enterprise City.”

 

Disclaimer: I have no position in any stock mentioned above. I have no relationship with any parties mentioned above except that I subscribe to Promotion Stock Secrets, which features the writing of ‘nodummy’ and may be owned in part by him. 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 Charges Oil Exploration Company Centro Energy (CNTO) and CEO Frederick DaSilva with Lying About the Company’s Prospects and Business Dealings

Yesterday on July 19th, 2018 the SEC announced that it had sued Centor Energy (CNTO) and its CEO Frederick DaSilva “for making materially false and misleading statements to Centor shareholders about Centor’s oil reserves, revenue prospects, and business dealings.” The company its its SEC both settled without admitting or denying the allegations.

SEC litigation release
SEC complaint (pdf)

The penalties seem particularly weak (quote from the litigation release):

Without admitting or denying the allegations, Centor and DaSilva consented to the entry of a final judgment enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. DaSilva has also agreed to the imposition of penny stock and officer and director bars and to pay disgorgement of $7,500 plus pre-judgment interest of $1,028 and a civil penalty of $22,500. The settlements with Centor and DaSilva are subject to court approval.

I have previously blogged about Centor Energy thrice, when it was first promoted, when it was re-pumped, and when the SEC suspended trading in the stock. The trading suspension was in 2014 and the first promotion was in 2013.

Below are some details from the complaint:

8. Centor is a corporation organized under the laws of the State of Nevada in 2011 as “Centor, Inc.,” with a stated principal place of business in Winter Park, Florida. Centor is purportedly engaged in the business of shale oil exploration, drilling and extraction in the east central region of the Canadian Province of Saskatchewan known as the “Pasquia Hills.” The Company changed its name to “Centor Energy, Inc.,” effective January 2014. The Commission suspended trading in Centor securities on February 11, 2014, prior to which Centor was quoted on OTC Bulletin Board and was a penny stock as defined under Exchange Act Rule 3a51-1.
9. Frederick DaSilva, age 55, resides in Alberta, Canada. On February 13, 2013, DaSilva became Centor’s Secretary, Treasurer, and Director. DaSilva became Centor’s CFO at some point in late 2013, and became its President and CEO in March 2014.

30. The December Press Release, the Presentation, and the January 8-K were materially false and misleading. As DaSilva knew or recklessly disregarded, the 1.1 billion
barrels of oil estimate was based on the Reserve Report’s estimate of the Conglomerate’s entire Lease Interests, of which Centor only owned 55%. The true number of barrels of oil Centor could realistically expect to recover (even assuming the accuracy of its own projections) was therefore materially lower than 1.1 billion barrels.
31. The Presentation also falsely stated that Centor had entered into an agreement to purchase the remaining 45% of leasehold interests over the Region from the Conglomerate. As DaSilva knew or reckless disregarded, the Purchase Agreement covered only an additional 11.66% (such that Centor could at most hope to acquire 66.66% of the Lease Interests) and there was no other agreement that covered the remaining interests.
32. Nor did Centor or DaSilva disclose in the December Press Release or in the Presentation that the Reserve Report indicated that the study of the Lease Interests was
incomplete, in that no individual connected to the Reserve Report had conducted a field test or even visited the Lease Interests to test some of its assumptions about geological conditions.
33. Indeed, DaSilva, who had not read the Reserve Report, failed to make any attempt to verify the assumptions, calculations, and conclusions made in the Reserve Report, and accordingly had no good faith basis to make any projections about Centor’s prospects purportedly drawn from the Reserve Report.
34. The Presentation was also misleading because it (a) repeated many of the untested favorable assumptions made in the Reserve Report (such as that the Region had low overburden providing easy access to the oil shale); and (b) contained other false statements such as that the Region was located in an area with “established infrastructure” such as roads and railroads.
35. In fact, as DaSilva knew or recklessly disregarded, the favorable assumptions in the Presentation had not been verified and were untested; the nearest small town to the Region was over 71 miles away; and there was no main road or railroad running to the Region.

And the reason for the small settlement? This tweet makes sense to me — the SEC didn’t have a great case and statute of limitations was about to run out:


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

Efuel EFN Corp (EFLN) Shows how not to get OTCMarkets Caveat Emptor designation removed

When OTCMarkets designates a stock as Caveat Emptor (Buyer Beware), marked by the skull and crossbones, the stock will tend to drop and brokers and clearing firms may restrict deposits of new shares in that stock or at least do more careful due diligence on people depositing new shares of stock. Interactive Brokers will not let any client open new positions in any stocks marked Caveat Emptor. So Caveat Emptor designation is a big deal.

Here is OTCMarkets’ explanation of its policy on Caveat Emptor:

OTC Markets Group designates certain securities as ‘Caveat Emptor’ and places a skull and crossbones icon next to the stock symbol to inform investors that there may be reason to exercise additional care and perform thorough due diligence before making an investment decision in that security.

The Caveat Emptor Designation may be assigned when OTC Markets becomes aware of one or more of the following:

  • Promotion — The security is the subject of stock promotion that may be misleading or manipulative. Promotional activities may include news releases, spam email, and newsletters, whether they are published by the issuer or a third party. See OTC Markets Group’s Policy on Stock Promotion.
  • Investigation of Fraud or Other Criminal Activities — There is an investigation or other indication of fraudulent or other criminal activity involving the company, its securities or insiders.
  • Suspension/Halt  A regulatory authority or an exchange has halted or suspended trading for public interest concerns (i.e. not a news or earnings halt).
  • Undisclosed Corporate Actions — The security or company is the subject of a corporate action, such as a reverse merger, stock split, or name change, without adequate current information being publicly available.
  • Other Public Interest Concern  OTC Markets Group may determine that there is a public interest concern regarding the security. Such concerns may include but are not limited to promotion, spam or disruptive corporate actions even when adequate current information is available.

When Does Caveat Emptor Get Removed?

Facts and circumstances may differ, however generally, OTC Markets Group will remove the Caveat Emptor designation once the company meets the qualifications for Pink Current Information, has verified the information on its company profile on www.otcmarkets.com, and demonstrates that there is no longer a public interest concern. The Caveat Emptor designation is typically not removed within the first 30 days. During the time it is labeled Caveat Emptor, any stock that is not in Pink Current Information will also have its quotes blocked on www.otcmarkets.com.

 

A June 1st, 2018 petition to terminate its SEC trading suspension (pdf) by Efuel EFN (EFLN) gives some details about the company’s attempt to have its Caveat Emptor designation removed. The statements made by Efuel EFN’s President are rather comical for their bad English. For example:

11. On September 15, 2017 OTC Markets designate Efuel as a Caveat Emptor. All financial statements are true and correct. There were NO perpetrated reports. Efuel is small micro cup company which we represent as true, real, stable, genuine, dedicated and committed. Efuel was using “Research Report” to file more information regarding company activities. Efuel made many attempts to reach upon OTC regarding CE status, to reveal to the company relevant factor for action.

[14.] d. Efuel states no new shares were issued since 2013, which are restricted shares exchanged for acquired property.

The SEC enforcement brief against Efuel’s motion to terminate the trading suspension gives a fair amount of detail (far more than OTCMarkets provides) about why Efuel EFN received Caveat Emptor designation in the first place:

II. OTC Markets Designates Efuel as a Caveat Emptor Issuer
On September 25, 2017, OTC Markets designated Efuel as a “Buyer Beware” or “Caveat Emptor” issuer. (May 21 Enright Aff. ¶11) The designation was due to concerns about Efuel’s public disclosures, financial statements, and purported “Research Reports.” These documents were public as they were filed on OTC Market’s website under Efuel’s listing.  [Note by Michael Goode: Previous sentence was in footnote 2. Included in quote for clarity.] OTC Market’s concerns were based, among other things, on documents Efuel filed on OTC Market’s website, including:

(a) a May 21, 2017 “Research Report” titled “EFUEL CORPORATION HAS BEEN AUDITED BY DEPARTMENT OF REVENUE;”
(b) a May 5, 2017 “Research Report” titled “Euro-American Finance Network [sic] Inc. and [sic] Stefanovic Family Plan [$160 million] to Invest in Efuel EFN Corporation Projects;” and
(c) multiple balance sheets that did not balance, and did not include “cash” as an “asset.”

(May 21 Enright Aff. ,¶12) On January 2, Efuel sent a letter to OTC Markets, requesting that the Caveat Emptor designation on Efuel be removed. (Efuel Petition, Ex. A)

Efuel EFN then responded to OTCMarkets in an attempt to get Caveat Emptor designation removed:

III. Efuel Files Its 2017 Annual Statement on OTC Markets’ Website
On January 8, 2017, Efuel filed its purported financial statement with OTC Markets, claiming that the company had been audited by Mr. Stefanovic himself, through his firm EuroAmerican Financial Network, Inc. (“Euro-American”). (May 21 Enright Aff. ¶13)

IV. Efuel Sends an Attorney Opinion Letter to OTC Markets
On February 8, Efuel’s attorney, Mark E. Pena, sent a letter to OTC Markets regarding certain prior financial statements. (June 18 Enright Aff. Ex. 0). This letter is referenced in Efuel’s Petition, but is not attached to it as an exhibit. The Division includes it as an exhibit to the June 18 Enright Aff. for completeness of the record. [Note by Michael Goode: Previous sentence was in footnote 3. Included in quote for clarity.] The letter states that Mr. Pena has personally reviewed and discussed the financial statements with Mr. Stefanovic, and that Efuel’s 2017 financial statement complies with “Pink OTC Markets Guidelines for Providing Adequate Current Information.” Mr. Pena’s letter further states that: (i) the financial statement was internally prepared by the company in accordance with GAAP, with “auditing consultation” provided by Euro-American; (ii)he had the financial statement reviewed by an unidentified “local independent accounting firm specializing in public disclosure;” and (iii) that Efuel’s financial statement reports assets of over $519 million, with liabilities of approximately $3.7 million. The financial statement (which is only four pages) does not provide specific information as to what constitutes the $519 million in assets – only that Efuel supposedly has $15.1 million in “Property: Land, Building” and $500 million in “Land, Minerals, and Gold Deposit.” (June 18 Enright Aff. Ex. E, pg. 9) The financial statement does however, specifically state that it contains “audited results.” (June 18 Enright Aff. Ex. E, pg. 10) Efuel’s Petition (page 2) elaborates slightly by stating “Efuel holds 2905 acre land with 21 gold mining claims with minerals. Efuel is a small micro cup [sic] company which we represent as true, real stable, genuine, dedicated, and committed.” In its Petition, Efuel repeats the representation that it has over $519 million in assets, and only $3.7 million in liabilities. (Efuel Petition, pg. 3)

The SEC then gives OTCMarkets’ response detailing why it was not removing Caveat Emptor designation:

V. OTC Markets Declines to Remove the Caveat Emptor Designation
On February 23, 2018 OTC Markets sent a letter to Efuel stating “[w]e have completed our review of your December 31, 2017 Annual Report and related Attorney Letter and have determined that the information contained in these documents does not comply with OTC Pink Basic Disclosure Guidelines, therefore we are unable to remove the caveat emptor flag at this time. (May 21 Enright Aff. ,¶14 (Italics added)) OTC Markets’ letter further states that: “[i]n past reviews we have identified similar deficiencies to you and you continue to submit disclosure that does not resolve these deficiencies.” OTC Markets directed Efuel to submit revised financial reports and disclosure documents, a new attorney letter, and a letter from a U.S.-registered CPA certifying that the company’s financial reports were GAAP-compliant. (Id.) As of March 21, the date of the issuance of the trading suspension, Efuel had not submitted revised filings to OTC Markets in accordance with OTC Markets’ instructions. (May 21 Enright Aff. ¶15)

What can we conclude from this? OTCMarkets’ explanation of when it applies the Caveat Emptor designation and when it removes it is fairly complete at least when it comes to a company’s failures in disclosure. However, this does not provide clarity on the question of stock promotion and when that leads to the Caveat Emptor designation — I have seen some promoted stocks get designated Caveat Emptor and others not.

Trading in Efuel EFN (EFLN) stock was suspended by the SEC on March 21, 2018 (pdf). On May 7th, 2018 the SEC issued an order requesting additional submissions (pdf) stating that Efuel EFN was challenging the trading suspension and asking the company for more information. At the time I write this it appears that the administrative proceeding has not been decided. All relevant documents can be found on the administrative proceeding page for 3-18420.

I believe it unlikely that the SEC will grant Efuel EFN’s petition to remove the trading suspension given that the company is alleged by the SEC to have posted a false PR saying that the company was in compliance with OTCMarkets and the caveat emptor designation would be removed:

VI. Efuel Issues Materially False Press Releases and Twitter Statements
On March 19, 2018, Efuel drafted and disseminated a press release, which purports to be a letter from OTC Markets, and which states in relevant part, “[w]e have completed our review of your December 31, 2017 Annual Report and related Attorney Letter and have determined that the information contained in these documents complies with the OTC Pink Basic Disclosure Guidelines, therefore we are able to remove the Caveat Emptor flag at this time.” (Italics added) (May 21 Enright Aff. ¶6) The letter is a doctored version of the real February 23 letter from OTC Markets, which stated that Efuel’s filings “do not comply” with OTC Markets’ OTC Pink Basic Disclosure Guidelines, and that OTC Markets was “unable” to remove the Caveat Emptor designation. (May 21 Enright Aff. ¶14) Efuel released the doctored letter via Globe Newswire, and posted it on the company’s Twitter account (@aEfuelEFNCorp). (May 21 Enright Aff. ¶17) As of March 21, the letter remained viewable on Twitter and Yahoo Finance. (Id) As of March 21, 2018, Efuel’s Twitter feed touted the company’s stock, discussed purported stock repurchases in the open market, and described claimed shorting activity in Efuel stock. (May 21 Enright Aff. ¶18)

In Efuel EFN’s petition it also asked the SEC to tell OTCMarkets to remove the Caveat Emptor designation from its stock. This was the SEC’s response:

There is no provision in the Commission’s Rules of Practice for the additional remedies Efuel seeks – namely, an order from the Commission to OTC Markets requiring the removal of the Caveat Emptor designation on Efuel’s common stock that OTC Markets imposed in September 2017.

The Commission is not an arbiter of disputes between issuers and registered broker-dealers or alternative trading systems.

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