Lawyer Luke Zouvas indicted — he has worked for multiple companies involved in pump and dumps

On Friday, July 13th the US Attorney’s Office for the Southern District of California announced a number of unrelated criminal indictments for stock-fraud related offences. I will write another blog post about the other indictments, but the first one I wanted to write about the indictment of attorney Luke Zouvas. The case against Zouvas is US v. Zouvas (3:18-cr-03070) in US District Court, Southern District of California. The indictment (pdf) is only four pages long. Zouvas was released on a $50,000 bond (pdf). The charges are 8 counts of money laundering (18 U.S.C. § 1956 (a) (3) (B)), each one relating to a separate wire transfer to or from Zouvas’ client escrow or trust accounts at Wells Fargo to or from three different accounts at City National Bank accounts between November 13, 2017 and March 5, 2018. Of the 8 wire transfers listed in the indictment, 5 (totaling $350,000) were to the Wells Fargo accounts and 3 (totaling $236,700) were to the City National Bank Accounts. Two of the City National accounts (ending in 8609 and 6797) only sent money to Zouvas’ Wells Fargo accounts, while one (ending in 7084) only received money from Zouvas’ Wells Fargo accounts. Below is a quote from the indictment:

3  2. On or about the dates indicated below, within the Southern
4  District of California and elsewhere, the defendant LUKE CHRISTOPHER  ZOUVAS,
5  with the intent to conceal and disguise the nature, location,
6  source, ownership and control, of property believed to be the proceeds
7  of specified unlawful activity, did knowingly conduct the following
8  financial transactions affecting interstate commerce involving property
9  represented by a person at the direction of, and with the approval of,
10  a law enforcement officer, to be proceeds of specified unlawful activity,
11  to wit: fraud in the sale of securities:

The wire transfers at issue:

Zouvas has worked for a number of companies that have undergone pump and dumps and at least at one point he represented the people behind spam promoter “Stock Castle” and he received a subpoena in the case that George Sharp filed against the companies and promoter(s) involved in those promotions.

In 2016 Luke Zouvas was sued by the SEC for his role in a pump and dump. Read the complaint (pdf). Below are excerpts from the complaint:

2. As part of the scheme, Larson obtained controlling shares of Crown from Asher Z. Zwebner (“Zwebner”), an Israeli accountant who created and secretly controlled the company and its stock. Although Larson controlled Crown and acted as its de facto chief financial officer, his name did not appear in any of Crown’s filings with the Commission. With the assistance of Zouvas, an attorney
based in San Diego who served as Crown’s general counsel, Larson transferred free-trading Crown shares from Zwebner’s nominees – purported shareholders in Crown’s initial public offering – to Larson’s nominees, including Jorgenson and Schiprett. Larson then paid $400,000 for a “call center” to promote Crown and
placed manipulative trades in his own brokerage account to create the appearance of market interest in the stock. Robb prepared materially misleading press releases about the company’s business success. As Crown’s stock price became inflated as a result of Larson’s and Robb’s efforts to pump the stock, Larson’s nominees
Jorgenson and Schiprett sold Crown shares and wired most of the sale proceeds – at least $865,000 – to accounts controlled by Larson. Jorgenson and Schiprett retained some of the proceeds as compensation for their assistance in the scheme as nominees.

4. Zouvas, age 45, resides in San Diego, California. He is an attorney licensed to practice law in the State of California. During the relevant time period, he acted as escrow agent for Larson’s purchase of the Crown shell from Zwebner, and as general counsel for Crown. Zouvas declined to testify in the Commission’s
investigation based on his Fifth Amendment privilege against self-incrimination.

17. Ultimately, Larson purchased the Crown shell from Zwebner. On or about December 6, 2011, Larson wired $300,000 from a bank account titled to an entity he controlled – S&L Investments, LLC – to Zouvas’ trust account, which reflected that payment was for Crown. Two days later, Zouvas wired $25,000 to Zwebner. On or about December 14, 2011, Zouvas wired an additional $206,127 to Zwebner through a financial cash change house in Jerusalem. The next day, Larson wired an additional $25,000 from the same bank account he controlled to another of Zouvas’ trust accounts. Larson thus gained control of Crown’s 2.5 million freelytradable
shares that Zwebner had fraudulently placed in the names of the 40 Israeli subscribers and the shares held by the two nominee officers of the company.

21. On or about January 3, 2012, Zouvas directed Crown’s transfer agent to transfer the shares from the seven Israeli subscribers to Jorgenson and Schiprett. However, Zouvas instructed the transfer agent to send the certificates to Larson, rather than to Jorgenson and Schiprett, the supposed shareholders of record. The transfer agent did as Zouvas directed. As a result of a 3-for-1 forward stock split, Jorgenson and Schiprett became the record owners of 656,250 free-trading Crown shares each.

23. To enable Jorgenson and Schiprett to make the deposit, Zouvas prepared a false attestation for them to provide to the brokerage firm. The attestation was dated January 17, 2012. In it, Zouvas wrote that his law firm had acted as escrow agent for the transaction in which Jorgenson and Schiprett had purchased Crown shares for $25,850. He misrepresented that on December 14, 2011, he sent the funds to the selling shareholders. The attestation was false because Zouvas’s escrow account never received the funds from Jorgenson and Schiprett, and never remitted the funds to the seven purported subscribers. When
Zouvas provided the attestation, he knew, or was reckless in not knowing, that it was false.

35. On March 14, 2012, Crown filed a Form 10-K “Annual Report” (“10-K”) with the Commission. Zouvas approved a draft of the Form 10-K falsely reporting that Aninye owned the nine million shares of Crown, a statement which was repeated in the final Form 10-K. Zouvas became Crown’s general counsel in December 2011 and took responsibility for directing the transfer agent any time
shares of Crown needed to be cancelled or reissued. Zouvas therefore knew Aninye did not receive any shares from Rehavi and Zehavi because he had not directed the transfer agent to cancel the Rehavi and Zehavi share certificates or reissue them in Aninye’s name.
36. In a communication with FINRA three months later, Zouvas
reaffirmed the false 8-K by stating Aninye had purchased the nine million shares of Crown from Rehavi and Zehavi for $180,000: “On January 17, 2012, the Company executed a Stock Purchase Agreement, under which 9,000,000 (post-split) shares of
common stock of the Company were sold by Rehavi and Zehavi to Steve Aninye in exchange for $180,000.” Zouvas knew, or was reckless in not knowing, that his statement to FINRA was false because (i) he never had the shares placed in Aninye’s name, and (ii) he directed the transfer agent to cancel the shares and retire
them to Crown’s treasury.

H. Zouvas Receives Crown Shares and Provides False Certification to Transfer Agent
60. In or around June 2012, Zouvas received 87,500 shares of Crown stock for which he paid no consideration. According to a stock purchase agreement dated June 25, 2012, Zouvas purchased 87,500 shares of Crown stock from one of the original purported Israeli subscribers for $2,000. According to a second stock
purchase agreement dated June 19, 2012, a third-party entity purchased 100,000 shares of Crown stock from the same purported subscriber for $2,000. The purported subscriber was – like the other subscribers – Zwebner’s nominee. She did not purchase the shares or sell them to Zouvas or to the third party, nor was she even aware the stock certificate had been issued in her name. She never communicated with Zouvas and her signature was forged on the Stock Purchase Agreement.
61. On or about June 25, 2012, Zouvas directed the transfer agent to transfer the subscriber’s shares to himself and the third party. In his instruction letter to the transfer agent, Zouvas wrote, in part: “We certify that these shares have been validly purchased by the following parties,” including the third party and Zouvas himself. The certification was inaccurate because Zouvas did not purchase the Crown shares referred to in the letter, and the purported subscriber did not sell the shares either to Zouvas or the third party. When Zouvas made the certification, he knew, or was reckless in not knowing, that it was inaccurate.
62. Approximately one year later, in July 2013, Zouvas deposited the 87,500 Crown shares into his brokerage account. Between September 27 and October 7, 2013, Zouvas sold all of the 87,500 Crown shares he purportedly acquired for proceeds of approximately $10,300. Zouvas also received legal fees and other payments related to Crown in addition to his stock sale proceeds.

That case, SEC v. Zouvas et al, started in the US District Court, Southern District of California (3:16-cv-00998) but in 2017 was transferred to the US District Court for the District of Arizona (2:17-cv-00427). Read Zouvas’ answer to the complaint (pdf). Zouvas (at least as of the December 5, 2016 answer, is defending himself (‘in pro per’). The case is ongoing.

In 2013 Luke C. Zouvas and his wife filed for bankruptcy and that case was not terminated until December 28, 2017. That case is 13-06250 in the US Bankruptcy Court, Southern District of California. The bankruptcy case docket and a couple of the documents are available at the CourtListener website. The only interesting thing in the bankruptcy is the listing of unsecured non-priority claims which lists three claims resulting from San Diego Superior Court lawsuits. Those creditors/cases are as follows:

  • Social Media Ventures, lnc. — NOTICE ONLY – 01/2012, prof. liability claim, San Diego Superior Court Case #37-2012-00097720, settled as of 06/14/13
  • Joseph B. Larocco — NOTICE ONLY – 01/2012, prof. liability claim, San Diego Superior Court Case #37-2012-00097720, settled as of 06/14/13
  • lronshore Indeminty, Inc. — 05/20/13, declaratory relief and reimbursement claim, San Diego Superior Court Case #37-2013-000502

At the time of the bankruptcy Zouvas listed net monthly take home pay as $19,085, which seems to me modest for an attorney in independent practice in San Diego County.

For years Zouvas worked with and for some time he was name partner with Luis Carrillo and Wade Huettel. In 2011 Vancouver journalist David Baines said that the firm has “facilitated many dubious bulletin board companies that have turned into horrendous promotions.”

In March 2013 the SEC sued Wade Huettel and Luis Carrillo and their firm (as well as others) for their involvement with multiple pump and dump scams and in May 2017 won a large default judgment against them. (Luke Zouvas was not named in that suit.) From the judgment:

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Defendants are jointly and severally liable for disgorgement of $6, 703,484.15, representing the ill-gotten gains resulting from the conduct alleged in the Amended Complaint (reduced by the amounts procured by the Plaintiff from other defendants through settlement agreements), together with prejudgment interest thereon in the amount of $1,579,643.12 for a total of$8,283,127.27. In addition, each Defendant shall pay a civil penalty in the amount of $375,000 pursuant to Section
20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3).

 

Zouvas has also been named in other litigation, such as this in pro per lawsuit:

The docket for that case can be found on CourtListener.com. It is  Willett v. Procopio (3:17-cv-02144-LAB-JMA) US District Court, S.D. California.

For more on Luke Zouvas including on his bankruptcy and other litigation, see George Sharp’s account of the Zouvas indictment.

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.

Stock Promoter litigation follow-up: Jay Fung in prison for Insider trading, more litigation for Anthony J. Thompson Jr.

I usually ignore SEC insider-trading litigation so I managed to miss when Jay Fung was arrested for insider-trading on a takeover (specifically, the Gilead takeover of Pharmasset in 2011). This was a follow-up to SEC v. Kevin L. Dowd (3:13-cv-00494) and USA v. Kevin Dowd (3:13-cr-00636-AET), all in the US District Court for the District of New Jersey (links are to dockets at CourtListener.com). The original civil complaint (pdf) was brought by the SEC on January 25, 2013. The final judgment against Dowd ordered him to pay $33,325 to the SEC. As to the criminal complaint, Dowd plead guilty and was sentenced to 3 years probation and forfeiture of $35,000.

The criminal complaint against Dowd listed his co-conspirators (the ones who actually traded on the information) as follows:

j. Co-conspriator J.F. was defendant DOWD’s childhood friend, and resided in or around Del Ray Beach, Florida. Among other things, J.F. operated “Company A” , which maintained a brokerage account with a brokerage firm headquartered in Shrewsbury, New Jersey (“Brokerage Firm B”). J.F. previously worked at a penny stock promotion company in Boca Raton, Florida (the “Stock Promotion Company”) from approximately in or about 2000 to approximately in or about late 2006, where defendant DOWD also worked between in or about May 2000 through in or about July 2001.

k. Co-conspirator E.B. resided in or around Boca Raton, Florida, and among other things, was the vice president of “Company B” , a business based in Boynton Beach, Florida. E.B. worked at the Stock Promotion Company with co-conspirator J.F. from
approximately in or about 2003 through in or about 2005, and knew defendant Dowd.

“Con-conspirator J.F.” was later revealed to be Jay Fung when he was charged on information on March 9, 2016 and immediately pled guilty. The case was US v. Fung (3:16-cr-00107) in the US District Court, District of New Jersey. On January 17, 2018 he was sentenced to 1 year in prison to be followed by 3 years of supervised release. Jay Fung forfeited $345,245.

Jay Fung is currently imprisoned at CI Taft:

Previously, Jay Fung had been sued by the SEC for his promotion of RecycleTech (RCYT). That case was SEC v. Recycle Tech, Inc (1:12-cv-21656) in the US District Court, Sourthern District of Florida. I blogged about that case when it was first filed in 2012. In that case, the final judgment against Jay Fung was rendered on February 14th, 2014. Fung and his company Pudong LLC were judged to be jointly and severally liable for disgorgement of $456,457 along with interest of $30,998.36. Fung was also ordered to pay a civil penalty of $120,000.

Criminal and Civil cases against Jay Fung, Anthony J. Thompson Jr., and Eric Van Nguyen

The Manhattan District Attorney charged a number of stock promoters including the three listed above, back in 2014. The case is 03853-2014 in Manhattan Supreme Court. I first reported on that case in September 2014 and then provided an update on September 26th, 2017.

The summary of the criminal case is below:

The charges (at least against Thompson) are shown below:

Charge Detail Disposition/Sentence
PL 165.52 00 C Felony, 1 count, Arrest charge, Not an arraignment charge

Description Cpsp-2nd:value Of Prop >$50000
Indictment Count 7
Dismissed
PL 165.54 00 B Felony, 2 counts, Arrest charge, Not an arraignment charge

Description Cpsp-1st:value Prop > $1000000
Indictment Count 16
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 20
Date Added 09/03/2014
Dismissed
GB 0352C 05
**TOP CHARGE**
E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 12
Date Added 09/03/2014
Pled Guilty
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 23
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 27
Dismissed
PL 165.52 00 C Felony, 1 count, Arrest charge, Not an arraignment charge

Description Cpsp-2nd:value Of Prop >$50000
Indictment Count 33
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 39
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 52
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 66
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 73
Dismissed
GB 0352C 05 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 77
Date Added 09/03/2014
Dismissed
GB 0352C 05 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 1
Date Added 09/03/2014
Dismissed
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 30
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 53
Date Added 09/03/2014
Covered By Gb 0352c 05
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 61
Date Added 09/03/2014
Dismissed
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 62
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 85
Date Added 09/03/2014
Dismissed
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 2
Date Added 09/03/2014
Covered By Gb 0352c 05
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 6
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 19
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 9
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 11
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 26
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 41
Date Added 09/03/2014
Dismissed
PL 165.54 00 B Felony, 1 count, Arrest charge, Not an arraignment charge

Description Cpsp-1st:value Prop > $1000000
Indictment Count 49
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 55
Date Added 09/03/2014
Dismissed
GB 0352C 05 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 46
Date Added 09/03/2014
Pled Guilty
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 57
Date Added 09/03/2014
Covered By Gb 0352c 05
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 68
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 71
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 28
Date Added 09/03/2014
Dismissed
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 31
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 45
Date Added 09/03/2014
Dismissed
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 48
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 69
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 83
Date Added 09/03/2014
Dismissed
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 3
Date Added 09/03/2014
Dismissed
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 5
Date Added 09/03/2014
Dismissed
PL 165.54 00 B Felony, 2 counts, Arrest charge, Not an arraignment charge

Description Cpsp-1st:value Prop > $1000000
Indictment Count 15
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 8
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 24
Date Added 09/03/2014
Covered By Gb 0352c 05
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 36
Dismissed
GB 0352C 05 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 29
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 43
Date Added 09/03/2014
Dismissed
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 47
Date Added 09/03/2014
Dismissed
PL 155.40 01 C Felony, 1 count, Arrest charge, Not an arraignment charge

Description Gr Lar 2nd:property Val>$50000
Indictment Count 65
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 70
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 72
Date Added 09/03/2014
Dismissed
GB 0352C 05 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 60
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 80
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 81
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 82
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 84
Dismissed
PL 155.30 01 E Felony, 1 count, Arrest charge, Not an arraignment charge

Description Gr Lar 4-vlue Prpty>$1000
Indictment Count 10
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 25
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 37
Date Added 09/03/2014
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 42
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 44
Dismissed
PL 165.52 00 C Felony, 1 count, Arrest charge, Not an arraignment charge

Description Cpsp-2nd:value Of Prop >$50000
Indictment Count 50
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 59
Date Added 09/03/2014
Dismissed
PL 165.54 00 B Felony, 2 counts, Arrest charge, Not an arraignment charge

Description Cpsp-1st:value Prop > $1000000
Indictment Count 63
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 74
Date Added 09/03/2014
Dismissed
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 78
Date Added 09/03/2014
Dismissed
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 79
Date Added 09/03/2014
Dismissed
GB 0352C 05 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >9 Perso
Indictment Count 4
Date Added 09/03/2014
Dismissed
PL 190.65 1B E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:property> $1000
Indictment Count 14
Date Added 09/03/2014
Dismissed
PL 165.54 00 B Felony, 1 count, Arrest charge, Not an arraignment charge

Description Cpsp-1st:value Prop > $1000000
Indictment Count 32
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 40
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 54
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 56
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 58
Dismissed
PL 165.54 00 B Felony, 2 counts, Arrest charge, Not an arraignment charge

Description Cpsp-1st:value Prop > $1000000
Indictment Count 64
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 21
Dismissed
PL 190.65 1A E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Scheme Def 1st:10 Or> Persons
Indictment Count 13
Date Added 09/03/2014
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 22
Date Added 09/03/2014
Covered By Gb 0352c 05
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 38
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 67
Dismissed
PL 155.35 01 D Felony, 1 count, Arrest charge, Not an arraignment charge

Description Grand Larceny 3rd Degree
Indictment Count 75
Dismissed
GB 0352C 06 E Felony, 1 count, Not an arrest charge, Not an arraignment charge

Description Securities Fraud >$250
Indictment Count 76
Date Added 09/03/2014
Dismissed

 

The appearances in the case are shown below. Unfortunately, details are not given so I cannot be sure if any of the defendants have been dropped from the case. Sentencing is scheduled for September 27th, 2018.

Date/
Time
Judge/
Part
Calendar
Section
Arraignment/
Hearing Type
Court
Reporter
Outcome/
Release Status
09/27/2018
Scherzer, A
TAP A
SENTENCES Sentencing  
06/05/2018
Antignani, S
TAP A
SENTENCES Sentencing Castellano, L
Adjourned For Sentencing
Released on Recognizance
05/17/2018
Scherzer, A
TAP A
SENTENCES Sentencing Wilson, T
Adjourned For Sentencing
Released on Recognizance
02/08/2018
Edwards, E
TAPA-93
SENTENCES Sentencing Geraldi, Vincent
Adjourned For Sentencing
Released on Recognizance
09/27/2017
Biben, E
TAPA-93
TRIALS AM No Type Whitaker,
Pled Guilty
Released on Recognizance
09/18/2017
Biben, E
TAPA-93
TRIALS AM No Type Whitaker, B
Adjourned
Bail Continued
09/13/2017
Biben, E
TAPA-93
TRIALS AM No Type Whitaker, B
Adjourned
Bail Continued
09/05/2017
Biben, E
TAPA-93
TRIALS AM No Type Geraldi, V
Adjourned
Bail Continued
07/21/2017
Biben, E
TAPA-93
TRIALS AM No Type Hudson,
Adjourned
Bail Continued
06/08/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, L
Adjourned
Bail Continued
05/12/2017
Conviser, Daniel
95
TRIALS AM No Type Davidson, C
Edwards, C
Adjourned
Bail Continued
05/02/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, L
Adjourned
Bail Continued
04/04/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, L
Adjourned
Bail Continued
01/27/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, Lisa
Adjourned
Bail Continued
01/20/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, L
Adjourned
Bail Continued
01/19/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, L
Adjourned
Bail Continued
01/11/2017
Conviser, Daniel
95
TRIALS AM No Type Kramsky, L
Bruno, E
Dismiss Some, Not All Counts
Bail Continued
01/06/2017
Conviser, Daniel
95
TRIALS AM No Type Bruno, E
Adjourned
Bail Continued
12/05/2016
Conviser, Daniel
95
TRIALS AM No Type Davidson, C
Adjourned
Bail Continued
11/18/2016
Conviser, Daniel
95
TRIALS AM No Type Davidson, C
Adjourned
Bail Continued
11/15/2016
Conviser, Daniel
95
TRIALS AM No Type Davidson, C
Adjourned
Bail Continued
10/11/2016
Conviser, Daniel
95
TRIALS AM No Type Mcneill, D
Adjourned
Bail Continued
09/20/2016
Conviser, Daniel
95
TRIALS AM No Type Gale, Geralyn
Adjourned
Bail Continued
09/13/2016
Conviser, Daniel
95
TRIALS AM No Type Fleming, J
Adjourned
Bail Continued
07/12/2016
Conviser, Daniel
95
TRIALS AM No Type Tiardo, E
Adjourned
Bail Continued
06/07/2016
Conviser, Daniel
95
TRIALS AM No Type Geralyn, Gale
Kramsky, L
Adjourned
Bail Continued
05/17/2016
Conviser, Daniel
95
TRIALS AM No Type Demattia, L
Adjourned
Bail Continued
04/20/2016
Conviser, Daniel
95
TRIALS AM No Type Postel, M
Adjourned
Bail Continued
02/26/2016
Conviser, Daniel
95
TRIALS AM No Type Minelli, L
Adjourned
Bail Continued
02/23/2016
Conviser, Daniel
95
TRIALS AM No Type Minelli, L
Adjourned
Bail Continued
01/15/2016
Conviser, Daniel
95
TRIALS AM No Type Mcneill, D
Adjourned
Bail Continued
12/15/2015
Conviser, Daniel
95
TRIALS AM No Type Huntington, D
Conroy, E
Adjourned
Bail Continued
12/01/2015
Conviser, Daniel
95
TRIALS AM No Type Minelli, L
Adjourned
Bail Continued
09/08/2015
Conviser, Daniel
95
TRIALS AM No Type Huntington, D
Adjourned
Bail Continued
02/24/2015
Conviser, Daniel
95
TRIALS AM No Type Torres-fuster, L
Adjourned
Bail Continued
02/06/2015
Conviser, Daniel
95
TRIALS AM No Type Corcoran, R
Adjourned
Bail Continued
02/05/2015
Conviser, Daniel
95
TRIALS AM No Type Corcoran, R
Adjourned
Bail Continued
01/06/2015
Conviser, Daniel
95
TRIALS AM No Type Benkel, V
Adjourned
Bail Continued
12/09/2014
Conviser, Daniel
95
TRIALS AM No Type Huntington, D
Adjourned
Bail Continued
12/02/2014
Conviser, Daniel
95
TRIALS AM No Type Benkel, V
Adjourned
Bail Continued
11/18/2014
Conviser, Daniel
95
TRIALS AM No Type Aiello, C
Adjourned
Bail Continued
09/22/2014
Hayes, R
85
TRIALS AM No Type Kramsky,
Adjourned
Bail Continued
09/11/2014
Hayes, R
85
ARRAIGNMENTS Regular Aiello, Cynthia
Pled Not Guilty, Returned On Warrant
Bond $1,000,000 (Bond)
09/03/2014

GRAND JURY
MISCELLANEOUS No Type   True Bill, Warrant Ordered

 

The most recent decision in the case that I can access is from May 16th, 2016. Decisions do not appear to be accessible through the court’s website.

SEC Case against Anthony J. Thompson et al

Notwithstanding my ignorance of the exact outcome of the criminal case, the civil case has resumed (see docket). This week (on July 11th) the SEC alleged the following in a letter (document 99):

We write in advance of the July 10, 2018 prehearing conference in this matter in order to provide the Court with additional background as to the status of this litigation. Unfortunately, it has become apparent that defendant Anthony J. Thompson (“Thompson”) has engaged in a pattern of obfuscation and delay. The SEC has recently obtained documents from other litigation in which Thompson is involved that suggest not only that he has deliberately delayed the discovery process in the SEC action, but that his misconduct might be far broader than originally thought, and that Thompson might have significant assets secreted abroad.

As to defendant Jay Fung, he was agreed to a settlement offer that the staff is prepared to submit senior management and the Commission for review.

The other litigation referred to by the SEC is his divorce, Kendall Thompson v. Anthony J. Thompson, Jr., Case No. 147268-FL, and a trust litigation “in which Kendall [Thompson] alleges that Thompson has fraudulently diverted assets from a trust supposedly set up for the benefit of their children to pay for drugs and prostitutes, among other things.” (The quote is from the first footnote in the above-linked letter.)

This letter highlights how the SEC had agreed to a settlement with Thompson but he never formally agreed and now with the new allegations it is my opinion that the SEC will not settle with Thompson:

After approximately two months of what the SEC believed were good faith settlement discussions, Thompson has failed to formally agree or execute the settlement papers sent to him.

Information Obtained From the Matrimonial Case and the Trust Litigation

The SEC has learned from an initial and by necessity cursory review of some of the materials it has recently received of certain facts that are potentially material to the case at bar. These facts include that Thompson, in addition to the funds received in from the schemes set out in the Complaint, sold off OTC Solutions, Inc. for $6 million. The SEC was also informed that Thompson has been providing “consulting” services to companies located in Belize, might have been paid several million dollars in Belize. The SEC further learned that Thompson might have converted his ill-gotten gains into luxury cars and boats, and jewelry, including expensive watches. Finally, from reviewing the pleadings in those cases the SEC learned that Thompson was accused of similar dilatory and obfuscatory discovery tactics therein, including failing to adequately produce tax returns, banking information, and other financial data.

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.

 

Trading in AXM Pharma (AXMP) suspended by SEC

This morning prior to market open the trading in AXM Pharma (AXMP) was suspended by the SEC.

SEC Suspension Release (pdf)
SEC Suspension Order (pdf)

The reason for the SEC trading suspension (from the release):

because of questions about the adequacy and accuracy of information concerning AXMP’s leadership and operations contained in a Quarterly Report issued by AXMP on May 14, 2018, AXMP’s press releases issued between July 2, 2018 and July 6, 2018, and a Supplemental Information Report issued by AXMP on July 5, 2018. AXMP is a Nevada corporation based in Las Vegas, NV. AXMP’s stock is quoted on OTC Link (previously “Pink Sheets”) operated by OTC Markets Group Inc. under the symbol AXMP.

 

Here is the quarterly report mentioned above. The supplemental information report referred to above includes the CEO’s resignation. Below are the links to the press releases issued between July 2 and July 6:

AXM Pharma Announces A Proposed Reverse Merger with A Cameroon Billionaire Businessman – GlobeNewswire | 07/02/2018

AXM Pharma Announces the Appointment of a New Chief Executive Officer – GlobeNewswire | 07/03/2018

AXM Pharma Issues Correction – GlobeNewswire | 07/07/2018

This trading suspension is related to the suspension earlier this month of WSML, CYPE, and BTHI. AXM Pharma shares many connections with those other three companies including a connection with Mandla J. Gwadiso.

 

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.

More SEC & FINRA actions for failing to file SARs: Chardan Capital, ICBC Financial Services, and Schwab

The SEC and FINRA continue to pursue actions against brokers and clearing firms for failures in anti-money laundering (AML) controls and defects in filed suspicious activity reports (SARs) and failures to file SARs. In April I reported that the SEC had fined Aegis Capital for failures to file SARs related to the company’s penny stock business. Since then there have been a few SAR enforcement actions worth noting.

Chardan Capital LLC & Industrial and Commercial Bank of China Financial Services LLC (ICBCFS)

On May 16, 2018 the SEC announced settlements with Chardan Capital LLC and ICBCFS. The same day, FINRA announced a $5.3 million settlement with ICBCFS. At least in part, these settlements relate to failure to file SARs for penny stock transactions. I look in more detail at each settlement below.

FINRA fine of ICBCFS

The FINRA letter of acceptance, waiver, and consent with ICBCFS (pdf) gives detailed descriptions of the failings of ICBCFS’ systems and controls. There are many problems mentioned in the FINRA lettter, including “inadequate AML testing,” “customer reserve hindsight deficiencies,” “inaccurate books and records,” “inaccurate segregation calculations and possession or control violations,” “innacurate FOCUS reports,” “failure to seek SEC approval to use a satisfactory foreign control location,” “registration violation,” and “inadequate supervisory system and written procedures.” However, the charge that most interests me is “ICBCFS’s AML program was not reasonably designed to detect and cause the reporting of potentially suspicious activity.”

This failure was related to their business with penny stocks: “As described below, during the Relevant Period, the Firms AML program was not reasonably designed to detect and report potentially suspicious activity,
including customer trading in penny stocks.”

From the FINRA AWC letter:

In late 2012, ICBCFS added the clearing and settling of equity transactions as a new business line. The Firm began to clear for numerous direct customer accounts and dozens of correspondent clients (the introducing brokerdealersthat introduced over 21,000 fully disclosed DVP/RVP1 and held in custody accounts at ICBCFS. Within a few months of launching the equity clearing business, ICBCFS began clearing and settling the purchase and sale of millions of dollars’ worth of penny stocks.

Despite adding the equity clearing as a new business line, ICBCFS failed to design an AML program that was reasonably tailored to identify potentially suspicious activity, particularly in penny stock transactions. From January 2013 through at least June 2014, the Firm had no surveillance or exception reports identifying potentially suspicious activity involving penny stock liquidations or red flags of potentially manipulative trading, such as (1) purchases and close in time liquidations of large blocks of thinly traded penny stocks, (2) substantial fluctuations in price of thinly traded penny stock shares, and (3) customers who dominated the trading volume in penny stocks. ICBCFS also did not require its employees to document their review of monitoring / surveillance reports that the Firm had in place during the Relevant Period. Nor did the Firm require its employees to document their decisions regarding the filing of SARs.

The Firm failed to track whether customer accounts were related, or determine whether or not account holders were acting in concert to liquidate penny stocksThe Firm also lacked systems and procedures to monitor whether certain activities – including the opening of multiple accounts, wire transfers out of an account, or funds transfers among accounts, each of which would be relevant to evaluating potentially suspicious activity– were unusual for any given customer, despite the Firms written AML procedures specifically identifying such items as red flags requiring monitoring.

The Firm’s AML program also was unreasonable in that it assigned a significant number of the Firms suspicious activity monitoring functions to a nonexistent employee title. The Firms written AML procedures delegated the responsibility for investigating indicia of potentially suspicious activity such as the opening of multiple accounts by a single customer, wire transfers from an introduced customer with no apparent business purpose, and transactions inconsistent with a customers normal pattern of business to an unnamed employee identified by the title Operations Manager.However, during the Relevant Period the title Operations Managerdid not exist at the Firm and no Firm employees effectively carried out the investigation of suspicious activity assigned to the Operations Manager.

The scale of ICBCFS’ penny stock business is impressive (emphasis mine):

During the Relevant Period, Firm customers liquidated more than 33 billion shares of penny stocks and generated approximately $210 million in proceedsApproximately 15 billion penny stock shares were sold by Firm customer accounts that did not purchase a single penny stock during the Relevant PeriodIn total, approximately 106 accounts during the Relevant Period sold penny stocks without making any purchases. Liquidations of penny stocks by Firm introduced customers frequently dominated the overall trading volume, resulting in hundreds of instances where such liquidations represented more than 75% of a penny stocks trading volume in a single day.

The AWC letter gives several examples of suspicious trading, but the anonymous firm “XYZ Financial LLC” takes the cake:

In 2013 and 2014, the Firm opened two accounts for introduced customer XYZ Financial LLC (XYZ Financial), notwithstanding that the entitys beneficial owner had been barred from the securities industry in 2012 following a FINRA disciplinary action. XYZ Financial liquidated penny stocks associated with approximately 107 different issuers and generated more than $18 million in proceeds. In approximately 675 instances, XYZ Financials liquidations represented more than 50% of the total daily market volume for a given penny stock.

Over 143 trading days from June 2013 through June 2014, XYZ Financial liquidated more than 3.2 million shares of a thinly traded penny stock without purchasing a single share. On approximately 103 trading days, XYZ Financials liquidations exceeded 50% of the total market volumeXYZ Financial generated more than $475,000 from the liquidationsDuring this period, the price of the stock dropped by roughly 77% from a high of approximately $0.35 per share to $0.08 per share.

From late October 2013 through March 2014, XYZ Financial liquidated approximately 89 million shares of a different thinly traded penny stock without purchasing a single share. On several trading days, XYZ Financial’s liquidations represented or exceeded 30% of the daily trading volume. During the time period of XYZ Financials liquidations, the price of the penny stock dropped by more than 50%. XYZ Financial generated approximately $65,000 in proceeds from the liquidations.

SEC Settlement with ICBCFS

The SEC’s cease and desist order / settlement (pdf) with ICBCFS also relates to SARs on penny stock transactions and only mentions transactions with clients of Chardan:

4. Specifically, during the relevant period, seven of Chardan’s customers sold over 12.5 billion shares of penny stocks. These sales were often in large volumes, constituting a material percentage of the daily sales volume in the security. Each of the seven customers engaged in at least one transaction where the customer’s sales of a particular penny stock accounted for over 50 percent of the sales volume in that penny stock during a single trading day, and four of the seven customers engaged in at least one such transaction where the customer’s sales exceeded 70 percent of the sales volume in a penny stock during a single trading day. Moreover, while not identified by ICBCFS at the time, the liquidations by the seven customers at Chardan frequently occurred where the issuers had ongoing promotional campaigns or had large accumulated deficits.

5. On January 27, 2014, ICBCFS requested that Chardan have a customer stop trading “all these sub penny stocks today.” Despite this prohibition, that customer sold multiple sub-penny stocks after this date. ICBCFS failed to file a SAR related to these transactions and did not produce a written analysis or other records supporting the reasonableness of why a SAR did not need to be filed.

6. On March 18, 2014, ICBCFS asked Chardan for a description of another customer’s sales transactions, indicating that unless it received sufficient information about that customer’s background, it would close the account. ICBCFS closed that account a few days later, but failed to file a SAR related to the customer and did not produce a written analysis or other records supporting the reasonableness of why a SAR did not need to be filed.

7. On June 23, 2014, ICBCFS asked Chardan for more information on two specific transactions by customers trading low-priced securities. ICBCFS failed to file a SAR related to these transactions and did not produce a written analysis or other records supporting the reasonableness of why a SAR did not need to be filed.

8. On June 25, 2014, ICBCFS asked Chardan about ten specific transactions in lowpriced securities. ICBCFS failed to file a SAR related to these transactions and did not produce a written analysis or other records supporting the reasonableness of why a SAR did not need to be filed.

9. On June 26, 2014, ICBCFS asked Chardan about eight specific transactions in low-priced securities. ICBCFS failed to file a SAR related to these transactions and did not produce a written analysis or other records supporting the reasonableness of why a SAR did not need to be filed.

10. On June 27, 2014, a Vice President at ICBCFS told Chardan’s President that ICBCFS had closed certain customer accounts at a broker-dealer specializing in low-priced security trades, and those customer accounts were migrating to Chardan. Three of the accounts listed in the email had opened and begun trading in February 2014, and the fourth had opened and begun trading in October 2013. ICBCFS did not conduct a review of these customers’ trading activities despite flagging these issues. ICBCFS failed to file any SARs related to these transactions or customers and did not produce a written analysis or other records supporting the reasonableness of why SARs did not need to be filed.

11. By late June 2014, ICBCFS effectively ceased clearing transactions in penny stock securities by certain of Chardan’s customers.

ICBCFS was ordered to pay $860,000 to the SEC.

Chardan Capital Markets LLC Settlement with SEC

Chardan Capital Markets’ settlement with the SEC (pdf) relates to the SEC settlement with ICBCFS because it was Chardan’s clients’ trading cleared through ICBCFS that was responsible for a significant portion of the penny stock volume traded through ICBCFS. The FINRA action noted that ICBCFS “firm customers liquidated more than 33 billion shares of penny stocks and generated approximately $210 million in proceeds”. The SEC settlement with Chardan mentions that “seven of Chardan’s customers from the period October 1, 2013 to June 30, 2014 sold over 12.5 billion shares of penny stocks”. So by share volume Chardan clients were responsible for just over a third of penny stock trades at ICBCFS.

From the settlement:

1. Beginning in late 2013, Chardan on-boarded seven new customers who routinely deposited and then promptly sold billions of shares of thinly-traded penny stocks. These customers typically obtained their holdings by converting debentures into shares of microcap issuers. The shares were generally deposited with a custodian and then sold through the customers’ “delivery versus payment/received versus payment” accounts (“DVP/RVP accounts”) at Chardan. The customers engaged in sales that regularly accounted for a substantial percentage of the daily volume in these thinly-traded penny stocks until the customer’s entire position was sold. The sales frequently occurred after or as promotions in the securities were occurring. Those transactions, in light of other information known to Chardan at the time, raised or should have raised red flags for the firm. Given the suspicious nature of its customers’ transactions, related red flags, and the requirements of its written policies, Chardan should have filed SARs on numerous occasions and did not produce a written analysis or other records supporting the reasonableness of why SARs did not need to be filed.

7. Beginning in late 2013 through the first half of 2014, Chardan facilitated the sale of billions of shares of low-priced, thinly-traded penny stocks for seven customers, all of which cleared through a single clearing firm, ICBC. This trading in penny stocks led to a large uptick in Chardan’s commissions from equity trading: in December 2013, Chardan generated just over $235,000 in such commissions, while in January 2013, it generated over $797,000.

8. Specifically, seven of Chardan’s customers from the period October 1, 2013 to June 30, 2014 sold over 12.5 billion shares of penny stocks. These sales were often in large volumes, constituting a material percentage of the daily sales volume in the security. Each of the seven customers engaged in at least one transaction where the customer’s sales of a particular penny stock accounted for over 50 percent of the sales volume in that penny stock during a single trading day, and four of the seven customers engaged in at least one such transaction where the customer’s sales exceeded 70 percent of the sales volume in a penny stock during a single trading day.

9. Despite the explicit requirements of Chardan’s Policies, Chardan failed to adequately investigate suspicious activity as these customers engaged in these sales.

10. These liquidations were coupled with other indicia that should have further heightened suspicion and raised concerns for Chardan. For example, its customers were trading in penny stocks where the issuers had ongoing promotional campaigns or had large accumulated deficits. In other instances, Chardan became aware of additional suspicious transactions or other red flags related to its customers or their accounts subsequent to their suspicious trading. For example:

  • After the trades were executed, Chardan received numerous regulatory inquiries concerning certain securities that certain of these seven customers’ effected trading in.
  • Chardan discovered past criminal and regulatory issues with an entity with which certain of these seven customers were associated.
  • Chardan knew, or should have known, that the Commission suspended trading in three securities after the securities had been recently liquidated by certain of these seven customers.

11. Chardan failed to properly investigate its customers’ already suspicious high volume trading in light of these red flags and never filed a SAR with respect to any of these transactions. This contravened Chardan’s Policies, which required that Chardan investigate suspicious transactions and file a SAR as necessary.

Here are some illustrative transactions from the settlement:

Customer A
19. In December 2013 and March 2014, Customer A opened two accounts at Chardan controlled by the same individuals. Customer A traded substantial volumes of the daily market in fourteen microcap issuers in these two accounts from December 2013 through May 2014. Of the 165 dates it sold securities, Customer A accounted for over 20 percent of the sales volume on 129 of those dates and over 50 percent of the sales volume on 59 of those dates. In addition to this high-volume trading, which was a red flag of potential money laundering under its policies, Chardan was or should have been aware of a number of additional red flags that should have further raised suspicions concerning Customer A’s trading, including:

  • Chardan knew or should have known that eight of the issuers were the subject of promotional campaigns just before or during Customer A’s trading.
  • The SEC suspended trading in one of the issuers approximately six weeks after Customer A’s large volume of sales in that security.
  • After the trades were executed, Chardan received regulatory inquiries regarding Customer A’s trading in three securities.

In addition, Chardan never questioned the business purpose of the same individuals havingaccounts in two names, despite its policies identifying a single customer having multiple accounts under multiple names as a red flag requiring further investigation.

20. Chardan was also aware that the individuals involved with Customer A were previously associated with an entity that had been charged by the Commission on August 22, 2012, with securities fraud. In that matter, the Commission charged the entity with conducting an unlawful penny stock scheme in which the entity bought billions of stock shares from small companies and illegally resold those shares in the public market. The purported exemption used in the Commission’s action was the same one that Customer A used to conduct certain of its trading at Chardan. The registered representative at Chardan on Customer A’s account contacted management of Customer A who informed him that the individual charged in the Commission’s action, while not a principal or control person of Customer A, was a consultant to Customer A.
Despite knowing this additional fact, Chardan conducted no further investigation into Customer A’s trading and took no alternative actions, such as heightened scrutiny of Customer A’s transactions, as required under the Chardan’s Policies. Further scrutiny of Customer A’s transactions would have shown that it was engaged in the same type of transactions as the Commission had alleged to be fraudulent.

21. Despite the substantial daily volume of trading by Customer A in these securities and the other red flags associated with the transactions set forth above, Chardan never filed a SAR to report Customer A’s transactions and did not produce a written analysis or other records supporting the reasonableness of why SARS did not need to be filed.

Although I cannot be 100% certain, I believe the “entity that had been charged by the Commission on August 22, 2012, with securities fraud,” was E-Lionheart Associates LLC. The litigation release for that case is dated August 23rd, 2012 and the same phrase is used in that litigation release, “bought billions of stock shares from small companies and illegally resold those shares in the public market.” The docket of the SEC suit against E-Lionheart Associates can be found free at CourtListener.com.  In summer 2017 the SEC won a summary judgment (pdf) in that case. To be clear, “the individual charged in the Commission’s action, while not a principal or control person of Customer A, was a consultant to Customer A.”

Chardan was ordered to pay a penalty of $1,000,000 to the SEC.

Chardan’s AML officer, Jerard Basmagy, also settled (pdf) with the SEC. He was fined $15,000 and barred from associating with any broker or investment adviser for three years and barred from participating in the offering of any penny stock for three years.

From Basmagy’s settlement:

Despite having policies which set forth red flags of suspicious activities and the requirement to review those red flags, Chardan did not conduct the requisite review of significant penny stock liquidations that occurred through seven customer accounts during the relevant period. Chardan’s clearing firm, Industrial and Commercial Bank of China Financial Services LLC (“ICBC”), raised multiple concerns to Chardan about certain of Chardan’s customers and their trading in low-priced securities. In June 2014, ICBC ceased clearing penny stock trades, and Chardan withdrew from the penny stock business. Chardan also knew, suspected, or had reason to suspect that certain of the seven customers were engaged in fraudulent activity based on other red flags listed in their policies. These included the background and identity of the customers, trading suspensions in certain issuers that were the subject of prior trading by the customers, and numerous regulatory inquiries received by Chardan after May 2014 regarding certain of the customer’s trading. Despite the suspiciousness of its customers’ transactions, the related red flags, and the requirements of its written policies to review those red flags, Chardan never investigated these red flags or filed a SAR during the relevant period related to its customers’ suspicious penny stock transactions.

By failing to file SARs as required, Basmagy, as Chardan’s then CCO and AML Officer, willfully aided and abetted and caused  Chardan’s violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.

17. In certain instances, when FINRA staff and the Commission’s staff separately requested any files in the possession, custody, or control of Chardan related to certain transactions in low-priced securities as part of their respective regulatory inquiries and the Commission’s investigation in this case, Basmagy requested that registered representatives contact customers and obtain those documents. Neither he nor any other Chardan employee had previously done so despite the requirements of Chardan’s Policies described in paragraph 12, above. Basmagy then provided the documents to regulatory staff without noting that Chardan obtained those documents only after receiving the request. As a result, the regulatory staff believed that the documents were in Chardan’s files at the time of the transactions when, in fact, Chardan received the documents after the receipt of the regulatory inquiry.

 

Unrelated SEC settlement with Schwab

On July 9, 2018 the SEC announced a settlement with Charles Schwab for failing to file SARs. See the complaint (pdf). The SARs that Schwab should have filed were not for penny stock transactions but instead for “cherry-picking” and excessive fees charged by advisers. From the complaint:

3. In 2012 and 2013, Schwab violated Exchange Act Section 17(a) and Rule 17a-8 by failing to file Suspicious Activity Reports (“SARs”) on suspicious transactions by independent investment advisers (“Advisers”) that Schwab terminated from its custodial platform. Schwab terminated the Advisers for engaging in activity Schwab determined violated its internal policies and presented risk to Schwab or its customers.

4. Schwab’s failure to file the SARs at issue resulted from its inconsistent implementation of policies and procedures for identifying and reporting suspicious transactions under the SAR Rule (31 C.F.R. § 1023.320(a)). Although Schwab investigated and terminated the Advisers, it did not have clear or consistent policies and procedures regarding the types of transactions on which SARs needed to be filed. For example, Schwab did not file SARs in certain instances where it investigated and terminated Advisers for conduct that led, or reasonably should have led, Schwab to suspect that the Advisers had charged certain customers excessive advisory fees, had allowed their state registrations to lapse, or were engaged in schemes involving “cherry-picking” (a fraudulent trade allocation scheme where the Adviser allocates profitable trades to the Adviser’s personal account and unprofitable trades to client accounts). In addition, in a number of instances where Schwab investigated and
terminated Advisers for conduct that led, or reasonably should have led, it to suspect that the Advisers misappropriated or misused client funds, Schwab applied an unreasonably high standard for determining whether to file a SAR on the suspicious transactions.

From the settlement release:

Schwab has agreed to settle the action by consenting, without admitting or denying the allegations of the complaint, to the entry of a permanent injunction and the payment of a $2.8 million civil penalty.

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.

Brian Sodi aka ‘Mailman’, allegedly responsible for dozens of pump and dump flyers, faces criminal and civil charges

On March 9, 2108 Brian Robert Sodi aka ‘Mailman’ was arrested and criminal and civil charges were announced against him. See the SEC press release and the Department of Justice press release. I have been behind in my blogging and did not realize just how important Brian Sodi allegedly was to the pump and dump industry until I finally got around to reading the criminal indictment and the SEC complaint.

How did Sodi acquire the nickname “mailman”? According to the SEC complaint he ran a large number of stock promotions (both online and physical mail) for 17 years.

91. From 1998 through at least 2015, Sodi’s Penny Stock Promotion Platform was a significant disseminator of penny stock promotional materials, handling, at its peak, as many as two dozen or more such campaigns annually

First, the allegations from the above-mentioned press releases. I start with excerpts from the DoJ press release:

A ten-count indictment filed in U.S. District Court charges BRIAN ROBERT “Mailman” SODI, 46, of Boca Raton, with conspiracy to commit securities fraud and mail fraud, and related charges.

According to the indictment, Sodi used his Florida-based publishing houses to distribute deceptive promotional mailers recommending the purchase of select penny stocks, while hiding from potential investors that he secretly was selling the stocks he was urging them to buy. The indictment also charges that Sodi obscured his involvement in the scheme by using offshore accounts and intermediaries to launder the proceeds of his fraud back to himself and his publishing houses.

According to the indictment, Sodi conducted his scheme as follows:

He would acquire shares of a publicly-traded stock, positioning himself to benefit from selling the shares at inflated prices. Sodi would try to induce the public to purchase the stock by developing and disseminating promotional and marketing mailers that exaggerated the stock’s prospects for growth and urged readers to purchase it. The mailers would falsely and deceptively conceal and fail to disclose that Sodi intended to sell the stock he was urging others to buy. After the stock price rose, Sodi would sell the stock for a profit.

Sodi hid his ownership interest in the promoted stock by trading through Arliss, a Swiss account, instead of through a brokerage account held in his own name. He brought the proceeds of his fraud back to himself and his publishing houses through offshore accounts held by firms in Switzerland, the Cayman Islands, and elsewhere.

Now excerpts from the SEC press release:

The SEC’s complaint alleges that Brian Robert Sodi, known in penny stock circles as “Mailman” for his pervasive participation in direct-mailed penny stock promotions, committed a fraud known as scalping.  He allegedly disseminated promotions recommending the purchase of the stocks in Southern USA Resources Inc. and Goff Corporation without disclosing he owned shares and planned to sell them through a foreign bank.  Sodi also allegedly hid from investors that he was being paid in stock for one of these promotions.  According to the SEC’s complaint, Sodi proceeded to unload hundreds of thousands of his own shares to the detriment of other investors who bought in to the hype.

The SEC’s complaint filed February 26 charges Sodi and two of his publishing houses, Capital Financial Media LLC and List Data Solutions LLC, with violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and Sections 17(a) and (b) of the Securities Act of 1933.  The complaint also charges Sodi with violating Section 13(d) of the Exchange Act and Rule 13d-1 as well as Sections 5(a) and (c) of the Securities Act.  Among other things, the complaint seeks an accounting of all of Sodi’s and his entities’ sales of all U.S. penny stocks that Sodi’s platform promoted within the last five years.

 

Perhaps most interestingly, the list of domestic and foreign regulatory agencies that assisted in the investigation is long:

The SEC appreciates the assistance of the U.S. Attorney’s Offices for the Northern District of Alabama, District of New Jersey, Eastern District of New York, and Eastern District of Virginia as well as the Criminal Fraud Section of the U.S. Department of Justice, Federal Bureau of Investigation, U.S. Postal Inspection Service, U.S. Department of Homeland Security, Alabama State Securities Commission, Financial Industry Regulatory Authority, Alberta Securities Commission, British Columbia Securities Commission, Cayman Islands Monetary Authority, the Cyprus Securities and Exchange Commission, Dubai Financial Services Authority, Guernsey Financial Services Commission, Hong Kong Securities and Futures Commission, Liechtenstein Financial Market Authority, the Malta Financial Services Authority, the Mauritius Financial Services Commission, Investigation Section of the Financial Services Regulation Division of the Government of Newfoundland and Labrador, Ontario Securities Commission, Québec Autorité des Marchés Financiers, Monetary Authority of Singapore, Swiss Financial Market Supervisory Authority, United Arab Emirates Securities and Commodities Authority, and United Kingdom Financial Conduct Authority.

There are three court cases that have been generated by this so far. The first (and least interesting) is United States v. Sodi (9:18-mj-08088) in the US District Court of the Southern District of Florida. All my links to court cases in this post are to the freely-available docket on CourtListener.com. In addition to the docket, some of the court documents are available to download from that website for free.

The criminal indictment was originally filed in the US District Court, Northern District of Alabama before being removed to the Southern District of Florida — where it was promptly transferred back to Alabama. My guess is that the only reason for the brief removal of the case to Florida was because Sodi was arrested there so therefore bond had to be set there. On March 8, 2018, was released on $250,000 bond (pdf).

The second case is  Securities and Exchange Commission v. Sodi (5:18-cv-00313) in the US District Court, Northern District of Alabama. Read the complaint (pdf). As is normal when a defendant is facing parallel civil and criminal charges, Sodi and his companies (Capital Financial Media, LLC and List Data Solutions, LLC) filed a motion to stay the proceedings of the civil case while the criminal case is litigated. From that motion:

Pursuant to Rule 7 of the Federal Rules of Civil Procedure, Defendants Brian Robert Sodi (“Sodi”), Capital Financial Media, LLC, and List Data Solutions, LLC (collectively, “Defendants”), respectfully move the Court for an order staying this matter pending resolution of the criminal case against Sodi in this District.

On June 28th lawyers for the SEC and the defendants had a telephone conference to discuss the motion to stay. On June 29th the judge ordered:

Consistent with discussion on the record during the telephone conference on June 28, 2018 in this matter, on or before July 20, 2018, the parties shall please submit a proposed partial stay order that addresses the Fifth Amendment concerns in this case. The Court STAYS the defendants’ obligations to respond to the complaint in this matter until the Court reviews the parties’ joint submission and enters an appropriate order. Signed by Judge Madeline Hughes Haikala on 6/29/2018.

The third and most important case is  United States v. Sodi (5:18-cr-00056) in US District Court, Northern District of Alabama. Read the criminal indictment (pdf). The indictment was filed under seal on February 22, 2018.

I will skip discussion of the indictment to briefly address the other filings in the case so far, most of which are procedural and uninteresting. Unsurprisingly, both sides moved for the case to be ruled complex (which gives both sides more time to prepare for trial) and the judge ordered that motion approved.  From the motion:

A first production of discovery has already been delivered to the defense and further productions are being prepared. The Government estimates that the organized discovery ultimately made available to the defense will amount to at least 100 gigabytes of data, mostly in the form of thousands of documents, with additional materials to be made available for inspection or copying.
A telephone status conference has been scheduled for July 30, 2018 to discuss the timeline for pretrial motions, plea notification, and trial.

One interesting fact garnered from the government’s motion for alternative victim notification procedures (pdf):

The Indictment alleges that Sodi participated in such fraud schemes involving four separate stock tickers during 2012 and 2013.
Because the frauds alleged in the Indictment were directed at influencing the stock price of each of the targeted stocks, and thereby influencing the market for the stocks as a whole, the number of victims harmed by the defendant’s activities reaches far beyond the typical range for ordinary financial fraud cases. The Government currently estimates that 48,848 investors, in the United States and elsewhere, purchased manipulated stock during Sodi’s frauds.

Considering that the same people would tend to trade many different pumps, rather than dividing 48,848 by 4 to get 12,000 traders/investors during each pump and dump, I would estimate 24,000 traders/investors traded each of the stocks Sodi is alleged to have promoted.

The Indictment

We return to review the indictment (pdf). I will excerpt what I think are the most important parts of the indictment. First, the people and entities involved:

c. The defendant, BRIAN ROBERT SODI, known to others involved in penny stock fraud as “Mailman,” personally controlled companies Capital Financial Media, LLC (CFM), List Data Solutions, LLC (LDS), GLJ Holdings, LLC (GLJ), Trinity Investment Research, LLC (TIR), and other companies using the same business address in Delray Beach, Florida. BRIAN ROBERT SODI and his entities were involved in penny stock promotion s, primarily through the distribution of mailers by postal mail, email, and online advertising.

d. Cooperating Witness 1 (CW-1) and Cooperating Witness 2 (CW-2) were co-conspirators with BRIAN ROBERT SODI as described below

e. Arliss International, Inc. (Arliss) was a corporate entity incorporated in the British Virgin Islands in and around October 2009. BRIAN ROBERT SODI used Arliss to scalp stock during the pump-and-dump schemes described in this Indictment. Although Arliss’s manager was nominally an official of EuroHelvetia Trustco S.A. (EHT), a wealth administration firm headquartered in Geneva, Switzerland, Arliss was in fact used by and operated for the benefit of BRIAN ROBERT SODI.

f. Southern USA Resources, Inc. (SUSA) was a Delaware corporation doing business in Ashland, Alabama, in Clay County, within the Northern District of Alabama. From in and around 2012 to in and around 2013, SUSA operated a gold mine in the Northern District of Alabama. SUSA registered its common stock with the U.S. Securities and Exchange Commission (SEC) under Section 12 of the Securities Exchange Act of 1934 on or about May 10, 2012. SUSA securities were quoted on OTC Link, an electronic inter-dealer quotation system for over-the-counter securities, under the ticker symbol “SUSA.” SUSA shares were available for public trading until on or about March 1, 2013, when the SEC issued an order suspending trading in SUSA stock. BRIAN ROBERT SODI used Arliss to scalp SUSA stock during a promotion by BRIAN ROBERT SODI’s publishing houses that was executed from in and around 2012 to in and around 2013. On or about November 22, 2013, the SEC revoked SUSA’s registration for various violations of the securities laws.

g. Great Wall Builders Ltd. (GWBU) was a Texas corporation. GWBU common stock was registered with the SEC under Exchange Act Section 12(g) and was quoted on OTC Link under the ticker symbol “GWBU.” BRIAN ROBERT SODI used Arliss to scalp GWBU stock during a promotion by BRIAN ROBERT SODI’s publishing houses in and around 2012.

h. Potash America, Inc. (PTAM) was a Nevada corporation headquartered in Boca Raton, Florida (originally named Adtomize Inc.). PTAM common stock was registered with the SEC under Exchange Act Section 12(g) and was quoted on OTC Link under the ticker symbol “PTAM.” BRIAN ROBERT SODI used Arliss to scalp PTAM stock during a promotion by his publishing houses in and around 2012.

i. Goff, Corp. (GOFF) was a Nevada corporation headquartered in Cork City, Ireland. GOFF common stock was registered with the SEC under Exchange Act Section 12(g). BRIAN ROBERT SODI used Arliss to scalp GOFF stock during a promotion run by his publishing houses in and around 2013. GOFF securities were quoted on OTC Link under the ticker symbol “GOFF” and were available for public trading until on or about June 29, 2013, when GOFF terminated its stock registration.

Of the four stocks mentioned in the indictment, two of them (GOFF and GWBU) were also promoted by the infamous AwesomePennyStocks. I wrote a blog post detailing the Goff Corp (GOFF) stock promotion by email and by online landing page and hard mailer (distributed by Capital Financial Media). I wrote about the Great Wall Builders (GWBU) email promotion by Awesomepennystocks and how that campaign was interrupted by SpamHaus and iContact. I previously blogged about the SEC suspending trading in Southern USA Resources (SUSA). Tim Lento posted a scan of the front and disclaimer page of the SUSA hard mailer. Here is a copy of that scan.
The main allegations from the indictment are as follows:
6. It was further a part of the scheme that BRIAN ROBERT SODI’s mailers would falsely, deceptively, and misleadingly conceal and fail to disclose the material fact that BRIAN ROBERT SODI intended to sell the very stock that he was urging others to buy.

8. It was further a part of the scheme that sometimes, accomplices and co-conspirators of BRIAN ROBERT SODI, both known and unknown to the Grand Jury, would use “match trading,” i.e.,coordinated transactions designed to manipulate the stock price, to deceive investors into believing that the public was actively trading in the stock.
9. It was further a part of the scheme that after the stock price rose, BRIAN ROBERT SODI would sell the stock for a profit.
10. It was further a part of the scheme that BRIAN ROBERT SODI would conceal his ownership interest in the promoted stock by trading through Arliss, a Swiss account, instead of through a brokerage account held in his own name.
11. It was further a part of the scheme that BRIAN ROBERT SODI would repatriate the proceeds to himself and his publishing houses through offshore accounts held by firms in Switzerland, the Cayman Islands, and elsewhere.
THE CONSPIRACY TO COMMIT SECURITIES FRAUD
12. From in and around 2012 through in and around 2013, all dates inclusive, BRIAN ROBERT SODI, together with CW-1, CW-2, and others known and unknown to the Grand Jury, conspired to defraud investors in the Northern District of Alabama and elsewhere through the fraud scheme described above by executing trades of SUSA stock.

The SEC complaint (pdf) against Sodi and his companies includes some other details not in the indictment:

IT IS LIKELY THAT SODI HAS ENGAGED IN ADDITIONAL
SCALPING FRAUD WITHIN THE LAST FIVE YEARS
Sodi for Years Had Access to Administrative Firm A’s Network of Offshore Accounts
83. Sodi made regular use of Swiss Administrative Firm A – administered accounts from as far back as 2005 and continuing through at least 2015, as demonstrated by, among other things:
a. both Front Company A and Front Company B being Swiss Administrative Firm A-administered accounts;
b. a third, older account (“Front Company C”), which was active from at least early 2005 through early 2010, and which was also Swiss Administrative Firm A-administered – having been used repeatedly to make payments for Sodi’s benefit to many of the same persons and entities to which Front Company A likewise made payments, including parties who designed, built and landscaped Sodi’s vacation home on Nicaragua’s Pacific Coast, “Casa Sodi”;
c. Swiss Administrative Firm A itself having sent at least one wire, on September 8, 2010, to Sodi’s very same “player account” at the very same Casino to which Front Company A also wired funds (as alleged in paragraph 28 above);
d. other Swiss Administrative Firm A-administered accounts, including “omnibus” accounts, transferring funds to, and/or receiving funds from, the Front Company A account; and
e. other Swiss Administrative Firm A-administered accounts wiring funds to reload the very same Swiss Visa Card that Front Company B, as alleged in paragraph 81.c above, wired funds to reload.

After that section the SEC complaint details alleged scalping in PTAM and GWBU in 2012. One alleged detail of note (emphasis mine):

At the time of these purchases, Sodi knew that the massive GWBU promotional campaign his Penny Stock Promotion Platform had prepared was about to launch, and that it would also coincide and be coordinated with a massive APS campaign likewise promoting GWBU.

The complaint continues to allege other stocks scalped after 2013, although it lists only one stock, Graham & Hill Industries (GHIL):

88. In addition to the Front Company A and Front Company B-linked funds that were routed circuitously to Sodi’s CFM entity in April 2014 via Hong Kong Account A, as alleged in paragraph 81.b above, other funds followed a similar path. These include six transfers totaling $950,000 between June 18 and September 22, 2014 from Hong Kong Account A to Sodi’s LDS entity.

89. Sodi’s Penny Stock Promotion Platform booked all $950,000 of the aforementioned wires from Hong Kong Account A as income relating to the Sodi Platform’s promotion of a marijuana stock called Graham & Hill Industries (GHIL). Every penny of this $950,000 however, was first sent to Hong Kong Account A by the very same account – which happened to be at a Cayman Islands bank – that was selling GHIL stock into the price and volume rises generated by that touting campaign. Moreover, every penny of this $950,000 was funded by sales of GHIL stock.

The SEC complaint also alleges that Sodi lied to SEC staff:

93. During the staff’s investigation leading to the filing of this action, Sodi appeared for testimony. During that testimony, Sodi made false statements, including claims that he (i) never had, and never was given the use of, any foreign accounts; (ii) never received or shared, directly or indirectly, in any proceeds of any sales of any of the stocks his publishing houses promoted; and (iii) had never – apart from a single instance over twelve years ago – been paid in stock for running a promotional campaign.

 

My Records of CFM and LDS stock promotions

I have collected a large number of records of stock promotions on this blog. While this collection is not exhaustive, I do make sure to collect disclaimer info and details of the promotion for each big promotion I have blogged about. Below are all the stocks not mentioned in the SEC complaint or indictment for which I have records showing CFM or LDS as being involved in the promotion. I blogged about many of these but many of the promotions below are linked only to archived webpages at The Internet Archive showing the promotion; others are linked to PDF copies of the online landing pages promoting the stocks that I made at the time of the promotion.

Note that my inclusion of the promotions in this below list does not mean that I believe that Sodi or his companies violated the law in promoting these companies — it is possible to legally promote a company — I only indicate that he and/or his companies promoted these stocks. Dates below are approximate — many of these promotions ran for many months.

Green & Hill Industries (GHIL): List Data Solutions (June, 2014)

Mining Metals of Mexico (WIIM): List Data Solutions (April, 2014)

Black River Petroleum (BRPC): Capital Financial Media (April, 2014)

Guar Global (GGBL): List Data Solutions (December, 2013)

Amazonica Corp (AMZZ): Capital Financial Media (November, 2013)

Xumanii Corp (XUII): Capital Financial Media (July, 2013)

Lot78 Inc (LOTE): Capital Financial Medial (March, 2013)

PacWest Industries (PWEI): Capital Financial Media (March, 2013)

Swingplane Ventures (SWVI): Capital Financial Media (February 2013) (Thanks to Tim Lento for the scan of the mailer)

Graphite Corp (GRPH): List Data Solutions (February 2013)

Lifetech (LTCH): Capital Financial Media (November, 2012)

Stevia Corp (STEV): Capital Financial Media (September, 2012)

Stevia Nutrition (STNT): Capital Financial Media (August, 2012)

Boldface Group (BLBK): Capital Financial Media (August, 2012)

American Energy Development (AEDC): Capital Financial Media (July, 2012)

Psychic Friends Network (PFNI): Capital Financial Media (May, 2012)

Sunpeaks Ventures (SNPK): Capital Financial Media (April, 2012)

North Springs Resources (NSRS): Capital Financial Media (January, 2012)

Xcelmobility (XCLL): Capital Financial Media (January, 2012)

White Smile Global (WSML): Capital Financial Media (November, 2011)

TakeDown Entertainment (TKDN): Capital Financial Media (September, 2011) (Archived copy of promotion landing page)

Allezoe Medical (ALZM): Capital Financial Media (July, 2011) (Archived copy of promotion landing page)

Portage Resources (POTG): Capital Financial Media (June, 2011)

Xinde Technology (WTFS): Capital Financial Media (June, 2011)

OncoSec Medical (ONCS): Capital Financial Media (May, 2011)

First American Silver (FASV): Capital Financial Media (April, 2011)

Avatar Ventures Corp (AVVC): Capital Financial Media (April, 2011) (Archived copy of promotion landing page)

Kunekt Corp (KNKT): Capital Financial Media (February, 2011)

Hiroyoshi Worldwide (HHWW): Capital Financial Media (February, 2011)

 

Many more stock promotions run by List Data Solutions and/or Capital Financial Media can be found by using the Internet Archive Wayback Machine on SmallcapFortunes.com although the pump pages were not accessible directly from the main page, so a reader needs to find the direct link to find the archived page. It appears that at least at one point Capital Financial Media LLC owned SmallCapFortunes.com (another messageboard source from someone I trust saying the same thing). The current owner of the SmallCapFortunes.com domain name is Trinity Investment Research LLC of Florida (per current WHOIS search; screen capture).

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

SEC Suspends trading in 3 suspected pump & dumps

This morning the SEC suspended trading in three stocks that had “unusual and unexplained market activity” (in other words, they looked like pump and dumps) and because of questions about the accuracy of the companies’ press releases and 8-Ks. The date on all the suspensions is July 3rd but the most liquid of the stocks CYPE traded all day July 3rd (a half-day) and the suspensions didn’t show up in the SEC trading suspension RSS feed until this morning after the open.

The three stocks are: Century Petroleum Corp (CYPE), Big Time Holdings, Inc (BTHI), and Williamsville Sears Management (WSML). All three companies show Brian K. Kistler as a consultant or officer. On OTCMarkets.com he is listed as CEO of BTHI and a consultant at WSML and a consultant at CYPE.

LinkedIn lists Mandla J. Gwadiso as founder of BTHI and WSML (pdf copy of his LinkedIn profile). He just tweeted two days ago that he was going to buy CYPE stock:

 

See more about these companies here:

Century Petroleum Corp (CYPE)
SEC suspension release (pdf)
SEC suspension order (pdf)

Reason for the suspension (from the release):

The Commission temporarily suspended trading in the securities of CYPE because of questions about the accuracy of information in the company’s press releases since at least May 25, 2018, regarding the company’s business plans and acquisitions, and concerns since at least May 25, 2018, about recent, unusual and unexplained market activity in the company’s common stock.

CYPE daily candlestick chart:

Big Time Holdings, Inc (BTHI)
SEC suspension release (pdf)
SEC suspension order (pdf)

Reason for the suspension (from the release):

The Commission temporarily suspended trading in the securities of BTHI because of questions about the accuracy of information contained in BTHI’s Form 8-K filed with the Commission on May 24, 2018, and concerns since at least May 24, 2018, about recent, unusual and unexplained market activity in the company’s common stock.

BTHI daily candlestick chart:

Williamsville Sears Management (WSML)
SEC suspension release (pdf)
SEC suspension order (pdf)

Reason for the suspension (from the release):

The Commission temporarily suspended trading in the securities of WSML because of questions about the accuracy of information in the company’s press releases since at least May 29, 2018, regarding the company’s business plans and acquisitions, and concerns since at least March 9, 2018, about recent, unusual and unexplained market activity in the company’s common stock.

WSML daily candlestick chart:

 

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.

UBI Blockchain Internet (UBIA): First the SEC trading suspension, now the settlement

Yesterday (July 2, 2018) the SEC filed suit against and then settled with “attorney T.J. Jesky and his law firm’s business affairs manager, Mark F. DeStefano,” for “violating the registration provisions of the federal securities laws” when they sold UBI Blockchain Internet (UBIA) stock. See the complaint (pdf).

The SEC had previously suspended trading (pdf) in UBIA from January 5th to January 23rd, 2018. The reason for the suspension at the time was:

(i) questions regarding the accuracy of assertions, since at least September 2017, by UBIA in filings with the Commission regarding the company’s business operations; and (ii) concerns about recent, unusual and unexplained market activity in the company’s Class A common stock since
at least November 2017

UBIA daily candlestick chart over last 8 months (click to enlarge):

Here are some details from the complaint:

1. This action seeks to enjoin further illegal conduct by, and obtain certain other relief from, Defendants Jesky and Destefano, who collectively illegally obtained approximately
$1.4 million in a ten-day period from their unlawful offers and sales of securities into the public market of UBI Blockchain Internet Ltd., which trades under the ticker symbol UBIA (“UBIA”). Even though the Defendants were required under the registration statement to sell their shares at a specific price that had been reported to the Commission and to the investing public, Defendants nonetheless sold their shares in the market for as much as thirteen times the required price.

2. From about 2010 through 2016, UBIA was a shell company that claimed to be in the business of designing climate controlled units for the distributed production of energy. In
early 2017, however, UBIA announced that it had entered a new business, to engage in “the research and application of blockchain technology with a focus on the Internet of things covering food, drugs and healthcare.” The Defendants have been associated with UBIA since at least 2011.

3. In October 2017, the Defendants arranged to receive UBIA shares in return for legal services rendered to UBIA by Jesky’s law firm, including the firm’s preparation of a
registration statement with the Commission. Pursuant to that registration statement, UBIA sought to register the public resale of certain shares, including the shares issued to Jesky and DeStefano. The registration statement prepared by the Jesky firm required that all Class A shares sold pursuant to the registration statement had to be sold at a fixed price of $3.70 per share.

4. Inexplicably, UBIA’s stock experienced a dramatic increase after the Defendants acquired their shares, rising from approximately $4.00 per share on November 20, 2017 to a high of approximately $115.00 on December 15, 2017, even though UBIA had not issued any news releases that would have explained such an increase. As soon as the registration statement was declared effective on December 22,
2017, the Defendants began to unlawfully sell their shares at prices far in excess of the $3.70 price required by the registration statement. Between December 26, 2017 and January 5, 2018,

Defendants sold more than 50,000 of their UBIA shares into the public over-the-counter market (“OTC”). Jesky sold 24,995 UBIA shares at prices between $21.12 and $48.13, for total proceeds of $766,036. DeStefano sold 26,000 UBIA shares at prices between $21.56 and $48.40, for total proceeds of $798,473.

6. The Defendants’ unlawful sales only stopped when the Commission suspended trading in UBIA stock on January 8, 2018, based on questions about the accuracy of assertions in
UBIA’s SEC filings and the recent, unusual market activity in the company’s stock.

7. Defendants’ offers and sales of UBIA securities between December 26, 2017 and January 5, 2018, none of which were made at the fixed price of $3.70 required by the registration
statement filed with the Commission, were in violation of Sections 5(a) and (c) of the Securities Act of 1933 [15 U.S.C. § 77e(a) & (c)].

The settlement is a typical SEC settlement:

Without admitting or denying the allegations in the SEC’s complaint, Jesky and DeStefano agreed to return approximately $1.4 million of allegedly ill-gotten gains, pay $188,682 in penalties, and be subject to permanent injunctions.  The settlement is subject to the court’s approval.

 

Disclaimer. No position in any stock 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 Charges Joseph A. Fiore and his companies with market manipulation and scalping of Plandai Biotechnology (PLPL) stock

Plandai Biotechnology (PLPL) was a stock promotion that lasted for over a year from early 2013 through mid-2014. At the peak the stock went over $3 on volume of 10 million shares. On June 20th, 2018 the SEC filed suit against Joseph A. Fiore and two companies he allegedly controlled, Berkshire Capital Management Company, Inc. (“Berkshire”), and Eat at Joe’s, Ltd. (now known as SPYR, Inc., a public company that trades OTC as SPYR) (“Eat at Joe’s”).

Below is a chart of Plandai Biotechnology during the period in question.

See the SEC’s allegations in the following documents:

SEC Litigation Release
SEC complaint (pdf)

Case docket on CourtListener. The case is Securities and Exchange Commission v. Fiore (7:18-cv-05474) U.S. District Court, S.D. New York.

Excerpt from the complaint:

1. Defendant Fiore orchestrated a fraudulent scheme to promote and otherwise manipulate the market for the common stock of microcap company Plandai Biotechnology, Inc. (“Plandai”). Fiore engaged in a variety of deceptive conduct to affect the market for Plandai stock, while concealing that he controlled a large number of Plandai shares and intended to sell them. Fiore generated more than $11.5 million in illegal proceeds through his undisclosed sales of Plandai shares, through his own accounts and in accounts that he controlled in the names of Defendants Berkshire and Eat at Joe’s.
2. One facet of Fiore’s scheme was scalping, the illegal and deceptive practice of recommending that investors purchase a security while failing to disclose an intent to sell the same security. From at least April 2013 to March 2014 (the “Relevant Period”), Fiore, himself
and acting through his company Berkshire, organized, financed and directed a steady stream of stock alerts and research reports that promoted the purchase of Plandai stock. Fiore paid promoters directly to promote Plandai stock or, more commonly, paid third-party consultants to retain promoters to promote Plandai stock.
3. These promotions recommended that investors buy Plandai stock, while failing to disclose, as required by law, that Fiore, the organizer and funder of the promotional campaign, beneficially owned shares of Plandai stock, intended to sell shares, and was actively selling his
Plandai holdings into the public market. During the course of his scalping campaign, Fiore sold nearly 12 million shares of Plandai common stock through accounts he controlled.
4. Manipulative trading was another facet of Fiore’s fraudulent scheme. During the Relevant Period, Fiore, Berkshire, and Eat at Joe’s knowingly engaged in manipulative trading practices in order to induce investors to purchase Plandai stock, by artificially supporting and increasing the share price and creating the false appearance of market activity in the stock.

The complaint is quite detailed and gives details of Fiore’s alleged wash trading. According to the complaint:

During the Relevant Period, Fiore maintained and controlled six
brokerage accounts held in the name of Berkshire and six brokerage accounts held in the name of Eat at Joe’s. Fiore directed and controlled these accounts and used them, along with a brokerage account in his own name, to engage in the unlawful trading, as alleged herein.

The alleged stock promotions were not cheap:

24. Between April 2013 and March 2014, Fiore paid the promoters at least $2,137,000 to promote penny stocks, including Plandai, with approximately $675,000 going to the two intermediary consulting companies, who then retained third parties to promote Plandai
stock. Fiore personally selected the promoters, including the promoters that the consulting companies located and later retained on his behalf. He also paid the promoters for each promotional publication that they disseminated, and controlled the timing of their promotions.

One facet of promotions that I am familiar with is that they usually come at the same time as company press releases. And the alleged connection in the case of Plandai is quite explicit:

27. Throughout the promotional campaign, Fiore suggested topics for certain promotions and routinely provided the promoters with information about Plandai for use in their promotional materials. Fiore also frequently coordinated the dissemination of the promotional
materials to coincide with Plandai’s issuance of press releases, in order to generate additional positive news about Plandai.
28. On multiple occasions, Fiore received copies of Plandai press releases directly from Plandai before they had been publicly disseminated, and then forwarded the releases to third-party promoters for use in their promotional materials.

The SEC in its complaint also alleges the inadequacy of stock promoter disclaimers:

34. Fewer than half of the promotions contained generic disclaimers indicating that the promoter had been compensated for promoting the stock, and that Berkshire, or the unnamed entity paying for the promotions, “may own,” or “may sell” Plandai stock. But these disclaimers were incomplete, misleading, and materially inaccurate because Fiore and Berkshire were actively selling throughout the Relevant Period. Moreover, many promotions contained no such
disclaimer, and none of the promotions disclosed the true state of affairs: that Berkshire and Fiore beneficially owned, intended to sell and were actively selling shares of Plandai stock.

In addition to allegedly paying for promotion and liquidating stock, the SEC alleges that Fiore also at times supported the price of Plandai Biotechnology by buying stock:

54. Fiore first learned on or about June 25, 2013 that the Seattle Times was preparing an article suggesting that Plandai was a fraud. He began buying Plandai stock immediately thereafter for the purpose of manipulatively supporting the stock price and conditioning the
market in advance of the publication of the negative article.
55. On the eighteen trading days from June 25, 2013 to July 22, 2013, Fiore not only bought more Plandai shares than he sold, but his purchasing accounted for a significant portion of the market volume in Plandai stock. As discussed in paragraphs 63 to 77 below, Fiore’s purchases during this period were manipulative. Fiore’s trades set the closing price for Plandai stock on eleven of these eighteen trading days. On seven of those days, Fiore had also been responsible for the prior trade execution reported in the market, further indicating that his trades were an attempt to artificially inflate the stock price.

Who were the brokers?

The SEC complaint does not name the brokers and it is important to point out that Fiore is alleged to have lied to his brokers. The brokers have not been charged in the suit. For this reason, although I have identified “Broker B” with a high degree of certainty I will not identify the broker here. The complaint did not provide enough information for me to identify any of the other brokers allegedly used by Fiore or his companies.

Legal Threats against critic Alan Brochstein

On September 3rd, 2013 Alan Brochstein, CFA wrote a negative article on Plandai Biotechnology, Plandaí­ Biotechnology: Avoid This Green Tea Fantasy. Less than a month later he received a letter from Plandai’s outside counsel (Paula Colbath of Loeb & Loeb) accusing him of defaming the company. Ultimately the article stayed up (although behind SeekingAlpha’s paywall) and nothing came of the legal threats.

SPYR Inc (formerly known as Eat at Joe’s)

On August 3rd, 2016 Fuzzy Panda Shorts (follow him on Twitter) wrote on SeekingAlpha about SPYR Inc as a good stock to short and outlined many of the connections with Fiore and Berkshire Capital and many of the penny stocks that Fiore has financed. This is an excellent article that has lots of details on Fiore not easily found elsewhere.

 

Disclaimer. No position in any stock 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 Suspends trading in yet another blockchain stock, Evolution Blockchain Group Inc (EVBC)

This morning the SEC issued a trading suspension for the shares of Evolution Blockchain Group Inc (EVBC).

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

The reasons given for the trading suspension (emphasis mine):

The Commission temporarily suspended trading in the securities of EVBC because of (1) questions about the accuracy and adequacy of information in the marketplace since at least May 17, 2018, including the accuracy of information contained in an Evolution Blockchain press release dated May 17, 2018, referencing a whitepaper, and (2) concerns since at least May 15, 2018, about recent unusual and unexplained market activity in the company’s common stock. Evolution Blockchain is a Nevada corporation whose stock is quoted on OTC Link LLC (previously Pink Sheets), operated by OTC Markets Group, Inc., under the ticker symbol EVBC.

The Commission acknowledges FINRA’s assistance in this matter.

The press release from May 17th, 2018 is copied below in full:

Evolution Blockchain Group – Announces Two Acquisitions and Corporate Updates

Las Vegas, Nevada (FSCwire) – Evolution Blockchain Group Inc. (OTC: EVBC) (“Evolution” or the “Company”) is pleased to announce that it has acquired two new blockchain technologies, Drive-coin and Gamebitcoin.

Drive-coin

Drive-coin is a peer-to-peer blockchain solution for the automotive and parts industry.  It is in development and when completed will allow for peer-to-peer vehicle and parts sales using a blockchain inventory management system designed with the use of smart contracts.  It will also have a social networking component with many features to localize sales of the vehicles and parts.  The technology will support automotive financing options integrated with traditional lenders to facilitate the purchasing or leasing of vehicles with Drive-Coin.

Gamebitcoin

Gamebitcoin is a game specific blockchain development solution tailored to gaming transactions across the globe.  Currently a prototype token, Gamebitcoin will be built out on our own unique blockchain with various unique features that will allow for multiple revenue streams.  Gamebitcoin will be an open platform where software and game developers can connect to API’s and integrate their game to the Gamebitcoin.  Fees are transaction based granting new developers easier access to revenue at a lower cost.

EBG Blockchain Prototype

Our whitepaper outlines a unique and proprietary blockchain technology system that improves on current blockchain methodology by improving the user experience, enhancing user asset protections, improving security methodologies and implementing unique and proprietary features. Extensive auditing of the blockchain will occur before release.

Management Additions

Evolution would like to welcome two new officers to the company, Thom Richardson as Vice President of Technology and Dominic dos Santos as Head of Project Management for Gamebitcoin.  Mr. Richardson has over six years of experience as a software engineer focused in the area of agile development.  He comes from a strong data-driven background and got his start at Fidelity Investments.  After graduation, Thom Richardson obtained his degree in Economics from the University of Texas at Arlington.  Prior to Evolution, Mr. Richardson has spent the last 5 years managing software teams from all corners of the world building applications and APIs using the MEAN stack , an open-source JavaScript software stack for building dynamic websites and web related applications.  Mr. Santos is a young entrepreneur and business owner of a private web development and server hosting company.  Educated at Sheridan College and then Concordia University, Mr. Santos is an expert in Windows and Linux software.

New Website

In addition, Evolution has launched its new website: www.evolutionblockchain.com.

“Drive-Coin is an exciting blockchain technology that we are developing and looking to forward to launching,” says Lawrence Stephenson, President of Evolution, “This blockchain technology will eventually be coupled with a compliant initial coin offering (ICO).  Prior to launching the Drive-Coin or the Gamebitcoin ICOs, we will be consulting with the Securities and Exchange Commission (SEC), the CSE and our legal team to determine if our Drive-Coin tokens are considered securities as defined by the SEC or token assets and will take the necessary avenues to ICO,” adds Lawrence Stephenson, “It is very important to us that we adhere to the laws and approach this new and exciting financial technology within the guidelines of regulation.  We are very pleased to welcome Thom and Dominic to the team, as they will be instrumental in managing the development and launch of our technologies.”

About Evolution Blockchain Group

Evolution Blockchain Group is focused on acquiring, developing and launching globally scalable blockchain technology solutions, as well as building cryptocurrency mining operations.  Initial product launches will utilize smart contracts and showcase our products core features.  EBG is committed to becoming a significant contributor in the evolution of blockchain technology that yields long term value for its shareholders and the global community by providing engineering, development, capital and expertise to our own proprietary blockchain core projects – projects that we will license and generate royalties from.  Our unique technologies improve on various aspects of current blockchain developments and focus on producing revenue driven results.  Evolution has entered a new and exciting field of technology, a field that is changing the way businesses and people interact.

Contact Info

Lawrence Stephenson

[email protected]

Perhaps more interesting than the press release is the SEC mention of the trading of the stock, which doubled before losing almost all its gains and closing close to the opening price on May 15th (the date mentioned in the SEC press release). The volume on that day was only about 35,000 shares and I cannot remember the last time the SEC mentioned unusual trading activity in a suspension press release in a stock that was trading so little volume. The SEC also mentioned the assistance of FINRA so perhaps SARs (suspicious activity reports) filed by brokers found evidence of wash trading. The somewhat increased volume and fairly tight trading range after May 15th does lead me to believe that there may have been wash trading going on in the stock to prepare it for a stock promotion.

EVBC will resume trading on the grey market (no market makers) at the open on Wednesday, July 11th.

EVBC previously traded as Garmatex Technologies (GRMX) and was reported by Promotion Stock Secrets to be a boiler room / email pump by StockCallers. The ticker and name were changed on March 27, 2018. Promotion Stock Secrets also reported that there had been some phone calls promoting the stock over the last month.

Below is the chart from when GRMX was promoted from March through early May of 2017:

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post except that I have subscribed to Promotion Stock Secrets for the last few years. 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.

Stock Promoter Alexander Kon settles with SEC

After almost two years of litigation and negotiation that started on November 14, 2016 with an SEC cease and desist administrative proceeding (pdf) before an SEC Administrative Law Judge (ALJ), Alexander Kon submitted an offer of settlement (pdf) that the SEC accepted on May 29th, 2018. This is a very simple case but it is important in that it addresses the legality of incorrectly listing the name of the party that paid for a stock promotion. Also, it addresses the legality of the SEC hearing cases before its own ALJs. The second issue is beyond my legal interest so I encourage the interested reader to read Brenda Hamilton’s blog post on the case.

The facts of the case as contained in the settlement (pdf) are as follows:

1. In early 2014, as part of an effort to increase his company’s (“Issuer A”) stock price, Issuer A’s former CEO (the “Former CEO”) retained Kon to disseminate information about Issuer A.

2. Kon possessed an email list and various websites through which he touted microcap stocks. Oftentimes, Kon hired other promoters to help distribute touts.

3. After various email exchanges and phone calls between the Former CEO and Kon, they agreed that for $25,000, Kon would run a marketing campaign on Issuer A stock on April 14, 2014 via four websites that Kon operated: 1)
007stockchat.com; 2) awesomestocktips.com; 3) otcfire.com; and 4) pennystockspy.com.

4. Kon and the Former CEO interacted with each other to both organize the promotional campaign and to make arrangements for payment for the campaign. The $25,000 payment to Kon was effected via wire transfer by the Former CEO and was in response to an invoice Kon sent directly to the Former CEO. However, despite Kon interacting exclusively with the Former CEO, sending the invoice directly to the Former CEO, and receiving payment from a transaction effected by the Former
CEO, Kon determined that the disclaimer for each of the touts on the four websites would note that Kon received money from “third party Casey Cummings.” Moreover,
Kon was aware that Casey Cummings was the Former CEO’s son, yet did not disclose this in the touts either.”

Brenda Hamilton identified the company (Issuer A) as CannaBusiness Group (CBGI) and the “Former CEO” (more appropriately referred to as the “then-CEO” in my opinion and referred to in that way by Brenda Hamilton), as Michael Cummings.

On the same day that the initial proceeding against Alexander Kon was announced, the SEC announced a settlement with Casey Cummings (pdf).

The violation listed in the SEC settlement with Kon is:

As a result of the conduct described above, Kon willfully violated Section 17(b) of the Securities Act, which prohibits the publication of any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration to be received from an issuer, without fully disclosing the receipt of such consideration and the amount thereof.

The penalty agreed to by Kon and the SEC was a 12 month suspension “from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant …”. Also, Kohn “shall pay disgorgement of $25,000, prejudgment interest of $332, and a civil money penalty of $20,000, for a total of $45,332”.

Getting back to the topic of the legality of incorrectly identifying the paying party in a stock promotion, see the ruling of the ALJ (pdf) in Kon’s case from early 2017 (shortly before the proceeding was stayed (pdf) because of questions about the legality of the SEC hearing cases in front of their ALJs).

From that ruling (emphasis added by me):

Respondent argues that the misconduct alleged in the OIP did not amount to a violation of the law because the websites at issue disclosed the fact and amount of consideration received. See Motion at 7-10. Respondent contends that Section 17(b) does not require disclosure of the source of the consideration, and that “misidentifying the source of the consideration” does not violate Section 17(b). Motion at 8.

A reading of the statutory text alone is sufficient to reject this contention. Section 17(b) contains two elements directly relevant here: (1) the consideration at issue must be “fully disclos[ed]”; and (2) the duty to disclose only arises when the consideration is from an issuer, dealer, or underwriter. 15 U.S.C. § 77q(b). Full disclosure means exactly that – disclosure that is fulsome rather than incomplete. If consideration is received from an issuer, but the only disclosed consideration is gratuitously (or misleadingly) reported to be from a third party, then the consideration from the issuer is not “fully disclos[ed]” within the meaning of Section 17(b). Such a disclosure constitutes an omission, not merely a misidentification of the source of the consideration. Here, drawing all reasonable inferences in the Division’s favor, Respondent allegedly omitted disclosure of consideration received from the issuer (via its CEO), and thereby failed to fully disclose that consideration under Section 17(b).

In urging a different result, Respondent cites SEC v. Recycle Tech, Inc., No. 12-21656-CV-LENARD, 2013 WL 12063952 (S.D. Fla. Sept. 26, 2013). See Motion at 10. In Recycle Tech, two defendants were charged with violating Section 17(b) based on disclaimers stating that they had “received from a third party non affiliate 2.325 million free trading shares of [Recycle Tech] for advertising and marketing,” or similar language. 2013 WL 12063952, at *8. According to the complaint, however, both defendants had received their shares indirectly from Recycle Tech, the issuer. See id. The district court held that “misidentifying the source of the consideration” did not violate Section 17(b) because the disclaimers “‘fully disclos[ed] the
receipt . . . of such consideration and the amount thereof.’” Id.

According to Respondent, the district court’s holding “clearly demonstrate[s] that the Respondent’s alleged actions are not in violation of Section 17(b).” Motion at 10. I respectfully disagree with the district court’s construction of Section 17(b), because that construction did not consider the entirety of the statutory text. The other cases upon which Respondent relies are either factually distinguishable or do not support his position. See Motion at 8-9; Reply at 13.

I previously blogged about the Recycle Tech suit.

Because the Recycle Tech ruling was from a district court judge while the ruling in this case was from an SEC ALJ, I believe that a future defendant could have a good case for arguing that the district court ruling is the correct precedent. However, by aggressively pursuing this case, the SEC has shown that it still believes that any false information in a stock promotion disclaimer violates Section 17(b). Expect this issue to be litigated more in the future.

 

Disclaimer. No position in any stock 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.