Nine Individuals Indicted by Florida U.S. Attorney and Sued by the SEC

Securities Lawyer 101 Blog

On August 14, 2013, the U.S. Attorney’s Office for the Southern District of Florida announced that six individuals had been charged as a consequence of penny stock sting operations conducted over the course of several years, and that another four, previously charged in similar circumstances, had recently pled guilty.  Simultaneously, the Securities and Exchange Commission (SEC) filed civil lawsuits against all but one of the individuals and four of the penny companies involved.

Those charged are Jack Freeman; Jeffrey L. Schultz, CEO of Redfin Network, Inc. (RFNN); Richard P. Greene; Peter Santamaria; Douglas P. Martin, CEO of VHGI Holdings, Inc. (VHGI); Scott Haire; Sheldon R. Simon; Thomas Gaffney, CEO of Health Sciences Group, Inc. (HESG); Mark Balbirer; and Stephen F. Molinari, CEO of Nationwide Pharmassist Corp.

Nationwide Pharmassist is not a public company, but it did sell stock through two Regulation D placements.

In 2009 and 2010, Jack Freedman was a promoter of Green Planet Group, Inc. (GNPG).  In an effort to move the stock price, he paid a bribe to a middleman who would pass it on to a “corrupt broker” who supposedly would then use his customers’ discretionary accounts to buy shares of GNPG in the open market.  Unfortunately for Freedman, the corrupt broker was an invention of the FBI, and the middlemen was an FBI cooperating witness.

Jeffrey Schultz wanted to see Redfin’s stock price rise.  In 2011, he paid a “corrupt broker” so that the broker and his buying group would purchase RFNN shares on the open market.  The corrupt broker was an FBI cooperating witness.

Richard P. Greene has enjoyed a long career as a securities lawyer and bad actor.  Once while still a securities attorney, in 2001 he engaged in a scheme to manipulate the stock of Movie O Networks, Inc., which then traded as MVEO (it was deleted by FINRA as an inactive issue in 2009).  The scheme involved the payment of kickbacks to co-conspirators who would purchase MVEO stock.  He was indicted for that, and in 2003 pled guilty and was sentenced to five years’ probation.  Greene believed that his participation in these criminal acts was “minor” and should not be punished by the Florida Bar with disbarment, arguing that he should instead be suspended for two years.  In 2004, his wish was more or less granted; he was suspended for three years.  In 2006, his request for readmittance was denied, and he was disbarred by the Florida bar.

Before and after the MVEO affair, Greene was involved with questionable penny stocks, and had attracted notice from the SEC.  The new charges against him are strikingly similar to those brought ten years ago.  With the help of fellow promoter Peter Santamaria, he paid yet another corrupt broker—whose part was played by a cooperating witness—to manipulate stock; this time, it was the stock of VDO-Ph International, Inc. (VDPH).  The purported corrupt broker and his group promised to buy VDPH stock in return for kickbacks; the stock was actually purchased by the FBI.

Douglas Martin, CEO of VHGI, did exactly the same thing; Sheldon Simon, a promoter, colluded with a “corrupt promoter” working with the FBI to pump the stock of EcoEmissions Solutions, Inc. (ECMZ).  Thomas Gaffney, as CEO of Health Sciences Group, long known as a doubtful enterprise, arranged for the payment of illegal kickbacks to a supposed pension fund fiduciary who promised to buy 400 million shares of HESG; he also issued stock to the middleman—actually an undercover FBI agent—who was to make the introduction to the pension fund fiduciary.

Mark Balbirer was the de facto principal of So. Florida Film Fund, Inc., a private company seeking to sell shares priced at $1.00 in a private placement.  Balbirer paid a kickback to the purported manager of a hedge fund as an inducement to him to make a significant investment in So. Florida Film.  The fund manager was an FBI agent, and the fund was the invention of the FBI.  Stephen Molinari, like Balbirer, ran a private company, Nationwide Pharmassist.  Molinari, too, was introduced to a corrupt hedge fund manager by a middleman.  The hedge fund manager was an FBI agent, and the middleman was a cooperating witness.  Molinari said that if he had “a few million bucks” he could take the money public by January 2012, and offered a 20% kickback to the manager if he invested in the placement.

None of the intended pumps had any real effect on the stocks’ price, because the FBI pulled the plug on its communications with the manipulators once they’d made a commitment sufficient to warrant prosecution.

Martin was recently sentenced to 12 months’ probation.  Scott Haire, who collaborated with Martin but was not sued by the SEC, received 30 months’ incarceration and three years of supervised release.  Gaffney, who evidently was unable to make bail, was sentenced to time served, 8 months’ house arrest, and three years of supervised release.

The SEC seeks penny stock bars against all the defendants, officer and director bars where appropriate, permanent injunctions, disgorgement, and financial penalites.

On 15 August, the SEC suspended trading in Redfin Network, but did not suspend any of the other companies involved.

“The defendants charged today abused their knowledge of the capital markets hoping to misappropriate money held in pension fund and brokerage accounts to enrich themselves and their co-conspirators,” said U.S. Attorney Wilfredo A. Ferrer in a news release.

Since 2010, Florida’s crackdown on securities fraud has resulted in $1.7 billion in restitution being ordered in prosecutions brought against 153 perpetrators.

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Brenda Hamilton, Securities Attorney
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