Last year, the Securities and Exchange Commission and the U.S. Attorney for the District of Massachusetts charged against five individuals whose attempt to manipulate shares of Amogear Inc. was caught in an FBI undercover operation. The defendants, stock promoters Andrew J. Affa, Michael A. Affa, Mitchell H. Brown, Christopher R. Putnam, and Christopher G. Nix, were charged with conspiracy to commit securities fraud.

The arrests and criminal charges were only the tip of the iceberg.  The case began and was developed as a sting that started at least several years earlier and which involved the FBI’s use of dormant public companies. Court documents reflect that in order too facilitate the sting, the FBI took control of a Nevada custodianship shell which housed a dormant public company with the name Kitcher Resources, Inc., a purported mining company.  While the government was quick to point out no investor lost funds as a result of the pump and dump of Amogear’s shares, the shareholders of Kitcher were harmed dramatically because their ownership interests were eliminated.  Schemes using custodianship proceedings aren’t complicated and don’t involve gray areas.

Nevada state court judges have expressed outrage at the same practice used by the custodian to obtain control of Kitcher Resources. Custodianship schemes first hit the microcap markets with the assistance of convicted felon and securities lawyer, Peter Berney. In one case involving Berney, a Nevada judge was so outraged by the custodianship scheme that he ordered the transcript of the hearing be delivered to federal authorities. The transcript of that proceeding can be read here. Pages 109-115, provide a nice summary of the scheme.

As reflected in the transcript, the scheme is simple. Fraudsters seeking to create reverse merger inventory submit an application to a state court judge seeking to be appointed as a custodian of an inactive issuer claiming to act for the benefit of the corporation and its stockholders. After appointment, the custodian eliminates the stockholders they promised to protect by enacting illegal reverse stock splits and issuing shares to themselves or their accomplices. After this, the custodian and other participants sell the shell company and pocket the proceeds.

According to the Amogear indictment, the FBI took control of Amogear at some point after the Nevada custodianship proceeding ended. Even after taking control of the public shell, no actions were taken to restore the ownership interests of the stockholders or provide them with the proceeds from the sale of public shell in exchange for their interests. In Amogear and other recent cases, the government takes no steps to remedy the harm caused to the victims of the scheme-the stockholders who were eliminated.

The Corporate Hijacking – Fleecing the Stockholders

Joseph Arcaro filed the original application for appointment of a custodian on April 11, 2011.  Arcaro is an old hand at creating and peddling public shells; he’s in fact known in some circles as “The Shell King.”  In his petition for custodianship of Kitcher, he stated that the purpose of the action was “to continue the business of the corporation for the benefit of the corporation and its stockholders.” Interestingly enough, in support of the motion to be appointed as custodian (a fiduciary), Arcaro failed to disclose that he would not continue the business of the company and instead would create a public shell company to sell for use in a reverse merger transaction.  The creation of the shell company would require that the interests of the company’s legitimate shareholders be wiped out with reverse stock splits while issuing new shares to Arcaro and/or the final shell purchaser.  What is also interesting is that in two of those five cases, the custodianship action was stopped when the companies’ transfer agents—who are encouraged by the SEC to act as “gatekeepers”—objected, declining to provide shareholder lists to Arcaro. As is true in all custodianship hijackings, Arcaro committed fraud to obtain control of the public shell as a custodian.

The illegal Kitcher state court proceeding went without a hitch, and Arcaro was granted custodianship of the shell a little more than a month later, on May 24.  Arcaro enacted a 1:40 reverse split on June 13, 2011.  He then lost no time finding a buyer for the shell.  On October 14, he entered into a stock purchase agreement with Michael Ceccon, by the terms of which he sold 1 million shares of common stock to Ceccon.  Three days later, Ceccon became the company’s sole officer and director, controlling the company with 57.14% ownership.  A glaring omission in the filing is any account of Ceccon’s background.  There’s a section for it, titled “Business Experience,” but all that’s noted below is “insert.”

Ceccon, who is purportedly from Massachusetts, announced that he planned to turn Amogear into a martial arts apparel company.  We know now that it did no business, and never planned to do any business.

Arcaro’s custodianship was terminated on February 24, 2012. By that time, despite the fact that no disclosure was made to the Nevada court in the custodianship procceding, Amogear had already applied to FINRA for approval of a 1:500 reverse stock split that would reduce its outstanding shares from 1,750,005 to 3,512 shares of common stock! The split became effective on March 1, 2012. Needless to say, the investments of any old holders of the Kitcher shell were wiped out, or nearly so.

Our understanding of what happened next depends on an interpretation of Amogear’s SEC filings, taken along with the SEC litigation and Department of Justice indictments related to the AMOG fraud.  On June 24, 2014, the DOJ announced its criminal action against the Affa brothers, Putnam, and Brown.  The SEC followed up with a civil lawsuit filed on 11 July.  Months passed, and then on November 6, 2014, the agency brought seemingly unrelated litigation against California attorney Richard Weed, and Massachusetts resident Thomas Brazil for their pump and dump manipulation of a company called CitySide Tickets, Inc. (CIST; now UBEX).  In a surprise twist, on December 4 the DOJ announced the criminal indictment of Weed—but not Brazil or Flaherty—for securities fraud in connection not only with CitySide, but also with Amogear.

Weed began the CitySide scam as early as 2006.  The Nevada shell had been formed in 1993 as Petrex Corp, and thereafter underwent a dizzying number of mergers, reinstatements, and name changes.  It went dormant between 2004 and 2006.  In April of that year, it was reinstated, and its name changed to GFY Foods, Inc.  According to the SEC, in February, Weed had become the beneficial owner of 45 percent of GFY’s float; his first act upon taking control was to terminate the company’s SEC registration. Upon reinstatement, he became its sole officer and director.  No further explanation of how these changes came about is offered in the SEC’s complaint.  The shell remained inactive until late 2009, when Brazil and Flaherty purchased a controlling interest in the company for $115,000.  There followed a reverse merger with The UpTurn, Inc.  UpTurn’s CEO was Jeffrey Eckman of Cambridge, Massachusetts, but he seems to have been meant to act as nothing more than a figurehead.  He turned out to be one of the rare figureheads who make trouble.