Guy Gentile Says FBI Double-Crossed Him

Guy Gentile FBI Indictment

Stockbroker Guy Gentile was flying high as 2012 began.  In January, he gave an interview to the Nassau Guardian in which he predicted wild success for his new Bahamas brokerage, SureTrader, a division of Swiss America Securities, Ltd., a firm regulated by the Securities Commission of the Bahamas.  Gentile told the paper he expected SureTrader to become the “largest trader” in the country within six months, explaining that looser offshore regulations would attract penny stock players from all over the world.  Guy Gentile offered cheap commissions, generous leverage, and an exemption from the pattern day trader rule that limits holders of accounts worth less than $25,000 to only three day trades in any five-day rolling period.  As a businessman familiar with the world of over-the-counter securities trading, Guy Gentile believed he could generate healthy profits by focusing on the volume of transactions rather than on their size.  He was certain SureTrader would soon outstrip the success of its U.S.-based sister company, SpeedTrader, which he’d founded in 1999.

Gentile’s plans were abruptly and permanently altered six months later, when he was arrested by Customs and Border Patrol while sitting on a plane awaiting takeoff from the Westchester, New York airport.  The customs agents transferred him to the custody of the FBI, who escorted him to Newark, New Jersey for a weekend stay in jail.  There he was informed he’d been named in a sealed complaint for alleged crimes committed in connection with two pump and dump operations from years earlier.

Guy Gentile Becomes BFF With the FBI

While still en route to Newark, the FBI agents explained they were chiefly interested in Gentile’s dealings with Adam Gottbetter, a New York attorney they suspected of extensive securities fraud.  They said they wanted Gentile to cooperate with them in the hope of obtaining a conviction.  Gentile didn’t hesitate.  Even before consulting an attorney, he agreed in principle.  Once he’d spoken with his lawyer, he consented to help the authorities not only with the two pump and dump schemes, but also with other investigations.  Over time, his relationship with his FBI handlers expanded, even becoming what Gentile saw as a kind of friendship.

According to Gentile, he did not initially demand a written non-prosecution agreement.  What happened almost four years later shocked and surprised him.  On March 23, 2016, the SEC filed a civil lawsuit naming him, and the Department of Justice refiled its complaint and charged him with one count of conspiracy to commit fraud and one count of securities fraud.  Feeling he’d been blindsided by his “friends” at the FBI, he filed a motion to dismiss the indictment on July 14, 2016, one day short of the anniversary of his arrest.  The pleading raises a number of questions about how law enforcement treats confidential informants it’s persuaded to work for and with them.

The Pump & Dump Scams:  RVNG

Gentile’s troubles began when Guy Gentile agreed to participate in the promotion of two penny stocks, Raven Gold Corporation (RVNG) and Kentucky USA Energy, Inc. (KYUS) in 2007-2008.  At the time, both companies were SEC registrants.  KYUS declared bankruptcy in 2010, and had its registration revoked in 2013 for delinquency.  RVNG is still technically breathing, though on life support; it was suspended by the SEC in March 2015 along with 127 other OTC companies, and now trades on the Grey Market.  Like KYUS, it’s a delinquent filer, but no steps have been taken by the SEC to revoke registration.  It last traded at $0.000001.

Back in the day, Raven Gold was a vigorous promotion that attracted a good deal of attention.  RVNG had a questionable history, to say the least.  It went public in 2005, with a Form SB-2 complied and opined on by Gregg Jaclin of Anslow and Jaclin, LLP.  Jaclin, along with his partner Imran Husain, was sued by the SEC in May 2016; the pair was charged with operating a shell factory using bogus Form S-1 filings.  Husain was indicted in connection with the scheme. RVNG is not one of the companies named in the SEC’s complaint against Jaclin, but its SB-2 is questionable nonetheless.  Then called Riverbank Resources, it was located in Vancouver, British Columbia. According to the SEC, it was “created and controlled by a British Columbia attorney engaged in the business of creating and selling shell companies”.

The Canadian attorney is not named, but the role he played suggests he may have been John Briner, who used U.S. attorneys to create mining shells registered with the SEC. Briner was sued by the SEC for these activities in January 2015; a few months later, he was criminally charged in British Columbia.  As is often the case with dicey penny companies, in August 2006, a year after the registration statement was deemed effective the company underwent a change in control.  It changed its name as well, to Raven Gold, and executed a 1:5 forward split.

The SEC says that “between September 2005 and approximately August 2006, a pair of penny stock promoters from Canada (the “RVNG Owners”) bought the Riverbank Resources shell from the attorney who had created it.  In early 2007, the new owners met Toronto promoters Mike Taxon and Itamar Cohen through a mutual acquaintance, and asked them to set up a pump and dump operation.  The Toronto touts were sued by the SEC for their role in the scam in May 2015.  The owners agreed to give Taxon and Cohen a block of unrestricted stock to be used in the promo for a hard mailer, other advertising, and manipulative trading that would “create the false impression of liquidity and active interest” in the issue.  To create even more apparent “liquidity,” the company performed an additional forward split, this at a ratio of 2:1, in March 2007.

Taxon & Cohen Enlist a Trader

To make the plan work, Taxon and Cohen needed a “trader,” and chose Gentile for the job.  During mid-May and mid-June, 27 million shares of RVNG stock were transferred to offshore accounts controlled by the trio.  During the same period, Newfoundland native Blair Naughty, who’d long been involved with junior miners and also with “awareness campaigns,” was appointed CEO and president of the company.  He would also serve as a board member.

As the initial phase of the promotion got underway, Taxon and Gentile traded RVNG stock among their accounts to suggest increasing liquidity and interest.  Along with Cohen, they contacted penny stock traders and promoters known to them, offering to provide free RVNG shares as kickbacks for open market purchases of the stock.  Naughty began to issue glowing press releases.

The bulk of the cash generated from the promoters’ stock sales went to advertising at websites including Bloomberg and the Wall Street Journal, and for a glossy “newsletter” that was distributed in mid-July 2007, and purported to have been compiled by an entity called “Stock Trend Report.”  Not surprisingly, the report pointed to the stock’s “remarkable uptrend so far.”  That “trend” had, of course, been created by Taxon and Gentile trading between themselves.  The SEC characterized most of the statements made in the mailer, including the disclaimer, as “materially false and misleading.”  That wasn’t all: according to one message board poster, a couple of “hot looking babes” dressed in shorts and wearing miners’ helmets were hired to pass out copies of the flyer on Wall St.

Predictably, RVNG’s stock price and volume increased dramatically during the promotion, the price reaching a peak of $1.73.  According to the SEC, Gentile, Taxon, and Cohen’s sales of stock generated gross proceeds of about $5 million.  The company said in its 10-K for the fiscal year ended February 29, 2008 that at April 30, 2008 it had $2,554,000 in outstanding promissory notes, but it seems unlikely that the holders of those notes took no opportunity to profit from the pump and dump operation.  By mid-2008, the SEC had been asking questions about RVNG’s filings for some time, and had not received any answers.

Blair Naughty resigned all his offices in November 2007.

The Pump & Dump Scams:  KYUS

The Kentucky USA Energy promotion followed on the heels of the RVNG effort.  It was commissioned by Adam Gottbetter, a New York attorney specializing in penny stocks, and a partner not named in the SEC’s eventual complaint against Gottbetter.  The two men became acquainted with Gentile in the summer of 2007.  Over the next few months, a plan was laid.  Guy Gentile would bring Taxon and Cohen in on the deal, and they would proceed as they’d done with the RVNG promotion.

KYUS had been formed in Delaware in September 2006 as Las Rocas Mining Corp.  Its initial registration statement, an SB-2, became effective in June 2007.  Gottbetter purchased all of the shell’s unrestricted stock in October 2007 for $760,000.  The funds were provided by him, his partner, Gentile, Taxon, and Cohen.  In return, Gentile and his promoter associates received 75 percent of the KYUS stock, some of which would be used to facilitate the pump.  The rest was split between Gottbetter and his partner.  The plan was to merge the public Las Rocas shell with a new private company, Kentucky USA Energy, that had been created in October 2007.

As before, Gentile’s group deposited their stock with offshore brokerages in the names of nominee entities.  Gentile and Taxon then began to “build the chart,” as they put it, to give an impression of activity and interest.  Gentile asked trader friends to buy on the open market, promising to tip them off when the promotion was to begin in earnest.  The stock price gradually rose.

The Las Rocas-Kentucky USA merger closed on May 2, 2008.  Shortly afterward, a mailer prepared by Gentile and his partners was sent out under the name “Global Investor Watch.”  The mailer disclosed that it had been funded by a fictitious entity called Green Century Capital; in fact, it was paid for from the proceeds of sales of Taxon and Cohen’s stock.  Once the promotional fluff had hit potential investors’ mailboxes, KYUS’s volume increased dramatically, and stock price soared to a high of $3.97.

U.S. Regulators Make Their Move

The participants in the scheme took in about $10 million in gross proceeds, by the SEC’s calculations.  In 2015, Gottbetter and two accomplices who helped with later promotions, Canadians Mitchell Adam and K. David Stevenson, were sued by the SEC on the same day the agency filed against Taxon and Cohen.  In September 2014, Gottbetter had pled guilty to crimes committed in connection with those two later promotions; he was sentenced to 18 months in prison, fined $60,000, and order to forfeit $344,967.  He was subsequently disbarred.

Gottbetter’s partner in the KYUS fraud was never named in the pleadings associated with the KYUS case, but FBI Informant, Guy Gentile’s own account of his work for and with the New Jersey State’s Attorney’s office identifies him as Samuel DelPresto, owner and operator of MLF Group, LLC, a promotional outfit. DelPresto and MLF were sued by the SEC in December 2015 in connection with unrelated pump and dump schemes involving BioNeutral Group, Inc. (BONU), NXT Nutritionals Holdings, Inc. (NXTH), Mesa Energy Holdings, Inc. (MSEH), and Clear-Lite Holdings, Inc. (CLRH).  In June 2015, months before the SEC suit was filed, DelPresto agreed to plead guilty to a single count of conspiracy to commit securities fraud for offenses committed between 2007 and 2010.  Kentucky USA was one of the companies referenced in the agreement, along with the four cited in the SEC civil action, and Empire Post Media, Inc. (EMPM), Mustang Alliances, Inc. (MSTG), IDO Security, Inc. (IDOI), Brainy Brands Co., Inc. (TBBC), Premier Brands, Inc. (BRND), and LTS Nutraceuticals, Inc. (LTSN).  DelPresto’s guilty plea was entered in December 2015, simultaneously with the announcement of the SEC action.  According to the SEC’s complaint, DelPresto worked on the BONU, NXTH, MSEH, and CLRH schemes with a partner who is not named in the litigation.  It seems certain that partner was, at least in the case of MSEH, Adam Gottbetter.

A New Life for Guy Gentile

According to Guy Gentile, when he was arrested in 2012, one of the first things the FBI told him was that they were interested in Adam Gottbetter.  He agreed to cooperate, and began a new life, and, in a sense, a new job.  Free to carry on more or less normally under FBI supervision, he renewed his acquaintance with Gottbetter.  Gottbetter persuaded Gentile, who pretended he’d “retired” from the promo game, to participate in a new deal; one in which Dynastar Holdings (DYNA) and HBP Energy Corp (HBPE) would be pumped and dumped.  Gottbetter was already working with Mitchell Adam and David Stevenson, but felt Gentile would make a good addition to his team.

That was a mistake.  The would-be manipulators put together plans to run the two stocks following the KYUS model, but as Gentile puts it, “[a]fter Gottbetter took sufficient steps in furtherance of this new scheme, the government arrested… Stevenson, and Gottbetter was charged criminally in connection with the new scheme [as] well as co-conspirator Mitchell Adam.”  Gottbetter was picked up in December 2013, but the criminal charges against the attorney weren’t immediately announced.  In the meanwhile, Gentile says, DelPresto, realizing the Feds were onto him, cooperated in two investigations that resulted in the indictment of more than two dozen people involved in two $300 million pump and dump schemes.  He does not offer further information about those cases.

Gentile’s Cooperation as a Penny Stock  Informant

Gentile continued to do the FBI’s bidding for the next several years, and collaborated with the SEC as well.  Sometimes he participated in sting operations; sometimes he merely supplied information that had come his way; sometimes he engaged in cloak-and-dagger operations he seems to have enjoyed.  He also at least once played instructor.  When the FBI was working to bring down Robert Bandfield, Andrew Godfrey, and a number of other individuals and brokerage firms active in Belize, Gentile trained the undercover FBI agent who would infiltrate the group, teaching him what to say and how to act.  In September 2014, the DOJ indicted Bandfield, Godfrey, and four associates for money laundering, securities manipulation and more.  The authorities described the scheme as a $500 million fraud.  Additional defendants, including well-known penny stock players, Philip Kueber and Gregg Mulholland, were later added to the case.  The SEC brought parallel civil actions.  Several of the defendants have by now pled guilty, but have not yet been sentenced.

Gentile also helped with the investigation of Alex Milrud’s complex schemes.  Milrud, a Canadian from the Toronto area living in Florida, hired Chinese and Korean traders to engage in “layering,” a sophisticated form of spoofing.  Layering is considered by the SEC to be manipulative trading.  Gentile arranged a meeting with Milrud in his office at SureTrader in the Bahamas.  The FBI had installed keylogger software that at first refused to work; Gentile also had to find a way to drown out the loud clicking noise the audio recorder made when he turned it on.  In the end, all went well:  “Ultimately, I was able not only to lay the groundwork for a future investigation into Milrud, but actually convinced him to log onto my computer and engage in fraudulent layering trading with his Chinese traders.”  Milrud was charged by the DOJ in January 2015, and was simultaneously sued by the SEC.  The SEC contended that Milrud’s operation brought in between $1 million and $50 million a month.

The Penny Stock Ghost

The services the Feds asked Gentile to provide were varied.  While working to find evidence against Mike Taxon, he heard of a “mystery broker” in Spain who was said to have pulled off a number of multimillion dollar scams.  While he was never able to identify the broker, he was led to one of his associates, a Londoner calling himself Eric Sharon.  Though Gentile felt what he was doing was dangerous, he managed to meet with Sharon, a man the authorities called “The Ghost,” and got a photo and some fingerprints from an espresso cup he pocketed.  It seems that if the authorities ever figured out who The Ghost was, they didn’t tell Gentile.

Guy Gentile Realizes the FBI Is Not His Friend

Guy Gentile was not the FBI’s first or only informant, of course.  In the past, we’ve written about Felix Sater, among others.  Gentile was aware that DelPresto and an associate had themselves offered to cooperate.  Ir’s likely that several of the Bandfield defendants who pled guilty also sang like canaries, though as far as we know, none of them has been working undercover for the authorities.

Gentile worked for the FBI for more than three years after his sealed indictment had been filed.  He didn’t agree to plead guilty, much less do so.  He hoped that the more helpful he was—the more Brownie points he earned—the more likely the FBI was to recommend that the DOJ not prosecute. He says that by early spring of 2014, when the Gottbetter investigation was complete, the agents he worked with “began telling [him]” that he wouldn’t be charged once his cooperation ended:

I have a specific recollection of the agents saying to me things like: They could “make the charges go away” if I cooperated against Gottbetter (on July 13, 2012); they were “not going to let anything happen to [me]” (shortly after February 2014); I was “more like an agent” and “no longer a cooperating witness” (in February 2014); there was no need to charge me given that my testimony was no longer needed (in February 2014); I would “walk” because I “fulfilled [my] agreement with Gurbir” (in February 2014); and, all the work I was doing is so that I would “not be charged” (in 2013 and 2014).

He was not unaware that another outcome was possible.  From the outset, he’d signed yearly tolling agreements.  The tolling agreements waived his right to claim that an eventual prosecution should be dismissed because the statute of limitations expired.

In February 2014, Guy Gentile told the agents he wouldn’t sign another tolling agreement.  That would mean the government would have only one year from the time it expired a few months later in which to file charges against him.  The agents confirmed his understanding of the situation.  He then told the Assistant United States Attorney (AUSA) assigned to the case that he was no longer interested in cooperating unless the government agreed not to “reinstate its previously withdrawn felony charges.”  The AUSA suggested it was in his best interest to continue his cooperation, saying “that “while I was more likely to be charged if I stopped cooperating, if I continued my cooperation, I was more likely not to be charged with a felony at its conclusion, because I could then make a “better presentation” as to why I should not be charged with a felony.”

Concerned that the Feds could use the tolling agreement stick to force him to cooperate indefinitely, he agreed to continue his work for them on the chance of finally getting the carrot he wanted, but refused to sign another tolling agreement.  That way, he thought, he’d be free of any threat of Federal prosecution by June 30, 2015.  At the time of his refusal, he was busy with the Milrud case, and hoped law enforcement would consider it important enough to warrant his freedom.  He went on working for the government into the summer of 2015, without a tolling agreement.  To his dismay, in July of that year he was told he would be prosecuted.

The Unsealed Indictment and Gentile’s Motion to Dismiss

Guy Gentile’s protestations notwithstanding, on March 23, 2016, the U.S. Attorney’s Office for the District of New Jersey charged him; on the same day, the SEC filed civil litigation.  In response, he filed a motion to dismiss based on violations of the statute of limitations, his right to a speedy trial, and his right to due process.  The motion’s memorandum of law begins with a plain statement that the government’s decision to prosecute is “outrageous”:

It is outrageous considering his extensive cooperation over the last four years which resulted in dozens of arrests and indictments, several guilty pleas of individuals involved in a wide variety of high-profile and sophisticated securities frauds, millions of dollars in disgorgement, penalties, injunctions, and lifetime industry bars. It is outrageous because the Government obtained Mr. Gentile’s extensive cooperation by assuring him – with explicit words, implicit conduct, and winks and nods all designed to give him a false sense of assurance – that he would not be charged if he just kept cooperating for a little longer.

Gentile’s attorney explains that his client’s initial arrest was handled in an unusual way.  Once the oral cooperation agreement was struck, rather than arraign Gentile and release him on bail, leaving the complaint sealed, the government withdrew the complaint entirely.  The U.S. Attorney’s Office did require Gentile to post bail, but “without any judicial knowledge, approval or oversight.”

The statute of limitations applicable to Gentile’s alleged crimes expired on June 30, 2015.  The tolling agreements did not extend it beyond that point because, according to counsel for the defense, “the tolled charges would in fact be time-barred” if not brought by that date.  Even if that were not the case, the statute of limitations for the offenses alleged is only five years.  Eight years had passed since Gentile’s involvement in the RVNG pump and dump operation.

The defense argues that Guy Gentile’s constitutional right to a speedy trial, triggered on the day of his arrest in 2012, was abridged because his liberty was restricted—the authorities held his passport except when they authorized its use—and his daily activities were largely under control of the government.  When the FBI required his services, he was expected to drop everything and get on the job.  He reported this took a toll on his marriage and on his businesses, even though SureTrader, his Bahamas brokerage, had proved useful to the FBI in several cases, particularly the one involving Alex Milrud.

Counsel also invokes the fundamental fairness doctrine of the Fifth Amendment’s due process clause, contending that the government’s “explicit and implicit statements” created a de facto non-prosecution agreement.  Gentile’s handlers heaped him with praise and, at least from his point of view, treated him as one of their own.  He genuinely believed they were sincere when they told him they’d never allow the government to prosecute him.

The defense closes with a demand that the indictment be dismissed with prejudice.  Judge Jose Linares has ordered the government to file any opposition by 23 September; Gentile will have until 28 October to reply to the government’s pleading.

Broader Implications

Guy Gentile clearly feels he’s been treated unfairly.  From his point of view, he offered extraordinary cooperation—sometimes involving physical danger to himself—over a long period of time; cooperation that resulted in many convictions and in the recovery of millions of dollars in ill-gotten gains.  Moreover, his work for the government went far beyond the alleged crimes in which he’d participated in 2007 and 2008, involving many individuals and entities with which he’d never had contact in the past.

In reality, his case is unusual, though not in all the ways Gentile believes. Felix Sater, a colorful Russian immigrant who lost his broker’s license in the early 1990s, became involved with organized crime, and signed a cooperation agreement in 1998.  Like Gentile, he spent years providing information to the authorities; he’s even said to have become involved in a plan to buy antiaircraft missiles on the black market for the CIA.  The truth of that story cannot be confirmed.  Unlike Gentile, however, he knew he’d be prosecuted.  The prosecution was accomplished in secret, without any publicity at all, and Sater wasn’t sentenced until 2009.  He got no prison time, thanks to a forceful government plea for leniency.

No doubt there’ve been many other informants like Sater including lawyers.  We know from Gentile’s own testimony that Samuel DelPresto quickly agreed to cooperate when confronted with proof of his misdeeds; Gentile also knew that DelPresto was later charged and convicted.  He should perhaps not have trusted his handlers as much as he did.

Sater knew he would be criminally prosecuted, and continued to work for the government even after his conviction.  Presumably DelPresto, and had no doubt of their eventual fate; they agreed to the government’s proposals convinced—and rightly so—that their cooperation would ensure lighter sentences that might otherwise be imposed.  Where that’s concerned, Gentile’s case is indeed different.  From the day of his arrest in 2012 he was told he might be let off the hook entirely, or at worst be charged with a misdemeanor, if he did the FBI’s bidding.  It may be wondered at what point he’d done enough to expunge his earlier misdeeds.  Or did the authorities intend to lead him on forever, asking him to sign one tolling agreement after another, in possible violation of his constitutional rights?

These questions and more will be addressed in the governments reply to Gentile’s motion to dismiss, and in the judge’s eventual ruling.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

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