JH Darbie Charged in Calissio Resources Scam – Securities Lawyer 101

 

Calissio - JH Darby

 

On March 27, 2018, the Securities and Exchange Commission (SEC) announced a settled administrative proceeding against broker-dealer J.H. Darbie & Co., Inc., and Robert Y. Rabinowitz, Darbie’s majority owner and CEO.  On its surface, the suit is both simple and unexciting:  between September 2015 and July 2016, Darbie operated with a net capital deficiency, and failed to record it properly.  It therefore violated Section 15(c)(3) of the Securities Exchange Act of 1934, which provides that broker-dealers “at all times have and maintain net capital” no less than the greatest of the minimum requirement applicable to its business.  But the legal action is related to several others involving a variety of unsavory players in the penny stock world.

Darbie is a small New York firm that’s been sanctioned by its regulator, the Financial Industry Regulatory Authority (FINRA), a number of times.  In 2015, it and Wolf A. Popper, Inc., a brokerage controlled by Rabinowitz and Wolf Popper, were the subjects of a complex FINRA  enforcement action involving violations that had taken place between 2008 and early 2014.  According to FINRA, the violations were mostly Darbie’s; the firm had, the regulator said, “facilitated the deposit and liquidation of billions of shares of low-priced, microcap stocks for customers without having in place adequate procedures to assure that such liquidation transactions were scrutinized sufficiently.”

FINRA was particularly interested in seven of Darbie’s customers whose accounts were involved in various kinds of suspicious activity, including “patterns of large deposits of penny stocks and liquidation of the shares shortly after their deposits, sometimes during periods of promotional activity, increased trading volume, and/or substantial price fluctuations, often accompanied by proceeds being wired out of accounts shortly after the liquidations.”  These transactions were in the stock of at least 21 penny stock issuers.  The seven customers were less than reputable.  Five of them had a history of regulatory problems or had been the subject of news reports about suspected violations.  The specifics are familiar to anyone who follows the penny stock market.  They consisted of:

SEC settlements finding registration violations involving the sale of unregistered or restricted stock; a court judgment finding unregistered securities distributions; a criminal conviction for fraud in the operation of a hedge fund; and an SEC settlement finding deceptive market timing, involving the use of fictitious family trusts. The adverse news reports included information that one customer was under criminal investigation for stock manipulation of micro-cap issuers; information that the SEC filed a complaint against one customer and his advisory firms for defrauding investors by receiving undeserved fees as a result of overvaluing hedge fund positions in a penny stock; and allegations that one customer improperly engaged in financing small companies for convertible shares, which he would then convert to fund short-selling.

In the end, Darbie and Popper were fined $230,000, only $10,000 of which was to be paid by Popper.  Darbie was also obliged to hire an independent consultant to help clean up its act, and Rabinowitz was required to take a course in anti-money laundering procedures.

The recent SEC administrative proceeding addresses some of the same issues, though it does not at first glance appear to do so.

Darbie, COR Clearing, and Calissio Resources Group

As the SEC saw it, Darbie had grossly miscalculated its net capital requirement, determining it to be a mere $5,000 when it was in fact $250,000.  The person responsible for making that determination was Rabinowitz, who in addition to being Darbie’s CEO was its financial and operations principal (“FINOP”).

Darbie’s net capital problems began in September 2015 and continued, worsening each month, until July 2016.  On August 5, 2016, the firm belatedly reported its net capital deficiency to FINRA, and upon receipt of the notice, FINRA limited its business to liquidating transactions of existing customer positions.  The SEC explained what had happened:

  1. In August 2015, the firm JH Darbie used to clear transactions (the “Clearing Firm”) notified JH Darbie and Rabinowitz that one of JH Darbie’s customers had threatened to sue in connection with a stock transaction. In accordance with the Fully Disclosed Clearing Agreement between JH Darbie and the Clearing Firm, JH Darbie was required to indemnify the Clearing Firm for fees and expenses incurred in defense of the threatened legal action.
  2. The Clearing Firm notified JH Darbie and Rabinowitz of its intent to seek such indemnification in August 2015 and informed JH Darbie of the amounts being spent in response to the legal action. In December 2015, the Clearing Firm advised JH Darbie and Rabinowitz that it would begin invoicing JH Darbie for monthly installments to cover the indemnity in manageable increments. According to the Clearing Firm’s December 2015 notice, the amount due to the Clearing Firm for the months of August and September 2015 totaled $155,325.73. The amount due grew each month until it reached $500,000 in February 2016. The Clearing Firm’s insurance policy covered the amounts above $500,000. JH Darbie did not pay the Clearing Firm any of the amount due. The Clearing Firm waived the indemnification provision on August 16, 2016 (with the right to reinstitute it), which brought JH Darbie back into net capital compliance at that time.

That explanation will ring a bell with those who’ve followed our series of articles—the most recent is from December 2017—about COR Clearing and its litigation against Calissio Resources Group (CRGP) and other entities.  To recap briefly, in mid-June 2015, Calissio, a purported mining company, declared two dividends.  One was to be a small stock dividend, the other a large cash dividend that would pay $0.011 a share, or a total of about $1.3 million.  The record and pay dates for both were the same:  June 30 and August 17, respectively.

Because the cash dividend was greater than 25 percent of the value of CRGP’s stock, it qualified as a special dividend.  For special dividends, the ex-dividend date—the first day on which the stock will trade without the dividend attached—is set one day after the pay date.  For regular dividends, it’s set one day before the record date.  Had the Calissio cash dividend not been “special,” the ex-date assigned by FINRA would have been June 29, and even with a pay date so far in the future, there would have been no problem with payment.

But there was a problem, and it was enormous.  Normally, when a special dividend is declared, the issuer sets the record and pay dates close together, and makes sure not to issue any new stock during what’s called the “interim period.”  Calissio did neither.  On the contrary, during the interim period it issued hundreds of millions of new shares to holders of the company’s convertible debt.  That stock should not have been eligible for the cash dividend, but in the end, the dividend was paid on it.  Why?  Calissio’s transfer agent, Signature Stock Transfer, says it was because CRGP ordered it to issue the stock under the old CUSIP number. The correct procedure would have been to obtain a new CUSIP for all stock issued after the June 30 record date.  But that is not what Calissio wanted, according to Signature.  And so when it came time for the Depository Trust & Clearing Corporation (DTCC) to distributed the dividend, its system was unable to distinguish between stock issued before the record date and stock issued after.  All of the company’s shares outstanding appeared to be eligible for the dividend.

As DTCC began to distribute the dividend, it quickly realized the money provided by Calissio—about $1.3 million—would not begin to be sufficient.  Needing to make up the shortfall, it looked to the clearing firms responsible for allowing those hundreds of millions of shares to reach the marketplace.  They were COR Clearing, LLC and Alpine Securities Corporation.  DTCC notified COR that it would debit about $4 million from its account on August 24.  It took $940,500 from Alpine’s account at the same time.  Both COR and Alpine objected vociferously, but DTCC was uninterested in eating the cost of someone else’s mistake.  It did inform the clearing firms that it would be possible to reverse the dividend payment, but only if a representative of Calissio ordered it.  Carlos Salas, CEO of COR, reached out to “Adam Carter,” the mysterious and probably nonexistent CEO of CRGP.  Carter was evasive, and declined to participate in a conference call.  Feeling it had no time to waste, COR sued Calissio, Carter, and Signature Stock Transfer the next day, August 26.

The holders of the Calissio convertible debt, and sellers of those hundreds of millions of shares were Nobilis Consulting LLC, Beaufort Capital Partners, and Edward Bronson’s Macallan Partners.  Macallan was Alpine’s client; Nobilis and Beaufort were COR’s clients.  J.H. Darbie had acted as introducing broker for the latter two. And that is how Darbie’s net capital problems began in August 2015.

In the meanwhile, COR’s lawsuit dragged on.  “Adam Carter” left the building early on, and was never heard from again.  It was not possible for COR to serve him as a defendant in the suit.  The clearing firm did obtain a default judgment against Calissio, but since no representatives of Calissio can be identified, it is unenforceable.  COR tried to persuade the judge in the case to appoint a receiver who would be an agent of the company, and would direct DTCC to reverse the dividend payment.  While that would have made COR whole, it would have created serious problems for unwitting shareholders who’d received and spent dividends to which they were not entitled.  Unfortunately for COR, the judge felt it had failed to justify the “extreme remedy” it sought, and denied the motion to appoint a receiver in early November 2015.

At that time, observers of the case were unaware that COR had made its own arrangements with J.H. Darbie, as described in the 2018 SEC action.  They only learned of the agreement between the two firms in March 2016, when the transcript of the November hearing was made public.  The judge had asked Carlos Salas whether he’d made any attempt to recover some or all of COR’s lost funds from Darbie:

  1. Have you made any claim against—you, when I say you, COR—has COR made any claims against Darbie as a result of this conversion of debt to equity or the subsequent sale of the shares that were issued as a result? 

Yes, in the following sense: We approached Darbie with this. They understood their liability to our firm for indemnification against errors or any losses caused by their activity or customers’ activity. And so Darbie paid to our firm a half million dollars in exchange for which I permitted—or the firm permitted the remaining unsecured debit balance to be owed to us by Darbie in the form of an unsecured—excuse me—yeah, an unsecured but a subordinated note.

2. Okay. So there was an agreement between Darbie and COR whereby Darbie paid COR $500,000, first of all, correct?

Correct.

 3. And then there’s a subordinated note from Darbie to COR in the amount of how much?

1.2 million—or thereabouts, about 1.2 million.

 4. And so collectively that’s roughly $1.7 million; is that right?

Correct.

It was not revealed until now that Darbie never paid a penny to COR, though COR did receive an unspecified amount from its insurer.  COR formally let Darbie off the hook on August 16, 2016, by waiving the indemnification provision, and so made it possible for the brokerage to stay in business.  That generosity was not entirely disinterested:  in September 2016, COR became a greater than 10 percent but less than 25 percent owner of Darbie.  It seem unlikely that COR paid for the stock it was issued at that time.

Beaufort Capital Partners, Beaufort Securities, and the SEC

J.H. Darbie isn’t the only entity involved in COR’s Calissio litigation to run afoul of the SEC subsequent to its involvement with Calissio.  Beaumont Capital Partners is another.  In July 2017, the SEC sued the firm and its principal Robert Marino in connection with the pump and dump of a penny stock called Mainstream Entertainment, Inc.  Mainstream was a shell company that was pumped on the announcement of a reverse merger with a power company—First Power and Light, Inc. (VOLT)—in 2013.  VOLT’s undisclosed control person, not named in the SEC’s complaint, was a convicted felon.  Beaufort, through Marino, bought insider shares from a VOLT affiliate, and immediately sold them into the market, though they should have been restricted.  By year’s end, VOLT had lost its sizzle, and in April the SEC suspended trading.  The company’s registration was revoked in December 2016.  The SEC litigation against Beaufort and Marino is ongoing.

Marino and his partner Leib Schaeffer formed Beaumont Capital in New York in December 2012, just before preparations for the VOLT pump and dump operation got underway.  Though Marino was only 24 years old at the time, and Schaeffer was probably not much older, both were veterans of Fairhills Capital, one of Edward Bronson’s toxic financing companies.  (Fairhills is no more; it was sued by the SEC in 2012 and dissolved in its home state of New York in 2016.  The SEC suit, however, is not yet over.)  At that time, but not today, Schaeffer noted on his LinkedIn page:  “Beaufort Capital Partners is the exclusive North American agent for Beaufort Ventures PLC, based in the United Kingdom.  Beaufort Ventures is an investment arm of Beaufort Securities, a UK regulated entity with over £400 million in client assets.”

Evidently Marino and Schaeffer are no longer proud of that connection.  On March 2, 2018, the SEC announced fraud charges against Beaufort Securities Ltd, and Panayiotis (Peter) Kyriacou, an investment manager at the firm, alleging manipulative trading in the securities of HD View 360 Inc., a penny issuer.  The agency also sued Dennis J. Mancino and William T. Hirschy, along with three entities they control, for manipulating HD View and another penny stock, West Coast Ventures Group Corp.  The agency also suspended trading in HD View.  In a parallel criminal action, Mancino and Hirschy were charged with conspiracy to commit securities fraud.  Mancino was CEO of HD View.  Hirschy, better known by his middle name, Todd, than his first, calls himself a “consultant,” but has worked as a penny stock promoter for years.  His role in Supatcha Resources (SAEI) back in late 2010 is well known.

That SEC action was only the tip of the iceberg.  The DOJ also unsealed an indictment against Kyriacou and a number of Beaufort’s employees in London; Beaufort Management Services Ltd, an offshore management company located in Mauritius; Loyal Bank Ltd, an offshore bank with offices in Budapest, Hungary, St Vincent and the Grenadines; and Loyal Agency and Trust Corp., a management company located in St Vincent and the Grenadines.

There was much more involved in this second DOJ prosecution than the manipulation of the two penny stocks referenced in the SEC case.  The Beaufort gang had been up to no good since at least 2014, pumping and dumping U.S. microcaps and laundering the proceeds in a variety of ways.  Beaufort became a subject of interest to U.S. law enforcement back in the spring of 2014, when a wiretap on a Belizean brokerage authorized in connection with an investigation revealed that the firm’s manager was executing manipulative trades in a U.S. stock—presumably CYNK Technology Corp (CYNK), though it is not identified in the complaint—through Beaufort Securities.  In late April, the corrupt broker told a co-conspirator that he was winding down his firm and was transferring a number of client accounts to Beaufort.  Beaufort was investigated, and in March 2016, it was found by the United Kingdom’s Financial Conduct Authority (FCA) that its financial crime controls and anti-money laundering processes were deficient.  The brokerage’s CEO promised he’d taken remedial action, and continued as before.  Between July 2016 and early 2018, Beaufort was involved in the manipulation of at least 10 U.S. penny stocks.  Beaufort’s clients profited to the tune of $50 million.

In the summer of 2016, the FBI began a sting operation.  An undercover FBI agent discussed opening an account at Beaufort with Peter Kyriacou, the investment manager at Beaufort.  Though the agent would retain control of the account, a Belizean confidential informant agreed to act as the nominee for it, so that no U.S. citizen’s name would appear on the paperwork.  They agent then told Kyriacou that he planned to open additional accounts.  Six accounts were created in January 2017.  It was agreed that the agent’s name would not appear on any documents, in part because Beaufort theoretically did not accept U.S. clients.

Evidently the FBI was feeling generous:  in June, it sent Beaufort $250,000 to fund the agent’s accounts.  When the agent told Kyriacou the money was his profit from a previous stock manipulation scheme, and before he used it in another, he’d like to clean it up a bit, Kyriacou was happy to help.  The agent bragged that he knew brokers in the States who could help with match trading—the microcaps in question traded only in the U.S.—if they were paid kickbacks.  As the contemplated pumps got underway, the match trading would boost volume and price, creating a false impression of interest in the stocks.

Naturally the agent’s accounts made money.  By the fall of 2017, he advised Kyriacou that he needed to find a way to get the cash back to the States without raising any eyebrows.  Kyriacou and his associate Aristos Aristodemou suggested he clean up his profits through the purchase and sale of fine art.  To that end, they introduced the agent to Matthew Green, a London art dealer.  The DOJ says in its complaint that “Aristodemou further explained that the art business was ‘the only market that is unregulated,’ and that art was a profitable investment because of ‘money laundering.’”  It was proposed that the agent buy a Pablo Picasso painting from Green and retain ownership of it for awhile.  Eventually, Green would arrange for the painting’s resale, and send the cash to the agent in an account at a U.S. bank.  Green offered a tip:  it was important for the agent to make a better-than-five-percent profit on the transaction, so he wouldn’t be asked why he was “in the money laundering business.”

Clearly the FBI agent had had better luck with microcaps than ordinary penny players.  On February 19, 2018, Kyriacou, not Green, sent him an invoice for the Picasso—“Personnages, Painted 11 April 1965”—in the amount of £6.7 million.  Although the DOJ does not say, it seems the agent never paid the invoice.  The sealed indictment was filed in New York less than 10 days after the invoice was prepared.

The SEC lawsuit was filed, and the DOJ indictment unsealed, on March 2, 2018.  The day before, in a move that had attracted little attention, the FCA declared Beaufort Securities and Beaufort Asset Clearing Services insolvent, and appointed two administrators to “protect assets from dissipation and protect UK consumers, including clients of both Firms, due to concerns that the Firms may be involved in financial crime”.

Given what Beaufort’s main line of business appears to have been, it seems likely its client list will be carefully scrutinized.  One prominent customer is Leslie Greyling, a penny stock scammer whose illicit activities go back to the 1980s or earlier.  A South African by birth, he came to United States in the mid-’80s, and within a few years had managed to get himself in trouble.  In 1991, he was permanently enjoined from violations of the securities laws.  Online records about the nature of his offenses and the extent of his punishment are sketchy, but from that time on, he generally used his wife Anne as a front woman.  His behavior was blatant, and the authorities didn’t turn a blind eye.  He committed crimes for which he was prosecuted and convicted.  He spent a year in prison for his last felony, and then was released and deported to the U.K. in 1998.  Ironically, that turned out to be a stroke of luck:  when the FBI busted 120 organized crime figures and their brokerage and boiler room assistants for securities fraud in 2000, Greyling was among those indicted, for his role in the E-Pawn pump and dump.  Unaccountably, the U.K. declined to extradite him, saying his crimes were insufficient to justify so extreme a measure.  The DOJ’s warrant for his arrest is still active.

Greyling chose to repay the U.K. government’s kindness by running scams in Britain for the better part of a decade.  He occasionally ventured farther afield, to Africa, Australia, and Southeast Asia.  His extremely colorful career in crime is summed up in an Australian newspaper article from 2010.  By then, he’d gone bankrupt in the U.K., but no one believed he was out of money.  He lived on Tortola in the British West Indies most of the time, and—since he’d become a bit too high profile under his own name—took to calling himself  “Leon Larson”.  His son Clinton remained in the U.S. when his father was deported, and still lives in Florida.  There he formed Charms Investments, Trends Mergers & Acquisitions, and a number of other entities.  Charms became inactive in 2016, and its business, which seems to be mostly shell vending, has been carried on by Trends, which was formed in that year.  Leslie was once a director of the U.K. branch of Charms, but removed his name some years ago.  He is not, of course, really gone.  In 2012, both Greylings, with Leslie pretending to be Leon Larson, sold a penny shell called Daulton Capital Corp (DUCP) to Malaysian billionaire Arun Pudur, and ran it as a “desert dust” gold mining scam involving a “new extraction technology” and worthless claims in Australia.  The plan was ingenious, but the pump and dump operation failed miserably.  Pudur eventually realized he’d been had, but evidently did not report the Greylings and their Australian associates to the SEC.

Greyling would have been a perfect client for Beaufort Securities.  The firm must have had many more like him.  But was the U.K. firm involved in the Calissio scam?  Probably, though information is scarce.  For a few months after COR brought its suit, a message board poster demonstrated suspicious knowledge of the principals in the case, and had copies of documents that should never have been in the possession of any but company insiders.  In late September 2015, he suggested that an individual called Sanjeev Verma from Beaufort Securities might have some interesting things to say.  No one contacted Verma, but at his LinkedIn page he claims still to be the chief executive of PWC/Beaufort Asset Clearing Services Limited, and was until March a director of Beaufort Ventures.

Alpine Securities and the SEC

Alpine Securities, another of the entities involved in the Calissio mess, also has SEC problems.  The agency filed suit against Alpine in June 2017.  Those problems aren’t specifically related to what happened in the summer of 2015.   They arise from what the SEC alleges are a failure to file accurate and complete Suspicious Activity Reports (SARs) with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).  Some of the examples cited in the SEC’s complaint are outrageous:

As another example, account opening documents for Customer A indicate that Customer A has a “criminal background of bank fraud, mail fraud and wire fraud” and had pleaded guilty to conspiracy charges in January 2012. On August 6, 2012, Customer A deposited 25 million shares of a penny stock that had zero trading volume prior to June 18, 2012, and only averaged a few thousand shares per day in the six weeks prior to the deposit. Alpine filed a SAR on August 21, 2012, that simply stated the name of the customer, the number of shares, the ticker symbol, the date of the deposit, the price per share, and the total value of the deposit, and added that the deposit involved a large volume of shares of a low-priced security with a high estimated value. The SAR did not include any information regarding Customer A’s criminal background, or the fact that the stock had almost no trading prior to the deposit, both of which formed the basis for the transaction being suspicious. Further, although Customer A sold millions of shares in the weeks following his deposit, Alpine did not file a SAR on the liquidation of the securities or the disposition of proceeds.

The “relevant period” for the allegations is May 17, 2011 to December 31, 2015.  Alpine cleared Macallan’s Calissio stock during the summer of 2015, so related SARs would probably have been considered deficient by the SEC.  Macallan is controlled by Edward Bronson, who as noted above was sued by the agency in connection with his firm Fairhills Capital in 2012.  In 2016, Bronson declared bankruptcy.  Among the bankruptcy documents is a declaration by Maranda Fritz, who represented two of Bronson’s associates.  At one point she notes that Alpine had “essentially shut down” Macallan.  It seems possible that was collateral damage from the CRGP affair.  COR had frozen the accounts of its clients Nobilis and Beaufort; probably Alpine did the same to the Macallan account.  Bronson also had his own dealings with Beaufort Capital Partners, in a transaction involving convertible notes that was handled by Alpine.

Since the Calissio story began in 2015, nearly all the players have suffered consequences of one kind or another.  What’s perhaps more interesting is the interrelationships among them, and the events set in motion by those relationships.  But the world of penny stocks is a relatively small one.

COR’s suit is not yet over.  It’s still trying to extract money from E*Trade, Scottrade, TD Ameritrade, and Signature Stock Transfer.  It lost its case in federal district court, but has appealed to the Eighth Circuit.  Nearly all the appellate briefs have been submitted, but there is no guarantee of a quick ruling by the bench.

The SEC’s action against Alpine is drawing to a close, on February 2, 2018, it won a motion for partial summary judgment, and Alpine lost its own motion for summary judgment and for judgment on the pleadings.  That news was enthusiastically greeted by some penny stock traders as heralding the imminent demise of toxic funders and the end of conversions and sales of promissory notes, though it is difficult to see why anyone would think that will happen.  Alpine will no doubt be required to be more careful with its SARs, and in all likelihood it will be fined by the regulator.  But toxic financing and its associated activities are a big and lucrative business.  The financiers won’t roll over and play dead; they’ll find new ways to do what’s made them wealthy.  Unfortunately, the relationship between the funders and the penny companies they service is mutually beneficial.  The companies get financing and the financiers get rich.  The only losers are investors.

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