Joseph Padilla Arrested and Charged in $7 Million Securities Fraud
On August 25, 2022, Joseph Padilla was arrested at the San Diego International Airport in connection with his alleged involvement in a sophisticated securities fraud scheme that generated over $7 million in illicit proceeds.
Padilla, 53, of Carlsbad, Calif., was charged in the United States District Court District of Massachusetts (Boston) with one count of securities fraud. The charge provides for a sentence of up to 20 years in prison, three years of supervised release, and a fine of $5 million.
According to the Complaint, between February and April 2021, Padilla participated in a lucrative pump-and-dump fraud scheme involving the shares of Charlestowne Premium Beverages Inc., a thinly-traded microcap company that traded under the stock ticker symbol FPWM.
The Complaint alleges that Padilla (i) concealed control by one or more persons of a large portion of Charlestowne stock (including nearly 97% of the float), (ii) orchestrated the fraudulent manipulation of Charlestowne stock in order to inflate its price through his association with five traders and cooperating witness #2 (CW-2) and, (iii) orchestrated the dump of Charlestowne stock through Valor Capital, a broker-dealer in the Cayman Islands netting at least $7 million in illicit proceeds.
Details of the Scheme
According to the Complaint, Valor came to control 97% of the float in the following manner:
- A fake debt note was created in the amount of $100,000 dated January 3, 2016, issued by Charlestowne’s predecessor entity, 1st Prestige Wealth Management, to Ticino Capital Ltd.
- In September 2019, Ticino Capital assigned $25,000 of the Note to Wellesley Holdings Ltd, purportedly in exchange for a $25,000 payment.
- In September 2019, Ticino Capital assigned $25,000 of the Note to Porrima Ltd, purportedly in exchange for a $25,000 payment.
- In December 2019, Wellesley Holdings converted its $25,000 balance into 2,500,000 free trading shares (a conversion rate of $.001/share).
- In January 2020, Porrima converted its $25,000 balance into 2,500,000 free trading shares (a conversion rate of $.001/share).
- In July 2020, the company completed a name change to Charlestowne Premium Beverages Inc.
- By October 2020, all 5,000,000 shares were put into an account at Valor Capitol located in the Cayman Islands and then deposited into a broker-dealer in Toronto, Canada.
That gave Valor Capital control of 5,000,000 of the 5,157,593 free trading shares, amounting to 97% of the public float and 12% of the 40,463,303 outstanding shares (above the 10% threshold).
It was concluded that the note was bogus because (1) the bank statement provided to the transfer agent for the $100,000 payment from Ticino Capital Ltd to the company was obviously doctored, and (2) bank records obtained by the government from the Hungarian bank for Wellesley Holdings and Porrima did not match the transactions in the statement provided to the transfer agent, in particular, they didn’t reflect the purported $25,000 payments made to Ticino Capital Ltd.
Up to this point, Charlestowne’s stock was nearly dormant, trading on only around 30% of the trading days and only an average of around 600 shares on the days it did trade, fluctuating between $.36 and $.58 per share.
Then, the Complaint claimed that beginning on February 18, 2020, Padilla allegedly orchestrated a concerted effort to artificially inflate the price of Charlestowne’s stock as high as $1.80 (an almost 500% increase over the prior day’s closing price) through trades placed in a brokerage account in Padilla’s name, trades placed in 5 additional brokerage accounts held in other individual’s names, and trades placed by CW-2 at Padilla’s request.
According to the Complaint, 3 of the 5 additional brokerage accounts (traders 1, 2, and 4) involved in the cross-trading logged in numerous times from the IP address assigned to Padilla’s internet at his residence in Carlsbad, California. A request for records showed that trader #1’s brokerage account was registered in the name of Padilla’s American girlfriend, trader #4’s brokerage was registered to an individual known to regularly work with Padilla, and trader #2’s brokerage account was registered to an individual that divorced trader #4 in June 2021.
The government further concluded that trader #3’s brokerage account was likely registered to Padilla’s other girlfriend (a Russian girl). And though the government didn’t provide details about trader #5’s association with Padilla, they did say that it was obvious that trader 5 was a part of Padilla’s group involved in manipulating the Charlestowne share price.
After walking up the Charlestowne share price through the manipulative cross trades, the Complaint alleges that from February 25, 2021, to April 2021, CW-2 sold approximately 1.28 million FPWM shares, averaging tens of thousands of shares sold per day. Trading records reflect that CW-2 nearly always sold FPWM shares short and then later bought FPWM shares to cover the short sales, claiming that this was done at Padilla’s request and direction, knowing Padilla would later facilitate a sale of FPWM shares to CW-2 to cover CW-2’s short sales.
CW-2 and Padilla discussed the price at which those shares would be sold to CW-2, which would generally be a slightly lower price than the price at which CW-2 sold FPWM shares short in the market (thereby providing CW-2 a modest profit margin). Using this method, Padilla was able to use CW-2 to make many small sales during a trading day (i.e., do the work of selling shares in smaller transactions) and then obtain the benefit of those sales by later arranging a large sale order to CW-2 (who needed to cover their short sales) at a slightly inferior average price.
Trading records also showed that, during the same period that CW-2 was selling FPWM shares short at Padilla’s request and direction, over 2.3 million FPWM shares were sold from Valor’s holdings at the Toronto-based broker, generating over $7.9 million in illicit proceeds.
Specifically, trading records reflect that a U.K.-based broker, through its U.S.-based clearing firm, sold the FPWM shares and then received the shares from Valor’s account for purposes of settlement. A review of the account statements for Valor’s account and the account through which the shares were sold reflects an exact one-for-one relationship (i.e., for every share sold, a share was transferred from Valor’s account).
Further, a review of the number of shares purchased by CW-2 (to cover CW-2’s short sales) and the number of shares sold for Valor’s account corroborate CW-2’s description of selling shares short for Padilla’s benefit. Over and over again, CW-2 purchased the same number of shares to cover the short sales that Valor sold, providing evidence that Padilla was conducting the trading for the Valor Capital account.
Further evidence of Padilla’s relationship with Valor was provided by CW-1, who turned over encrypted messages between himself and Padilla in which Padilla associated himself with an entity referred to as “Valor.” CW-1 also provided evidence that Padilla directed trading for a broker located in Belize, identified as Financials Worldwide Inc, until January 1, 2019, when its license was not renewed. The Complaint claims that according to the Toronto-based broker involved in executing the trades for Valor Capital, Financials Worldwide Inc “changed their name to Valor [Capital]” in or about 2019.
The encrypted messages came from a communication network maintained in Curacao under the control and direction of Frederick Sharp, referred to as the “xphone network.”
Between 2011 – 2019, Sharp masterminded a complex scheme in which he and his associates enabled control persons of penny stock companies, whose stock was publicly traded in the U.S. securities markets, to conceal their control and ownership of huge amounts of stock and then surreptitiously dump the stock into the U.S. markets, in violation of federal securities laws. The services Sharp and his associates allegedly provided included furnishing networks of offshore shell companies to conceal stock ownership, arranging stock transfers and money transmittals, and providing encrypted accounting and communications systems.
When Sharp was charged in August 2021, the regulators said that he and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies. See the Criminal Complaint against Sharp, Luis Carillo, Mike Veldhuis, and Courtney Kelln here) (See the SEC Complaint against Frederick Sharp here). The SEC won a default judgment of nearly $53 million against Sharp in August 2022. Sharp remains a fugitive in the criminal case with an active arrest warrant in his name. The special agent in charge of the Sharp criminal case is Keith Brown, the same agent leading in the Padilla case.
While Padilla was directing the sale of the FPWM stock from Valor’s account using CW-2’s short sales to facilitate the trades and increase profits, an active stock promotion was underway to manipulate the stock price even more.
Promotions materials captured by OTC Markets reflect, for example, a promotional email sent by pennystockbargain.com on March 1, 2021, touting FPWM as a “golden opportunity” with the subject line “Momentum Stock … set to Continue its Vertical Rise” and the body stating that FPWM was “primed to rocket 1000-1500% in the very short term.”. Pennystockbargain.com sent similar promotional emails as March continued, calling for the stock to rise to $10 within 1-2 months.
Then on or about March 24th, a website titled “The Financial News” (at www.the-financialnews.com) published an article about FPWM titled “Here’s Why This Stock Is Poised To Jump Over 700%.” and claiming that “Charlestowne’s PAPA VODKA is taking America by storm. The product continues selling out every time the company puts it on the shelves.”
In May 2021, staff from the Financial Industry Regulatory Authority (FINRA) asked Charlestowne’s CEO about this claim, which the CEO described as “absolutely horse [expletive].”
The company also put out 3 press releases during this period:
- March 9, 2021 – Charlestowne Premium Beverages Inc. CEO Martin Ustin Launches Progressive Company Agenda with a Plan for Success
- March 18, 2021 – Charlestowne Premium Beverages Inc. Enters Agreement to Secure Organic Produce for Beverage Production
- April 8, 2021 – Charlestowne Premium Beverages Inc. (FPWM) Announces It Is in Negotiation to Acquire US Vodka Brand, V Georgio Vodka
FPWM hit a high of $9.75/share on April 12, 2021, then crashed down to its starting price of around $.35/share by the start of June 2021.
On September 2, 2022, Padilla was released on a $1,000,000 bond (his long-time partner and fiancee, Ashley Robinson, made a $200,000 cash payment to secure the bond) and ordered to surrender his passport and be confined to home detention with strict travel restrictions to only San Diego County and Imperial County (barring special permission from the court). To secure his release, Padilla also posted his personal residence at 2647 Marmol Court, Carlsbad, CA, valued in excess of $5,000,000, and agreed not to enter Mexico (where he has a second residence in Cabo San Lucas).
Padilla’s attorney is currently asking the court to modify the conditions for release to allow Padilla more freedom to travel.
Padilla has yet to enter a plea in the case.
Though Padilla’s attorney tries to paint Padilla as a family man with no criminal history, his past is far from free of fraud and bad deeds.
Joseph Anthony Padilla was a registered broker starting in 1992 (CRD# 2203872). He mostly kept his nose clean until 2005, when he joined Empire Financial Group Inc through his Carlsbad, California office.
Soon after opening his Carlsbad office, Padilla got involved in an unregistered stock selling scheme, assisting insiders from VMT Scientific Inc, a thinly traded pink sheet company traded under the symbol VMTF, with liquidating their shares into the market while the company was conducting a fraudulent “pump and dump” scheme to manipulate the stock price.
VMT Scientific Inc was suspended by the SEC on July 8, 2008.
The same day, the SEC filed an action against two VMT Scientific insiders, Daniel Kaiser and Stephen Roebuck. According to the SEC Complaint, Roebuck and Kaiser conspired to take his company, Vacuum Medical Technologies, public to raise money through unregistered share sales to fund the company. To enact the scheme, Kaiser and Roebuck (i) took control of International Telecommunications Corporation, a.k.a. Belair Enterprises, Inc (a defunct publicly-traded shell) under court custodianship in 2005; (ii) changed the name of the issuer to VMT Scientific Inc, (iii) issued 120 million shares of VMT to Roebuck using a fake, back-dated debt note, and (iv) immediately transferred the shares to offshore brokerage accounts in the Cayman Islands, Turks and Caicos, and Panama. Then, while using false and misleading press releases to manipulate the share price, Roebuck sold 9,539,350 shares, resulting in proceeds of over $990,000, $300,000 of which was used to fund the company.
The entire scheme took place while the shell was going through the custodianship process under court supervision when court approval was required to conduct any corporate actions. The scheme was cut short when it was ordered shut down by the court in December 2005. But that didn’t stop Roebeck from continuing to sell millions of shares between December 14, 2005, and June 2006, absent any new press releases.
According to a FINRA action filed against Padilla in March 2009, from October 21, 2005, through June 5, 2006, while at Empire, Padilla opened several accounts for various individuals linked to VMT Scientific, then accepted and executed orders for the sale of approximately 6,389,033 unregistered shares of VMT Scientific common stock into the market for those accounts for total proceeds of $1,392,709. Padilla received approximately $53,312 in net commissions from sales of the VMT Scientific stock.
That same FINRA action details how Padilla left Empire in January 2007 and joined Andrea Marie Ritchie (CRD#5060501) at Cambria Capital Advisors Inc, working together out of a satellite office in Carlsbad, CA. While at Cambria, Padilla and Ritchie conducted business jointly from January 2007 to May 2007, with Padilla taking 96% of new commissions received and Ritchie taking 4% as Padilla’s partner and employee. Together the duo did hundreds of penny stock transactions weekly, including unregistered stock sales for First Pet Life Inc (FPLF), Sustainable Power Corp (SSTP), Pearl Asian Mining Industries (PAIM), eHolding Technologies (EHDN), and Aladdin Trading & Company (ALDI), which got FINRA’s attention (detailed in the FINRA action).
The FINRA action resulted in Padilla being suspended for 2 years, from October 1, 2012, to September 30, 2014, and Ritchie being suspended for 1 year, from October 1, 2012, to October 1, 2013. But even before the FINRA action was initiated, both Padilla and Ritchie got jobs at Scottsdale Capital Advisors Corp, starting in July 2007, working out of a satellite branch in Carlsbad, CA.
While at Scottsdale, Padilla and Ritchie picked up right where they left off, getting involved in assisting shady individuals with selling unregistered stock into the market. The most notable share-selling scheme that Padilla and Ritchie got involved with was Rudy Nutrition (RUNU).
According to an SEC Complaint filed on December 16, 2011, against Padilla, Ritchie, Gregg Mulholland, Kevin Quinn, Stephen DeCesare, Daniel E. Ruettiger, Rocco Brandonisio, Pawel P. Dynkowski, Kevin S. Kaplan, Mehmet Mustafoglu, Angelo R. Panetta, Chad P. Smanjak, and Gary J. Yocom, despite touting an energy drink, Rudy Nutrition primarily served as a vehicle for a pump-and-dump scheme that occurred between February and September 2008 and generated more than $11 million in illicit profits.
For their part, Padilla and Ritchie allowed Greg Mulholland, Kevin Quinn, and Stephen DeCesare to open accounts at Scottsdale to dump unregistered shares of Rudy Nutrition (RUNU) during the pump-and-dump scheme.
Padilla consented to a final judgment that ordered disgorgement of $197,427, prejudgment interest of $18,128, and a civil penalty of $100,000, barred him from participating in the offering of any penny stock for a period of three years, and permanently enjoined him from violating Sections 5(a) and 5(c) of the Securities Act. Additionally, Padilla consented to a Commission Order barring him from association with any broker or dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for a period of three years.
On April 11, 2013, because Padilla failed to pay his fines and disgorgement in the FINRA case, Joseph Padilla’s FINRA registration was revoked.
Ritchie consented to an identical final judgment in the SEC case, but like Padilla, she failed to pay her fines and disgorgement in the FINRA case and had her FINRA registration revoked on April 11, 2013.
In August 2011, before the SEC and FINRA actions were concluded, Padilla and Ritchie both left Scottsdale. It was soon after that, by at least February 2012, that Padilla, with the assistance of William Groeneveld of vFinance Inc (best known as market maker VFIN), began secretly operating through a new offshore broker located in Panama named Sterling Securities Group.
Registration information and information on the old Sterling website showed that Sterling Securities Group was conducting business under National Advisors Corporation, a Panama broker registered in 1998. Records also showed that National Advisors Corporation used the website vfinance.com/investments, which is the homepage of vFinance Inc, verifying Sterling’s link to William Groeneveld.
Padilla’s involvement in Sterling was hidden using frontmen located in Panama, mainly Militza Miro de Torm.
vFinance Inc, which had its own operations in Panama, listed 3 registered brokers working out of their Panama branch, one of whom was Militza Miro de Torm — the same person fronting for Sterling Securities Group.
The Criminal Complaint against Padilla mentions that Padilla used the code name “Sterling” when communicating through the secure xphone network set up by Frederick Sharp.
The complaint also mentions that Padilla directed trading for Financials Worldwide Inc., a Belize-based brokerage firm until 2019, that morphed into Valor Capital (the entity that controlled nearly the entire Charlestown Premium Beverages Inc float).
The Cooperating Witnesses
The Complaint credits two cooperating witnesses (CWs) with providing crucial information used to build the case, including, among other things, documents, emails, text messages, phone call recordings, other electronic messages, and trading records.
CW-1 is described as the founder, owner, and chief executive of a purported asset management firm based in Switzerland who pleaded guilty to securities fraud offenses in the United States District Court for the District of Massachusetts in 2020 in connection with his/her participation in pump-and-dump schemes involving an undisclosed control group. Between approximately 2013 and 2018, CW-1 managed the asset management firm on a day-to-day basis, including by generally placing all stock trades on behalf of the firm’s clients. The asset management firm provided a platform through which undisclosed control persons could secretly and quickly dump large quantities of microcap stock in circumvention of the registration and disclosure requirements of the federal securities laws.
CW-1 is said to be cooperating to obtain leniency when he/she is sentenced. According to the Complaint, CW-1 has met Padilla, who CW-1 described as both a client of the asset management firm and a competitor.
Identifying CW-1 was easy. The description matches perfectly with Roger Knox, who pleaded guilty in the United States District Court for the District of Massachusetts in January 2020. The Special Agent of the FBI that was in charge of the Knox case is the same one that put together the case against Padilla and against Frederick Sharp — Keith Brown.
In that case, Knox was described as the founder and operator of a Swiss asset management firm, Silverton SA (aka Wintercap SA). According to the details in the case, from approximately 2013 to 2018, Knox helped facilitate pump-and-dump, and other market manipulation schemes, by selling massive quantities of more than 100 microcap securities on behalf of “control groups” who secretly owned the stock through nominee shareholders, and who simultaneously orchestrated promotional campaigns and other efforts to artificially inflate the price and trading volume of those shares. Knox then funneled the proceeds of the securities fraud—totaling an estimated $164 million from 2015 to 2018 —to co-conspirators in the United States and elsewhere through a complex money transfer system that disguised the source and nature of the funds.
The criminal complaint credits CW-1 with turning over records identifying Padilla’s xphone network account and verifying his connections to Sterling Securities Group and Financials Worldwide Inc. The complaint even takes it a step further and gives CW-1 much credit for exposing Frederick Sharp as the mastermind that maintained the xphone encrypted and closed communications network on a server in Curacao from approximately 2013 through 2015. Records from the network exposed dozens of individuals involved in the sale of penny stocks in contravention of the securities laws.
An interesting side note is that it was through Morrie Tobin, who was criminally charged and charged by the SEC in connection with activities involving Roger Knox, that the FBI gained information that led to the College Admission Scandal bust. Tobin, who had 3 children who studied at Yale, tipped off the FBI in an effort to obtain leniency.
Based on the descriptions provided for CW-2, we believe CW-2 is likely William Groeneveld.
The Complaint describes CW-2 as a registered representative of a U.S.-based broker-dealer since approximately 1999 that acted primarily as a market-maker for securities traded on the over-the-counter market and has known and worked with Padilla for approximately 15 years.
We know that Groeneveld started vFinance Investments Inc in 1998 (market maker VFIN) and has worked out of Panama for about just as long. We know that Groeneveld assisted Padilla in setting up new operations in Panama by at least 2012. It is possible that even before Sterling Securities Group was created, Padilla was already working out of Panama with William Groeneveld on some level.
Additionally, Groeneveld was recently barred by FINRA after refusing to provide on-the-record testimony requested by FINRA in connection with an investigation into (among other things) the firm’s execution of cross trades. The CW-2 in the Padilla Complaint was cited for multiple instances of cross-trading activity in Charlestowne Premium Beverages Inc.
The Padilla pump and dump that never was?
While researching Valor Capital, I found the name owning shares in Bionovate Technologies Group Inc (BIIO) in a 10K filed on October 14, 2021.
BIIO was a heavily manipulated stock promotion in May 2019 linked to the same group involved in several similar promotions on other issuers. The group behind these stocks had a habit of resetting the stocks with reverse splits, then issuing super cheap stock through using bogus debt notes and running new promotions on the stocks.
BIIO was well on its way after doing a reverse split in January 2020, which took the outstanding share count down to just 155,798 shares, followed by 54,270,000 new shares (99.7% control of the shell) being issued to a Seychelles company named Evergreen Solutions Ltd (signed for by some nominee) in exchange for $5,427 in debt that was assigned to Evergreen by a former control person.
Those 54,270,000 shares were then passed to a Swiss entity named Human Data AG as part of a share exchange to bring in new operations. While control stock was being shuffled around, more debt was converted into 4,997,800 free-trading shares of stock.
Sometime before June 30, 2020, 1,200,000 shares ended up at Valor Capital, likely to be used as part of another pump-and-dump scheme.
If the plan was to use BIIO as another share-selling scheme, the plans were ruined when the SEC brought charges against the group that previously manipulated BIIO (through entities in Hong Kong) on June 9, 2020.
This group, which included Douglas Roe, Kelly Warawa, Nelson Gomes, Michael Luckhoo-Bouche, Shane Schmidt, and several offshore entities located in Hong Kong, manipulated several stocks, including Bionovate Technologies Inc (BIIO), Bioscience Neautroceuticals Inc (DEVV), Sandy Steele Unlimited Inc (SSTU), Rivex Technology Corp (RIVX), Phoenix Apps Inc (PXPP), Country Line Energy Corp (CYLC), and WOD Retail Solutions Inc (WODI).
The domains used to promote the stocks are linked to the domain created to promote Charlestowne Premium Beverage (pennystockbargain.com). One of them even had a very similar name — thepennystockbargain.com.
Details in the SEC complaint show that the Sandy Steele Unlimited scheme involved laundering money through Roger Knox’s company, Wintercap SA.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. 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 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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Brenda Hamilton, Securities Attorney
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