OTCQX Markets Foreign Issuer Dual Listings – OTCQX Eligibility, Listing, Quotation

The OTC Markets OTCQX offers foreign issuers seeking to go public in the U.S. an appealing alternative to listing on a stock exchange.  Foreign issuers whose securities are listed on a foreign stock exchange that qualify for the exemption from the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), can go public in the U.S by quotation of their securities on the OTCQX without registration or reporting obligations to the Securities and Exchange Commission (the “SEC”).

Foreign issuers with a class of securities registered under Section 12(g) of the Exchange Act also qualify to list on the OTCQX. Read More

SEC Obtains Final Judgment Ordering Frederick Sharp to Pay $52,925,214

On Friday, May 12, 2022, the Securities and Exchange Commission announced that it obtained a final judgment against Canadian resident Frederick L. Sharp.

In August 2021, the SEC charged Sharp with leading a fraudulent scheme that generated hundreds of millions of dollars from unlawful stock sales and caused significant harm to retail investors in the United States and around the world. Among other relief, the judgment orders Sharp to pay over $50 million in monetary relief.

According to the SEC’s complaint, Sharp masterminded a complex scheme from 2011 to 2019 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 penny stock and then surreptitiously dump the stock into the U.S. markets, in violation of federal securities laws. 

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Attorneys Gone Wild: Shawn Hackman, Elaine A. Dowling, and Harold P. Gewerter

On April 29, 2022, the Securities and Exchange Commission obtained a judgment against Shawn Hackman, who was previously disbarred by the State of Nevada and suspended by the SEC, ordering him to comply with the SEC’s suspension order and to pay nearly $1 million in disgorgement and prejudgment interest for the money he earned in violation of the suspension order.

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SEC Files Charges Against Michael Forster

On May 4, 2022, the Securities and Exchange Commission (the “SEC”) filed a complaint alleging Michael Forster engaged in manipulative trading in connection with a microcap issuer he controlled, Cuba Beverage Company (CUBV), a purported energy drink company.

According to the SEC’s complaint, in or around February 2012, Forster gained control of CUBV for $40,000 through an undocumented agreement with the sole executive of the company at the time. During this same period, Forster entered into a consulting agreement with CUBV and his company, SLO 3 Holdings dba as designir.com and stockmailer.com, to increase the CUBV share price.

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OTC Markets Listing and Quotation – OTCQB Requirements

OTC Markets Group (“OTC Markets”) requires companies seeking quotation of their securities on the OTCQB® Venture Stage Marketplace (“OTCQB”) have an initial and ongoing $0.01 per share minimum bid price, submit an initial OTCQB application, pay annual fees, and submit annual certifications to the OTC Markets.  Companies that do not meet all of these requirements are demoted to the OTC Markets Pink® Marketplace (“OTC Pink”).  OTCQB companies must also be reporting with the Securities & Exchange Commission (“SEC”). The OTC Markets offers companies seeking public company status new alternatives for listing while ensuring transparency for investors.

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SEC Charges Sung Kook (Bill) Hwang and Archegos Capital Management

On April 27, 2022, the Securities and Exchange Commission charged Sung Kook (Bill) Hwang, the owner of family office Archegos Capital Management, LP (Archegos), with orchestrating a fraudulent scheme that resulted in billions of dollars in losses. The SEC also charged Archegos’s Chief Financial Officer, Patrick Halligan; head trader, William Tomita; and Chief Risk Officer, Scott Becker, for their roles in the fraudulent scheme.

The SEC’s complaint alleges that, from at least March 2020 to March 2021, Hwang purchased on margin billions of dollars of total return swaps. These security-based swaps allow investors to take on huge positions in equity securities of companies by posting limited funds upfront. As alleged, Hwang frequently entered into certain of these swaps without any economic purpose other than to artificially and dramatically drive up the prices of the various companies’ securities, which induced other investors to purchase those securities at inflated prices.

As a result of Hwang’s trading, Archegos allegedly underwent a period of rapid growth, increasing in value from approximately $1.5 billion with $10 billion in exposure in March 2020 to a value of more than $36 billion with $160 billion in exposure at its peak in March 2021.

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Resales of Restricted Securities By Non-Affiliates

Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), requires that all offers and sales of securities be registered with the Securities and Exchange Commission (“SEC”) or exempt from SEC registration. When shares have not been registered with the SEC, investors receive restricted securities. Investors most often receive restricted securities in private placements that are exempt pursuant to Rule 506(b) or Rule 506(c) of Regulation D of the Securities Act. 

In most circumstances, restricted securities are not subject to a Form S-1 registration statement under the Securities Act. Resales of restricted shares can be registered with the SEC on Form S-1 or other SEC registration statement. Investors with restricted securities may resell their shares publicly if they comply with the requirements of SEC Rule 144 of the Securities Act.

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SEC Charges 15 Individuals in a $194 Million International Penny Stock Fraud


The Securities and Exchange Commission announced charges against 16 defendants, located in the Bahamas, the British Virgin Islands, Bulgaria, Canada, the Cayman Islands, Monaco, Spain, Turkey, and the United Kingdom, for participating in multi-year fraudulent penny stock schemes that generated more than $194 million in illicit proceeds.

The SEC investigations leading to these charges involved assistance from securities regulators and other law enforcement authorities in more than 20 countries and are associated, in part, with parallel criminal actions announced by the United States Attorney’s Office for the Southern District of New York.

In case number one, first announced on April 14, 2022, the SEC charged eight individuals for participating in a long-running fraudulent scheme that generated over $145 million from unlawful sales of at least 17 penny stocks, causing significant harm to retail investors in the United States and around the world.

According to the SEC’s complaint, UK-resident Ronald Bauer and his associates, Craig James Auringer, Adam Christopher Kambeitz, Alon Friedlander, Massimiliano (“Max”) Pozzoni, Daniel Mark Ferris, Petar Dmitrov Mihaylov, and David Sidoo – all of whom reside outside the U.S. – engaged in a complex scheme spanning from at least 2006 to 2020 to fraudulently unload on unsuspecting retail investors the respective defendants’ significant shareholdings of at least 17 microcap stocks quoted on U.S. markets. 

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What Is the OTC Markets Expert Market? Securities Lawyer Blog

Most of the companies quoted on OTC Markets are not able to meet the minimum listing requirements for trading on a national securities exchange. Many of these companies do not file periodic reports or audited financial statements with the SEC, making it difficult for the public to find current, reliable information about those companies.  Companies quoted on the OTC Markets are divided into four tiers, the OTCQX, the OTCQB, the OTC Pink and the Expert Market.  Companies on the Expert Market provide the lowest level of disclosure in comparison to other OTC Market tiers. As a result, trading is limited to quotation on an unsolicited basis.

On October 15, OTC Markets reported that “2,247 former Pink No Information securities shifted to the Expert Market tier, where securities may only be quoted on an Unsolicited (customer order) basis.  Quotes of securities in the Expert Market are “Unsolicited Only,” which means that trades of securities subject to unsolicited quotation in the Expert Market are only available to broker-dealers, institutions and other sophisticated investors, and not average investors.   

The SEC’s amendments to Rule 15c2-11 became effective on September 28, 2021.  Amended Rule 15c2-11 eliminated broker-dealer quotes of securities of issuers that fail to make current information publicly available. With the amendments to Rule 15c2-11, the OTC Markets Group Expert Market became the platform for broker-dealers to publish unsolicited quotes of securities designated as “No Information” securities. Typically, these are companies not subject to or not in compliance with SEC public company reporting requirements

Because of the restrictions imposed on securities quoted on the Expert Market, most investors will not be able to publicly sell their shares. Additionally, they will not have access to bid and ask prices or other information, including trading volume. As such, Expert Market shares are illiquid.

Companies moved to the Expert Market from another OTC Markets tier can apply to relist on the OTC Pink or other OTC Markets tier by becoming an SEC reporting company, submitting a new Form 211, and meeting OTC Markets requirements for the particular tier.

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SEC Charges Anthony Salandra in Market Manipulation Scheme

The Securities and Exchange Commission today announced charges against Anthony Salandra, for his role in a market manipulation scheme in which he and several other individuals created false rumors about public companies in order to profitably trade around the temporary price increases caused by the publication of the rumors.

The SEC previously charged Barton Ross and Mark Melnick for their roles in this scheme.

According to the complaint, filed in the United States District Court for the Northern District of Georgia on April 11, 2022, Salandra, Ross and a third individual created false rumors about purported market-moving events, such as corporate mergers or acquisitions, involving publicly-traded companies.

As alleged, the false rumors were then shared with Melnick and another individual who disseminated the false rumors through real-time financial news services, financial chat rooms, and message boards, causing the prices of the subject companies’ securities to rise temporarily.

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SEC Obtains Final Judgments from Chrysilios Chrysiliou and Panagiotis Bolovis for Their Roles in $45 Million Fraudulent Scheme

On April 4, 2022, the U.S. District Court for the Southern District of New York entered final judgments against Chrysilios Chrysiliou and Panagiotis Bolovis for their respective roles in a fraudulent scheme to gain control of Airborne Wireless Network, promote its stock, and defraud investors.

According to the SEC’s complaint, filed on March 2, 2021, in October 2015, Kalistratos “Kelly” Kabilafkas secretly purchased essentially all the outstanding stock of the public shell company, Ample-Tee, Inc., which ultimately became Airborne. More specifically, Kabilafkas bought both the control block of about 84.1 million restricted shares and about 30 million shares that had purportedly been issued to about 30 residents of Thailand in a 2013 distribution submitted on Form S-1. In fact, the Thai Shareholders were simply nominees who never owned the stock. Kabilafkas then distributed millions of shares among himself and his associates, including Chrysiliou and Bolovis.

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Old School Ties: Donald Trump Sues Hillary Clinton and Many of Her “Cohorts”

On March 24, 2022, as an anxious world hoped for positive results from a NATO meeting convened to address the ongoing war in Ukraine, former President Donald Trump sought to redress the harm he believes was done to him by Hillary Clinton “and her cohorts” in the run-up to the 2016 presidential election, an election he ultimately won. In order to accomplish that, he’s brought a civil lawsuit against her, her campaign, certain of her campaign officials, a number of former government and law enforcement officials, and the Democratic National Committee. The suit was filed in federal district court for the Southern District of Florida because Trump’s principal place of residence is in Palm Beach, and several of the other defendants have ties to the state.

The action was filed and signed by Peter Ticktin, a Florida attorney who attended the New York Military Academy with Trump when both were teenagers. In 2020, Ticktin wrote a 160-page book about his friendship with the future president called What Makes Trump Tick. My Years with Donald Trump from New York Military Academy to the Present.

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FINRA Extended Hearing Panel Expels Alpine Securities and Orders $2.3 Million in Restitution

On March 24th, the Financial Industry Regulatory Authority (“FINRA”) announced that a FINRA extended hearing panel has expelled Salt Lake City-based broker-dealer Alpine Securities Corp from FINRA membership and ordered the firm to pay more than $2.3 million in restitution to customers for converting and misusing customer funds and securities, engaging in unauthorized trading, charging customers unfair prices in securities transactions and unreasonable fees, and making an unauthorized capital withdrawal.

The hearing panel also issued a permanent cease and desist order; specifically, Alpine Securities was ordered to cease and desist from converting or misusing customer funds or securities. The decision resolves charges brought by FINRA’s Department of Enforcement in August 2019.

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Undercover Sting Takes Down Francis Biller, Raymond Dove, and Chester Alvarez in Boiler Room Scheme

On March 15, 2022, the Securities and Exchange Commission (the “SEC”) announced charges against five individuals for allegedly operating a call center in Medellin, Colombia, which used high-pressure sales tactics and made false and misleading statements to retail investors to convince them to buy the stocks of small companies trading in the U.S. markets.

According to the SEC’s complaint, filed on March 14, 2022, from at least January 2016 to at least July 2018 (the “Relevant Period”), U.S. citizen Chester Alvarez, Canadian citizens Francis Biller, Raymond Dove, and Troy Gran-Brooks, and Dutch citizen Justin Plaizier (the “Defendants”) operated call centers (also known as “boiler rooms”), set up as phony investment management firms, with fake names, websites, and phone numbers. 

Defendant Francis Biller had previously pled guilty to four counts of theft and fraud in British Columbia in 2005 in connection with an investment fraud run through Eron Mortgage Corporation. In 1999, Eron Mortgage and its key executives perpetrated one of the biggest swindles in Canadian history. The British Columbia Securities Commission estimated that 3,200 investors, most of them from B.C., lost C$ 170 million. Biller was sentenced to three years in prison and was permanently banned by the Ontario Securities Commission (OSC). 

The SEC’s complaint alleges that Defendants were hired by groups of people who controlled the stock of the issuers whose stock they were touting. These groups of people (called “control groups”) owned a significant percentage of the issuers’ free trading stock, oftentimes as much as 100% of the float.

During the Relevant Period, Defendants’ boiler room promoted the stock of at least 18 issuers, in coordination with control groups who were dumping their shares of those issuers. The demand created by Defendants’ misleading promotions enabled control groups to sell millions of shares of stock, which generated over $58 million in trading proceeds for the control groups. The stock of many of these issuers was thinly traded in the market when it was not being touted in one of the Defendants’ promotional campaigns, so investors who purchased these shares at Defendants’ urging often had difficulty finding buyers when trying to sell their shares once Defendants’ promotions were over.

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Attorney Andrew Coldicutt faces SEC charges after getting caught in an FBI sting

On March 1, 2022, the Securities and Exchange Commission (the “SEC”) announced fraud charges against San Diego-based attorney Andrew T.E. Coldicutt for his role in a would-be pump-and-dump scheme.

According to the complaint, the charges arise in part from an undercover operation conducted by the Federal Bureau of Investigation, which also resulted in a related criminal prosecution against Coldicutt by the U.S. Attorney’s Office for the Southern District of California.

The SEC’s complaint alleges that Coldicutt was approached by two individuals he believed to be hedge fund managers seeking to effectuate a pump-and-dump scheme. But unbeknownst to Coldicutt, one of the individuals was an undercover FBI agent, and the other was a cooperating witness. 

Coldicutt created a sham company, named SoCal Harvest Inc, to facilitate the scheme – the company purported to collect unpicked fruit from homeowners in the Southern California area, consolidate it, and sell it to grocery stores and the public generally.

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SEC Obtains Final Judgment Against Former Pharmaceutical Company CEO Martin Shkreli

On February 23, 2022, the United States District Court for the Eastern District of New York entered a final judgment against Martin Shkreli, the former CEO of Retrophin, Inc., a publicly-traded pharmaceutical company.

The Court granted in its entirety the SEC’s motion for a permanent officer and director bar and $1.392 million in civil penalties. Shkreli previously consented to a partial judgment ordering injunctions against future violations of the securities laws.

The SEC’s complaint, filed on December 17, 2015, charged Shkreli with committing widespread fraud during a 5-year period while CEO at Retrophin and when he managed hedge funds. The complaint alleged that Shkreli misappropriated money from two hedge funds he founded and made material misrepresentations to investors among other misconduct.

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SEC Charges Michael M Beck (aka BigMoneyMike) with Penny Stock Fraud

The Securities and Exchange Commission charged Michael M. Beck for using his Twitter handle, @BigMoneyMike6, to deceive investors into buying penny stocks that he recommended, even though he secretly planned to sell those stocks and, in some cases, was in the process of selling them when he made the recommendations.

The SEC’s complaint alleges that between February 2017 and May 2019, Defendant Michael M. Beck used his Twitter platform, @BigMoneyMike6, where he had as many as 3.1 million followers, to promote and encourage people to buy eight microcap stocks— all without disclosing that he planned to sell, or in some instances was personally selling, his own holdings of the same stocks (a practice known as “scalping”).

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SEC Proposes Faster Trade Settlement Times

The Securities and Exchange Commission voted on Wednesday to propose rule changes to reduce risks in the clearance and settlement of securities, including by shortening the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one business day after the trade date (T+1). The proposed changes are designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors.

According to SEC Chair Gensler, the primary goals of the proposal are to reduce risk to the financial system and improve efficiencies in the market by shortening the standard settlement cycle, requiring affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date, and requiring clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing.

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SEC Wins Summary Judgment Against Unregistered Penny Stock Dealer Justin W Keener

On January 21, 2022, Judge Beth Bloom of the United States District Court for the Southern District of Florida granted the SEC’s motion for summary judgment against Justin W. Keener d/b/a JMJ Financial.

The SEC’s complaint alleged that Keener failed to register as a securities dealer with the SEC, or to associate with a registered dealer, when he bought and sold billions of newly issued shares of penny stock from at least January 2015 through January 2018.

Keener obtained the shares directly from issuers after converting debt securities known as convertible notes. By failing to register, Keener avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records.

The court ruled that Keener met the statutory definition of “dealer” because he operated a regular business of buying and selling securities for his own account.  The court found that his failure to register as a dealer, or associate with a registered dealer, violated the dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934.

The court also denied Keener’s cross-motion for summary judgment.

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Paul Pelosi Jr’s Adventures in Pennyland

In mid-January 2022, British tabloid the Daily Mail published a long story about U.S. House Speaker Nancy Pelosi’s son Paul Jr, in which it was alleged that he’d been involved in a number of shady businesses, some of them targets of Securities and Exchange Commission investigations and enforcement actions. The piece was subsequently picked up by the NY Post and several Republican political organs. We’ll take a look to see if there’s any fire to go along with all the smoke.

Paul Pelosi Jr is the only son of Nancy and Paul Pelosi; their other four children are daughters. (One of them, Alexandra, memorably said of her mother on CNN: “She’ll cut your head off and you won’t even know you’re bleeding.”) Like his siblings, Paul isn’t a kid; he’s 52 and has worked as an attorney and environmentalist since he was in his 20s. He graduated from Georgetown University and has been a member of the California Bar since 1996 and a California real estate broker since 2002. He’s been fairly low-profile in his business and personal life. His sisters Christine and Alexandra are better-known. 

At LinkedIn, Paul lists Due Diligence, Corporate Finance, Start-ups, Corporate Development, Venture Capital, New Business Development, Investment Banking, and more as “skills” he possesses, and at which he presumably excels. Early in his career, he worked for Bank of America, but more recently, he’s been associated with smaller enterprises, some of them startups. As everyone who follows the OTC market knows, that choice can present its own dangers.

The Mail says that Paul “was involved in five companies probed by federal agencies—but has never been charged himself,” adding that “[a] shocking paper trail shows Paul Pelosi Jr.’s connections to a host of fraudsters, rule-breakers and convicted criminals.”

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SEC Charges Securities Fraud Recidivist Phillip W. Offill, Jr. and Justin W. Herman in Penny Stock Fraud Scheme

On January 19, 2022, the Securities and Exchange Commission charged securities fraud recidivist Phillip W. Offill, Jr. and Justin W. Herman (a former FINRA registered broker) with misappropriating and selling millions of shares of a penny stock company using forged documents and sham transactions.

The SEC’s complaint alleges that, shortly upon being released from prison in January 2016 after serving an eight-year sentence for participating in “pump-and-dump” schemes involving penny stocks, Offill started a new penny stock scheme to misappropriate millions of shares of a publicly-traded microcap company, Mansfield-Martin Exploration Mining, Inc. (OTC: MCPI).

According to the complaint, Offill obtained a position of trust and confidence with the then-controlling shareholder of Mansfield, whom Offill had known before going to prison and with whom Offill began sharing office space upon being released from prison, then, operating under the alias “Jim Jimerson” to conceal his actual identity, used his position of trust and his proximity to the then-controlling shareholder of Mansfield to coordinate, in three different sets of transactions, the fraudulent transfer of 40 million shares of Mansfield stock owned by the then-controlling shareholder of Mansfield.

Rather than selling the stolen stock himself, which Offill was prohibited from doing by an order imposed by the Court in a previous SEC enforcement action, Offill enlisted Herman to sell the stock and for him and to share in the sales proceeds.

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Christopher R. Esposito Charged with Securities Fraud

MagnaChip - Fraud

On January 7, 2022, Christopher R. Esposito, 55, of Everett, was charged and has agreed to plead guilty to one count of securities fraud.

Esposito, the sole officer and director of Massachusetts marketing firm Code2Action Inc, was charged in connection with misappropriating tens of thousands of dollars of investor funds to pay his personal expenses.

According to court filings, between August 2019 and February 2020, Esposito allegedly sold Code2Action shares to existing shareholders at sub-penny prices based on material misstatements and omissions and then misappropriated much of the proceeds. Specifically, it is alleged that Esposito deliberately misled prospective investors about, among other things, Code2Action’s plan and ability to complete a reverse merger, which Esposito touted would enable the investors to sell their shares at a profit.

It is further alleged that Esposito misappropriated over $57,000 to pay his personal expenses and failed to disclose to prospective investors, among other things, that the U.S. Securities and Exchange Commission had previously obtained a final judgment against him for committing securities fraud and barred him from certain securities-related activities. 

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SEC Commissioners Differ on Key Policies

Just before the end of 2021, Elad L. Roisman, one of the SEC’s five Commissioners, announced his resignation, effective at the end of January 2022. In a statement posted on the agency’s website, he said:

Serving the American people as a Commissioner and an Acting Chairman of this agency has been the greatest privilege of my professional life. It has been the utmost honor to work alongside my extraordinary SEC colleagues, who care deeply about investors and our markets. Over the next several weeks, I remain committed to working with my fellow Commissioners and the SEC’s incredible staff to further our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

Chairman Gary Gensler replied publicly, saying:

Today, my colleague and fellow Commissioner Elad Roisman announced his intentions to step away from the agency in January. I’d like to thank Commissioner Roisman for his dedicated service to the Commission and to the American public, both as a Commissioner and as Acting Chairman. While we didn’t always agree on policy matters, I’ve come to rely on his judgment and expertise, and I have enjoyed a positive working relationship with him.

The polite exchange glossed over conflicts that had been on the increase since Gensler’s appointment. The new chair arrived full of plans of his own, plans that didn’t necessarily fit with projects undertaken by the Commission months or even years earlier. He created an agenda that changed priorities already decided on by his colleagues and revived old issues, some of them quite recently decided, for reconsideration. He was the boss, and that was his right to do, but it ruffled the feathers of two of his fellow Commissioners, Roisman and Hester Pierce.

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Five Russians Charged in Hacking and Illegal Trading Scheme

On December 20, 2021, the Securities and Exchange Commission announced fraud charges against five Russian nationals for engaging in a multi-year scheme to profit from stolen corporate earnings announcements obtained by hacking into the systems of two U.S.-based filing agent companies before the announcements were made public. 

The SEC’s complaint, filed in federal district court in Massachusetts, alleges that defendant Ivan Yermakov, also known as Ivan Ermakov, used deceptive hacking techniques to access the filing agents’ systems and directly or indirectly provided not-yet-public corporate earnings announcements stolen from those systems to his co-defendants Vladislav Kliushin, Nikolai Rumiantcev, Mikhail Irzak, and Igor Sladkov.

According to the complaint, from 2018 through 2020, the traders used 20 different brokerage accounts located in Denmark, the United Kingdom, Cyprus and Portugal to generate profits of at least $82 million using the stolen information to make trades before over 500 corporate earnings announcements. The defendants allegedly shared a portion of their enormous profits by funneling them through, M-13, a Russian information technology company founded by Kliushin and for which Yermakov and Rumiantcev serve as directors.

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More Individuals Charged in Billion Dollar Penny Stock Pump and Dump/Money Laundering Operation

On Thursday, December 9th, three more Canadian citizens were charged by the Securities and Exchange Commission as part of what has been described as a long-running global pump and dump scheme that collectively generated over a billion dollars from unlawful stock sales. 

According to the SEC’s complaint, between at least 2011 and 2016, Jay Scott Kirk Lee, Geoffrey Allen Wall, and Benjamin Thompson Kirk allegedly were able to utilize a network of offshore front companies to conceal their control of shares in penny stocks, unload those shares on unsuspecting retail investors, and disburse the proceeds of their fraud to various bank accounts throughout the world.

The SEC’s complaint further alleges that Canadian resident Frederick L. Sharp masterminded a complex scheme from 2011 to 2019 in which he and his associates – Canadian residents Zhiying Yvonne Gasarch and Courtney Kelln – enabled control persons of microcap companies whose stock was publicly traded in the U.S. securities markets to conceal their control and ownership of huge amounts of penny stocks.  They then surreptitiously dumped 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.  According to the complaint, Sharp and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies.

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SEC Charges Robert Gandy and Others in 3(a)(10) Penny Stock Scheme

SEC Charges Robert Gandy and Others in 3(a)(10) Penny Stock Scheme

On November 9, 2021, the Securities and Exchange Commission charged four individuals and their companies, including a securities fraud recidivist, with scheming to issue free-trading shares of two penny stock companies through the use of bogus documents in 3(a)(10) court proceedings and backdated promissory notes.  The SEC’s complaint named New York-based CF3 Enterprises, LLC and its owner Clarence Fitchett, Texas-based Silverback Promotions, LLC and its manager Robert Gandy, Kathy Givens-Gandy, and Billy Chang as defendants.

The SEC alleges that, between 2017 and 2018, Fitchett and Robert Gandy abused the judicial system to obtain unrestricted or “free-trading” securities of two microcap issuers, Quantum Medical Transport, Inc. (“DRWN”) and Macau Capital Investment, Inc. (“MCIM”), pursuant to Section 3(a)(10) of the Securities Act of 1933. This provision provides an exemption from registration when a company issues securities in exchange for one or more bona fide debts when a court approves the terms and conditions of the transaction.

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Amended Rule 15c2-11 is Bad News for Shell Vendors

Though nearly two months have passed since compliance with the Securities and Exchange Commission’s amended Rule 15c2-11 became mandatory on September 28, 2021, the OTC marketplace is still reeling from the effects of its implementation. The new rule requires all OTC issuers to make “current information” available to investors and the general public. For most, that means qualifying for OTC Markets’ Pink Current Info tier, or, at a minimum, its Limited Information tier. 

Results have been dramatic. Thousands of penny stocks have been sent to OTC Markets’ “Expert” tier, where they have no published quotations. U.S. broker-dealers are not allowing their customers to purchase them, though liquidating trades are permitted. While this serves to protect genuine investors, as the rule intended, it’s a serious obstacle for those penny players interested in the kind of speculation that can result in large gains (or losses). 

Not so long ago, much of that speculation was fueled by “reverse merger plays,” in which specialist shell vendors would seek custodianship of public shell companies that had been abandoned by management in their states of incorporation. Once a petition for custodianship had been granted by a local court, control of the shell would pass to the shell vendor. He would then reinstate the company’s corporate charter—or, if it had been abandoned many years earlier, “revive” it—and pay delinquent fees to the Secretary of State. He could then present himself to the shell’s transfer agent. His ultimate goal would be to find a buyer for the shell. The buyer would be the owner of a private company who wished to take his business public through a reverse merger transaction. 

The amended Rule 15c2-11 has made all that far more difficult to accomplish. One of the objects of the new rule was to reduce the number of shell companies in the OTC market. The SEC has long realized that dormant shells are often purchased by individuals who intend to use them in pump and dump operations or other kinds of manipulative schemes. In the hope of putting a stop to that, the new rule specifies that a shell company can only continue to trade for 18 months following its initial quotation by a market maker. If it is still a shell after that time, it will no longer qualify for public quotation. In other words, OTC shells would be subject to some of the limitations imposed on special purpose acquisition companies (SPACs).

That was very bad news for the shell vendors. Some seem to have digested it and found new ways to make money; others have not. One of the latter is Benjamin Berry, who runs a company called Synergy Management Group. Synergy is, according to its website, located in Chicago and Minneapolis. Berry says of his company: “We are specialists that strive to create value for shareholders of distressed public companies.”

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Unregistered Dealer Activity Not Just For the SEC Anymore

Toxic Convertible Note Lenders Not Just For the SEC Anymore

Over the past few years, we’ve written frequently about so-called “toxic lenders” engaged in unregistered dealer activity and the toll their loans take on struggling over-the-counter companies. Nearly all of these companies need financing for operations, research and development, expansion and more, and are rarely able to obtain it from banks or other traditional lenders. They turn instead to the toxic funders, who charge high interest and, in the end, almost always convert their notes into enormous amounts of unrestricted stock. That causes runaway dilution, which damages the companies and their investors, and can result in reverse splits and even bankruptcy.

Since 2017, the Securities and Exchange Commission (“SEC”) has been trying to deal with the problem by suing the lenders for acting as unregistered dealers. Though they’ve won one important victory—against Ibrahim Almagarby and his company Microcap Equity Group LLC—and others are waiting in the wings, preparing and prosecuting individual lawsuits is time-consuming and expensive. The SEC has another remedy in mind, which entails changing the way note conversions work under Rule 144, but the rule change has yet to become effective. In the meanwhile, issuers victimized by toxic lenders try to fight back as best they can. 

One such company, GeneSYS ID, Inc., won a significant victory when the New York State Court of Appeals held that GeneSYS ID’s lender, Adar Bays, had committed criminal usury and that the contract between lender and borrower was void ab initio.

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Steven Gallagher Arrested And Charged With Securities Fraud For Using His Twitter Account To Operate A Pump-And-Dump Scheme

On Tuesday, October 26th, Steven Gallagher 50, of Maumee, Ohio, was arrested and charged with securities fraud, wire fraud, and market manipulation.

According to the Complaint filed in Manhattan federal court, Gallagher created a stock promotion account on Twitter using the alias “Alex DeLarge,” in September 2019 based on a character from the Anthony Burgess novel A Clockwork Orange and the Stanley Kubrick film of the same name @AlexDelarge6553.

The account was used to make thousands of tweets touting certain over-the-counter penny stocks and to disseminate false and misleading information about Gallagher’s trading in those stocks in order to induce his followers to purchase those stocks and drive up their prices. As alleged, Gallagher would then sell those stocks at the inflated prices without disclosing his sales. 

As of October 19, 2021, the DeLarge Twitter Account had over 70,000 followers.

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Will Small Cap Investors Embrace Donald Trump’s DWAC? The latest Reddit Meme Stock

Since the fall of 2019, we’ve written a number of times about the Securities and Exchange Commission’s amendments to Rule 15c2-11, which, most importantly, require over-the-counter stocks to provide “current information” to the public. Since the end of September of this year, compliance has been required, bringing dramatic changes to the penny stock market. So where will retail players in search of potentially dramatic gains turn? Many have moved to lower-tier NASDAQ or struggling NYSE issuers, with surprising results. 

The SEC requirements forbid broker-dealers to publish quotations for any OTC issuer that fails to meet its new requirements; the regulator’s intention was that the stocks in question would be moved to the Grey Market and left there to wither away. OTC Markets had hoped to soften the blow by instead placing them on its “Expert Market,” where it further hoped public quotations could at least be offered to brokers, institutions, and accredited investors. The SEC declined to consider that proposal at this time. The “no info” stocks have indeed been moved to the Expert Market, and nearly all of them are billed as quoted on an unsolicited basis, which ought to mean quotes would be available to all comers. But U.S. broker-dealers, who are regulated by both the SEC and the Financial Industry Regulatory Authority, aren’t taking chances: those stocks cannot be purchased by their customers; only liquidating transactions are permitted. (Most Canadian brokerages do allow buys, but that is not generating much volume.)

On October 15, OTC Markets reported that “2,247 former Pink No Information securities shifted to the Expert Market tier, where securities may only be quoted on an Unsolicited (customer order) basis.” Three days later, TDAmeritrade published its own list of securities clients cannot purchase. It contains 5,870 items, though not all of them are equities. 

Despite OTC Markets’ brave words about an increase in foreign issuers making use of its services, the penny market is in the doldrums from our perspective. There’s less interest, with lower trading volumes. But retail players haven’t just given up; they’ve gone elsewhere. 

They haven’t found just one refuge. Some have migrated to the so-called “meme stocks”; others have been buying stock and warrants in special purpose acquisition companies, known as “SPACs.”

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