On March 7, 2016 the Securities and Exchange Commission (SEC) charged a Rhode Island agency and its bond underwriter Wells Fargo Securities with defrauding investors in a municipal bond offering to finance startup video game company 38 Studios.

The Rhode Island Economic Development Corporation (RIEDC, now called the Rhode Island Commerce Corporation) issued $75 million in bonds for the 38 Studios project as part of a state government program intended to spur economic development and increase employment opportunities by loaning bond proceeds to private companies. Read More

The Securities and Exchange Commission (SEC) has obtained a jury verdict in its favor in a federal district court trial in Manhattan against Daryl Payton and Benjamin Durant, III, who the agency charged with trading on inside information ahead of a $1.2 billion acquisition of SPSS Inc. in 2009 by IBM Corporation.

In its complaint, filed in federal court in the Southern District of New York, the SEC alleged that Payton and Durant illegally traded on a tip about the acquisition from Thomas Conradt, a friend and fellow broker in the New York office of a Connecticut-based brokerage firm, who had received the information from his roommate and friend, Trent Martin. Read More

The Securities and Exchange Commission (SEC) announced that on March 1, 2016, the Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York entered final judgments on consent against defendants Zachary Zwerko and David Post. The final judgment entered against Zwerko imposes a permanent injunction against future violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and orders that Zwerko’s obligation to pay disgorgement of $57,000 be offset by the criminal forfeiture judgment imposed against him. The final judgment against Post imposes a permanent injunction against future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and orders that Post’s obligation to pay disgorgement of $683,967 be offset by the criminal forfeiture judgment imposed against him.

In its Amended Complaint filed on October 24, 2014, the SEC alleged that Zwerko and Post orchestrated an insider trading scheme that generated over $683,000 by purchasing securities in Post’s trading accounts based upon confidential information Zwerko tipped about his employer’s pharmaceutical acquisition targets. According to the Amended Complaint, Post and his friend, Zachary Zwerko, used prepaid “burner” cell phones to exchange coded text messages in advance of Post’s trading. Read More

On February 26, 2016 the U.S. District Court for the Eastern District of Pennsylvania issued a memorandum opinion and final judgment against Nan Huang, who a jury found liable last month for insider trading on information he improperly obtained from his employer Capital One Financial Corporation.

The court imposed on Huang permanent injunctive relief and ordered payment of $4,403,545 in disgorgement, $288,965 in prejudgment interest, and an $8,807,090 penalty for a total of $13.5 million.

According to court documents, Huang worked as a data analyst in Capital One’s fraud department when he searched a nonpublic company database that recorded the credit card activity for millions of customers at numerous, predominantly consumer retail corporations. Read More

The Securities and Exchange Commission (SEC) announced that on February 24, 2016, the Honorable Valerie E. Caproni of the United States District Court for the Southern District of New York entered a judgment against defendant Francis Canellas. The judgment resolves all issues of liability against Canellas arising from the SEC’s filing of a civil complaint against him on March 6, 2014. The judgment imposes on Canellas a permanent injunction against future violations of certain antifraud provisions of the federal securities laws.

In its Complaint, the SEC alleged that in 2008 and 2009, Canellas, the Finance Director of Dewey & LeBoeuf, LLP, an international law firm, in conjunction with other employees and officers of the firm, devised a scheme, and directed his staff, to materially falsify the firm’s financial statements in order to meet certain covenants with its lenders. Read More

The Honorable Michael A. Shipp, United States District Judge for the District of New Jersey, has entered a partial final consent judgment against defendant Paul Petrello, one of four individuals charged with engaging in an elaborate insider trading scheme involving the misappropriation of confidential information about secondary stock offerings and also illegally trading ahead of the announcement of a licensing agreement between two large pharmaceutical companies. The SEC’s complaint alleges that the scheme involved at least 15 stocks and generated a total of more than $4.4 million in illegal trading profits for the group.

The SEC’s complaint was filed on June 3, 2015 and charges California resident Steven Fishoff, his brother-in-law Steven Costantin of New Jersey, Fishoff’s friend and California neighbor Ronald Chernin, and Florida resident Paul Petrello, a friend and former day trading associate of Fishoff, as well as various entities they used to perpetrate the scheme. According to the SEC’s complaint, Fishoff, Chernin and Costantin posed as legitimate portfolio managers in order to induce investment bankers to bring them “over the wall” and share confidential information about upcoming secondary stock offerings. After agreeing with the bankers that they would neither disclose the confidential offering information nor trade in the issuers’ stock before the offerings were announced, they violated those agreements by tipping each other about the upcoming offerings and shorting the stocks before the offerings were announced. Read More

The Securities and Exchange Commission (SEC) charged Nathan Halsey and TexStar Oil, Ltd. in the United States District Court for the Northern District of Texas, with fraudulently offering securities through misleading investment materials and keeping funds from investors who believed they were investing in an entirely separate company.

The SEC’s complaint, filed in the U.S. District Court for the Northern District of Texan on February 17, 2016, alleges:

• TexStar and its founder and CEO Halsey raised at least $1.1 million from investors in China and Southeast Asia in fraudulent securities transactions and distributed false promotional materials in an effort to raise more funds.
• These false promotional materials described a successful, asset-rich company that held no profitable oil-and-gas assets, never drilled or produced any wells, and never generated investor returns.
• Halsey invited Chinese investors to Texas, showed them an operating oil well owned by another company, raised funds for an alleged investment in that well, and then kept that money for TexStar, without telling investors.

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The Securities and Exchange Commission (SEC) announced that on February 17, 2016, Judge Vincent L. Briccetti of the United States District Court for the Southern District of New York entered final judgments against Defendants Scott Valente and his company, The ELIV Group, LLC. The final judgments enjoin defendants from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Valente’s judgment further finds Valente liable for disgorgement of $8,200,579.69, and deems that amount satisfied by the criminal restitution order entered against Valente in the United States of America v. Scott Valente, No. 1:15-CR-124 (GLS) (N.D.N.Y.) (“Criminal Proceeding”).

In its complaint filed on June 3, 2014, the SEC alleged that Valente and The ELIV Group fraudulently raised more than $8 million from approximately 80 clients by falsely claiming they achieved consistent and outsized positive returns, among other misrepresentations. Read More

On February 18, 2016 the Securities and Exchange Commission (SEC) filed fraud charges against nine defendants for taking part in an international scheme to execute profitable securities trades based on nonpublic information that computer hackers stole from at least two newswire services. In August 2015, the SEC charged 34 defendants in connection with this same scheme. The SEC alleges that hackers hacked into newswire services to obtain the highly-valuable corporate information and then passed it to others who used the information to execute trades and generated more than $100 million in illegal profits. The nine defendants charged include five Russian nationals and four entities they controlled that engaged in the illegal trading.

The SEC’s fraud complaint was filed in U.S. District Court in Newark, New Jersey, and the court entered an asset freeze and other preliminary relief against the nine new defendants. Read More

The Securities and Exchange Commission (SEC) announced that, on February 17, 2016, Judge Nancy Edmunds of the U.S. District Court for the Eastern District of Michigan entered final judgments, on the consents of defendants Randy Hamdan and Oracle Consultants, LLC, which permanently enjoin them from violating the antifraud provisions of the federal securities laws and order them to jointly and severally pay $185,181 in disgorgement with prejudgment interest and civil penalties. These final judgments fully resolve the enforcement action before Judge Edmunds. Read More

On February 16, 2016, the Securities and Exchange Commission (SEC) charged PV Enterprises, Inc. (“PVEC”) and Panagiotis Villiotis (“Villiotis”) with violations of the registration and antifraud provisions of the federal securities laws. The SEC also charged Virtual Sourcing, Inc. (“Virtual”), Norman Birmingham (“Birmingham”), Mario Faraone (“Faraone”) and Sweet Challenge LLC (“Sweet Challenge”) with violations of the registration provisions of the federal securities laws.

PVEC and Virtual are both microcap stock companies who entered into business transactions with a specific Financing Company in Miami, which resulted in the companies issuing millions of shares of their companies’ stock to the Financing Company in purported reliance on an exemption from registration which exempts securities issued in court-approved exchanges for “bona fide outstanding securities, claims or property interests.” Read More

On February 12, 2016, a federal court in Boston, Massachusetts sentenced Michael Affa, of Toms Rivers, New Jersey, to 33 months in prison and ordered him to pay a fine of $1 million in a criminal case prosecuted by the Massachusetts U.S. Attorney’s Office. Affa previously pleaded guilty to conspiracy, securities fraud and wire fraud in September 2015.

The SEC previously charged Michael Affa, Andrew Affa, Mitchell Brown, Christopher Putnam, and Christopher Nix with fraud in an action filed in July 2014. The alleged fraud involved an attempt to manipulate shares of Boston, Massachusetts-based Amogear Inc. that was caught by an FBI undercover operation. In that action, the SEC alleged that defendants knew that Amogear was a shell company without any real operations, but schemed from at least August 2012 to February 2014 to boost the price of its securities and profit by selling their own shares. Read More

The Securities and Exchange Commission (“SEC”) says it doesn’t like over-the-counter shell companies, and would like to see them gone from the marketplace.  To that end, its Enforcement Division cooked up an initiative it called  “Operation Shell-Expel”.  It began with a bang on May 14, 2012, when the agency coupled an announcement of Shell-Expel with the suspension of trading in the stock of 379 dormant penny companies.  It was, the SEC said, the largest such action in agency history.  What danger did these sorry companies present and if they are so dangerous why are there so many dormant shell companies still out there being fraudulently taken over?

The existence of empty shell companies can be a financial boon to stock manipulators who will pay as much as $750,000 to assume control of the company in order to pump and dump the stock for illegal proceeds to the detriment of investors. But with this trading suspension’s obligation to provide updated financial information, these shell companies have been rendered essentially worthless and useless to scam artists.

The shells were “rendered essentially worthless” because the suspension meant they’d be delisted to the Grey Market, the graveyard of bad pennies, in which market makers are forbidden to publish quotes.

Critics of rampant abuse in the OTC market cheered the SEC on, hoping Operation Shell-Expel signaled a new, and far less tolerant, attitude toward dormant shells that were often serially pumped and dumped.  The following June, the agency suspended trading in another 61 issuers, and in February 2014, it followed up by shutting down another 255 shells.  The hammer came down on 128 more in March 2015.  There’s been no similar action in 2016.  At the time of the 2015 suspensions, Enforcement director Andrew J. Ceresney remarked, “We are getting increasingly aggressive and adept at ridding the microcap marketplace of dormant shells within a year of the companies becoming inactive.”  Many market participants see the SEC’s failure to pursue corporate hijackers of dormant shells as one of the greatest enforcement failures of the penny stock markets in the last decade. We have identified hundreds of hijacked tickers and/or companies involving penny stocks with minimal effort yet these companies are illegally acquired and have been used in schemes robbing investors of millions of dollars and eliminating existing stockholders of their holdings.
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On February 16, 2016 the Securities and Exchange Commission (SEC) charged Wade James Lawrence, a former investment adviser with two dually-registered securities firms, with executing unauthorized trades in his clients’ investment accounts and defrauding other individuals who tried to invest their money with him.

The SEC’s complaint, filed in federal court in Texas, alleges that:

• Starting in 2010 while employed at the first firm, Lawrence executed unauthorized trades in speculative, high-risk securities in several of his clients’ accounts.
• After joining the other firm in August 2011, Lawrence continued to place unauthorized trades of risky securities in his clients’ accounts.
• Between 2010 and 2013, Lawrence’s clients lost at least $2 million due to his improper and unauthorized trading.
• Lawrence fraudulently obtained approximately $480,000 from at least five individuals by claiming that he could trade securities for them at prices lower than those available to the general public and in securities that were not otherwise available to individual investors.
• Immediately after receiving the investors’ funds, Lawrence used most of the money for personal expenditures and to repay personal debts, while returning a portion of the funds disguised as investment profits.

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The Securities and Exchange Commission (SEC) charged an unregistered broker in Oceanside, California with fraudulently selling purported stock in a medical device company and pocketing investors’ money.

On February 10, 2016 the SEC filed fraud charges alleging that Gregory Ruehle raised approximately $1.9 million from more than 100 investors but never delivered or transferred the securities as promised while using the money to pay gambling debts among other personal expenditures.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California yesterday announced criminal charges against Ruehle. Read More

On February 11, 2016 the Securities and Exchange Commission (SEC) charged Jilbert Tahmazian, a lawyer licensed in the state of California, with fraud for engaging in a prime bank scheme.

Prime bank schemes involve the offer and sale of fictitious investment programs claiming that investors’ funds will be used to purchase and trade “prime bank” financial instruments on clandestine overseas markets to generate huge returns in which the investor will share. However, neither these instruments, nor the markets on which they allegedly trade, exist.

The SEC alleges that Tahmazian and his co-schemer offered and sold bogus investment contracts purporting to provide investors access to “a Financial Instrument issued by a top rated financial institution/top 50 bank with a minimum face value of $100 million” and “designated toward a 40-week private placement program.” Read More

On February 10, 2016, the Securities and Exchange Commission (SEC) charged Frank Lleras and two Charlotte, North Carolina-based companies that he controls, Optimum Income Property, LLC and Optimum Property Investments, LLC, with conducting an offering fraud lasting more than two years that raised more than $2.9 million from at least 25 investors from the Dominican Republic.

In a parallel action, the U.S. Attorney’s Office for the Western District of North Carolina announced that Lleras has pled guilty to securities and wire fraud. Read More

The Securities and Exchange Commission (SEC) announced that on February 9, 2016, the Court for the Southern District of New York entered a final judgment against Defendants Moazzam “Mark” Malik, a Pakistani citizen and New York City resident, and his purported hedge fund, American Bridge Investment Group, LLC, d/b/a Wolf Hedge LLC (“ABIG”). The final judgment enjoins defendants from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, enjoins Malik from violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and enjoins defendants from soliciting additional investors or accepting additional investments from existing investors. The final judgment further orders defendants to pay disgorgement, on a joint and several basis, of $1,005,244.70 plus prejudgment interest of $93,099.94, and imposes civil money penalties of $2,850,000 against Malik and $13,775,000 against ABIG. Read More

The Securities and Exchange Commission (SEC) charged two penny stock issuers and their principals with fraud for disseminating false and misleading press releases and other related documents about purported involvement in the marijuana industry.

The SEC’s complaint against Fortitude Group, Inc. and its CEO, Thomas Parilla, filed in federal court in Pennsylvania on February 29, 2016, alleges that:

• Between February and March 2014, Fortitude and Parilla made materially false and misleading statements in various publicly-disseminated press releases and a financial report concerning Fortitude’s purported efforts to enter into the rapidly growing legal marijuana business industry.
• The press releases falsely described Fortitude as having successful marijuana-related partnerships and operations, including claims about its issuance of a Discover-branded debit card and distribution of vaporizers to marijuana dispensaries.
• Fortitude and Parilla falsely represented in a company financial report that Fortitude was earning revenue from the purported marijuana business.

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The Securities and Exchange Commission (SEC) announced that on January 20, 2016, the Court for the Eastern District of New York entered a final judgment against defendant Martin Weisberg. The final judgment imposes on Weisberg a permanent injunction against future violations of certain antifraud provisions of the federal securities laws and bars Weisberg from serving as an officer and director of a public company.

The SEC’s complaint, filed on October 19, 2007 and amended on March 23, 2015, charged Weisberg with making fraudulent misrepresentations about an Israeli investor group in corporate filings and other documents of two public companies – Xybernaut Corporation and Ramp Corporation. Weisberg, the securities counsel to Xybernaut and Ramp, prepared the filings and also served as a director of Xybernaut. Read More

The Securities and Exchange Commission (SEC) announced that on February 5, 2016, a jury in federal court in Philadelphia returned a guilty verdict against Pennsylvania attorney Herbert Sudfeld (“Sudfeld”) in a criminal trial prosecuted by the U.S. Attorney for the Eastern District of Pennsylvania. The jury convicted Sudfeld of insider trading along with three counts of making a false statement. U.S. District Court Judge Cynthia Rufe has not yet set a date for sentencing.

The SEC previously charged Sudfeld with insider trading in a civil action filed July 16, 2015. The criminal case is based on the same conduct underlying the SEC’s action. The SEC’s complaint alleged that Sudfeld illegally traded in advance of the 2011 announcement of a $760 million merger of Harleysville Group, Inc. and Nationwide Mutual Insurance Company, which sent the price of Harleysville stock up 87%. Read More

On February 3, 2016, the Securities and Exchange Commission (SEC) charged a lending company in Manhattan, American Growth Funding II LLC and its owner, Ralph Johnson, with repeatedly lying to investors who purchased high-yield securities. The SEC also charged the brokerage firm that acted as the placement agent, Portfolio Advisors Alliance, and its president Kerri Wasserman and owner Howard Allen.

American Growth Funding II raises capital from investors to provide loans to businesses. The SEC alleges that American Growth Funding II and Ralph Johnson promised investors 12% annual returns and falsely claimed its financial statements were being audited each year. The SEC’s fraud complaint also claims that American Growth Funding II made misrepresentations in offering documents about its management and concealed details about deteriorating loan values that could imperil full payment of the promised returns to investors. Portfolio Advisors Alliance, Howard Allen, and Kerri Wasserman are alleged to have known the offering documents were inaccurate, yet continued using them to solicit sales of American Growth Funding II securities. Read More

The Securities and Exchange Commission (SEC) announced that it entered into a settlement agreement, subject to court approval, with Ukrainian-based Concorde Bermuda Ltd. (Concorde) in a case alleging a scheme to trade on hacked news releases. On August 10, 2015, the SEC filed a civil action in the U.S District Court for the District of New Jersey, and the court entered an asset freeze and other emergency relief against Concorde, among others. On August 23, 2015, the SEC amended its complaint to add two defendants, bringing the total to 34.

Concorde is alleged to have made approximately $3.6 million buying and selling stock on the basis of hacked press releases stolen from two newswire services between 2010 and 2014, and to have made additional profits trading on press releases stolen from a third newswire service in 2015. Read More

The Securities and Exchange Commission (SEC) announced that on January 20, 2016, the Court for the District of Massachusetts entered a final judgment against defendant Shirmila Doddi, permanently enjoining her from future violations of Section 10(b) and Rule 10b-5. The final judgment also orders further proceedings for the purposes of determining the appropriate amount of disgorgement, prejudgment interest thereon, and civil penalties. Doddi consented to the final judgment.

In its insider trading complaint, the SEC alleged that, in 2011, Vlad Spivak, then a resident of Medford, Massachusetts, traded in the securities of American Dental Partners, Inc. (“ADPI”) on the basis of material nonpublic information that he received from his romantic partner, Shirmila Doddi. Read More

The Securities and Exchange Commission announced that on January 26, 2016, the Honorable Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California entered a final judgment against Andrew Miller, the former CEO of Silicon Valley-based technology firm, Polycom Inc.

Without admitting or denying the allegations in the complaint, Miller consented to the entry of the final judgment that: Read More

On January 21, 2016, the Securities and Exchange Commission (SEC) filed an emergency civil action against a Dallas company, Sedona Oil and Gas Corporation and its president, Kenneth “Kenny” Crumbley, Jr., to stop their allegedly fraudulent offer and sale of oil and gas investments. The court entered a temporary restraining order halting the offering, as well as orders appointing a receiver over, and freezing, the defendants’ assets at the request of the SEC.

The SEC’s complaint, which was unsealed by the court on January 26, 2015 alleges that since at least June 2013, defendants have raised approximately $3.3 million from 55 investors through the fraudulent offer and sale of securities in six oil and gas investment programs. According to the complaint, defendants’ offering materials represented that 100% of investor funds would be used to cover expenses associated with drilling, testing, and completing wells located in Texas, Tennessee, Kentucky. But the SEC alleges that defendants only spent a portion of investor funds for these purposes, and instead spent more than 60% of these funds on undisclosed and unapproved expenditures such as the daily operating expenses of Sedona Oil, defending a lawsuit by an earlier investor, repayment of loans from another Crumbley-controlled company, personal expenses of Crumbley and his family, and Ponzi payments to investors in earlier offerings. Read More

The Securities and Exchange Commission (SEC) obtained an asset freeze and other ancillary relief against Marquis Properties, LLC, and its CEO/President Chad Deucher for orchestrating a $28 million Ponzi scheme that defrauded more than 250 investors throughout the United States. The complaint also names Marquis’ Executive Vice President, Richard (“Rick”) Clatfelter as a defendant.  Read More

On October 4, 2011, the Securities and Exchange Commission (SEC) filed a complaint in United States District Court for the Northern District of New York charging StratoComm Corporation, its CEO Roger Shearer, and its former Director of Investor Relations, Craig Danzig, with violating the antifraud provisions of the securities laws and with illegally selling securities in unregistered transactions. On October 3, 2011, the SEC filed a complaint in United States District Court for the Southern District of Florida alleging that attorney Stewart Merkin, StratoComm’s outside counsel, also committed securities fraud.

The SEC’s complaint filed in Albany, New York alleges that StratoComm, acting at Shearer’s direction and with Danzig’s assistance, issued and distributed public statements falsely portraying the company as actively engaged in the manufacture and sale of telecommunications systems for use in underdeveloped countries, particularly Africa. In reality, the company had no product and no revenue. The SEC’s complaint also alleges that StratoComm, Shearer and Danzig sold investors approximately $3 million worth of StratoComm stock in unregistered transactions. Shearer used much of that money for his own purposes, including paying a substantial part of the restitution he owed in connection with his guilty plea in a prior criminal proceeding. Read More

Last fall, we wrote about a highly unusual cash dividend paid by penny stock Calissio Resources Group, Inc. (CRGP).  The payment process was so badly botched it resulted in a Financial Industry Regulatory Authority (FINRA) U3 trading halt that sent the stock to the Grey Market, and prompted a lawsuit by COR Clearing, LLC, which claimed it had been cheated out of $4 million.  Much has happened since that time, and the drama continues.  While some important points have been clarified, others have not, and no resolution is in sight. This debacle comes as no surprise in light of the fact that CRGO was a former dormant ticker that slithered into the public markets without oversight.

To recap:  On June 16, 2015, Calissio, a purported mining company with properties in Mexico, 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.  As we explained in our earlier piece, although the company described the cash dividend as a regular quarterly distribution, at all times between the declaration date and the ex dividend date it qualified as a special dividend:  one worth more than 25 percent of the value of CRGP’s stock.

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On January 13, 2016, the United States Court of Appeals for the Eleventh Circuit affirmed entry of summary judgment in favor of the Securities and Exchange Commission (SEC) on its claims of securities fraud against defendant Stewart Merkin (“Merkin”), an attorney in Miami, Florida.

The SEC brought a civil action against Merkin on October 3, 2011, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder. The Complaint alleged that on four occasions, Merkin, an experienced attorney, wrote letters falsely stating that his client, StratoComm Corporation (“StratoComm”), was not under investigation for violations of the securities laws. The Complaint further alleged that Merkin knew that his statements were false because, at the time that he wrote each letter, he was representing StratoComm and several individuals in the SEC’s investigation into the company’s activities. The SEC’s Complaint alleged that Merkin authorized his letters to be posted on the website maintained by Pink Sheets LLC (currently OTC Markets Group Inc.) for viewing by the investing public. Read More