Securities Lawyer 101 Blog

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined New York-based Brown Brothers Harriman & Co. (Brown Brothers Harriman) $8 million for substantial anti-money laundering compliance failures including, among other related violations, its failure to have an adequate anti-money laundering program in place to monitor and detect suspicious penny stock transactions. Brown Brothers Harriman also failed to sufficiently investigate potentially suspicious penny stock activity brought to the firm’s attention and did not fulfill its Suspicious Activity Report (SAR) filing requirements. Read More

Securities Lawyer 101 Blog

On January 9, 2014, FINRA submitted proposals to the SEC to amend FINRA Rule 5110. FINRA’s proposals seek to:

(i) narrow the definition of “participation or participating in a public offering;”

(ii) modify the lock-up restrictions to exclude certain securities acquired or converted to prevent dilution to stockholders; and

(iii) clarify that the information requirements are applicable only to relationships with a “participating” FINRA member. Read More

Securities  Lawyer 101 Blog

On February 3, 2014, the Securities and Exchange Commission (“SEC”) announced the filing of stop order proceedings against 20 purported mining companies for providing false information in their S-1 registration statements. Of the 20 S-1 registration statements, 18 were opined upon by the same attorney, Diane Dalmy, who is the subject of a pending SEC  proceeding.

More than one year prior, Promotion Stock Secrets published a featured report in which it noted blazing red flags of fraud in the same 20 S-1 registration statements. Read More

Securities Lawyer 101 Blog

On January 31, 2014, the Securities and Exchange Commission charged two Florida college professors with perpetrating a complex naked short selling scheme for more than $400,000 in illicit profits. Read More

Securities Lawyer 101 Blog

The Multijurisdictional Disclosure System was adopted in July 1991 by the U.S. Securities and Exchange Commission (“SEC”) and the Canadian Securities Administrators to facilitate cross-border public offerings of securities between the U.S. and Canada. The Multijurisdictional Disclosure System provides Canadian issuers with appealing options for accessing the U.S. capital markets and completing going public transactions. Read More

Securities Lawyer 101 Blog

On January 27, 2014, the Securities and Exchange Commission (the “SEC”) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of trading in the securities of OLIE, Inc. (“OLIE”), of Vancouver, Canada, and of Hi Score Corp. (“Hi Score”), of Sunrise, Florida, commencing at 9:30 a.m. EST on January 27, 2014, and terminating at 11:59 p.m. EST on February 7, 2014.  The SEC temporarily suspended trading in Hi Score and OLIE due to a lack of current and accurate information about the companies.  It is not yet known whether the suspension will be followed by an SEC Enforcement action. Read More

On January 24, 2014, a Texas court sentenced David Kevin Lewis, 52, to 30 years in federal prison for 23 counts of securities fraud and conspiracy and ordered to pay approximately $2.5 million in restitution, following his conviction.

Lewis was the chairman and director of field operations of Always Consulting, Inc., an oil and gas well company in Richardson, Texas. Bruce Kyle Griffith, 59, of Dallas, and Thomas Alden Markham, Jr., 63, of Plano, Texas, each pleaded guilty to their roles and were sentenced in December 2013 to 100 months and 21 months, respectively. Griffith, who was the president and CEO of Always Consulting, pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud. Read More

Securities Lawyer 101 Blog

Last week, Barry Minkow pleaded guilty to embezzling funds from the San Diego Community Bible Church, a U.S. attorney’s statement said.  Minkow was already serving a five-year sentence for securities fraud.

According to the plea agreement, Minkow opened unauthorized church bank accounts, forged signatures on checks and used congregation donations as his own personal piggy bank.  Read More

Securities Lawyer 101 Blog

On January 23, 2014, the Securities and Exchange Commission (the “SEC”) issued new guidance concerning Rule 506(c) in its Compliance and Disclosure Interpretations. In the Compliance and Disclosure interpretations, the SEC addresses Rule 506 offerings that commenced prior to Rule 506(c)’s effectiveness on September 23, 2013. Read More

Securities Lawyer 101 Blog

The Latin phrase Caveat Emptor means “let the buyer beware.”  The application of the Caveat Emptor principle is most often applied in the sale of property where a purchaser has a specific period of time to discover any defects.  After that period of time expires, the buyer accepts any defects he failed to detect.  In the offer and sale of securities, the Caveat Emptor theory is reversed. Read More

Securities Lawyer 101 Blog

On January 24, 2014, the Securities and Exchange Commission (“SEC”) announced that a Massachusetts state court judge sentenced Massachusetts resident Steven Palladino to a prison term in a criminal action filed by the Suffolk County (Massachusetts) District Attorney. The criminal action against Palladino and his company, Massachusetts-based Viking Financial Group, Inc., was initially filed in March 2013 and involves the same conduct alleged in a civil securities fraud action brought by the Commission in April 2013.

Suffolk Superior Court Judge Janet Sanders sentenced Palladino, of West Roxbury, Massachusetts, to serve a prison term of 10-12 years, followed by a probationary period of five years, and to pay restitution to victims, for crimes that he committed in connection with a Ponzi scheme perpetrated through Viking.

At the same hearing, Palladino pled guilty to criminal charges that included conspiracy, being an open and notorious thief, larceny, and larceny from elderly person(s). Viking also pled guilty to related charges and was sentenced to a probationary period of five years and ordered to pay restitution to victims. The Court set a further hearing for March 7, 2014 to determine, among other things, the amount of restitution to be paid to victims.

The SEC previously filed an emergency action against Viking and Palladino (collectively, “Defendants”) in federal district court in Massachusetts. In its complaint, the Commission alleged that, since April 2011, Defendants misrepresented to at least 33 investors that their funds would be used to conduct the business of Viking – which was purportedly to make short-term, high interest loans to those unable to obtain traditional financing. The Commission also alleged that Palladino misrepresented to investors that the loans made by Viking would be secured by first interest liens on non-primary residence properties and that investors would be repaid their principal, plus monthly interest at rates generally ranging from 7-15%, from payments that borrowers made on loans. The complaint alleged that, in truth, Defendants made very few real loans to borrowers, and instead used investors’ funds largely to pay earlier investors and to pay for the Palladino family’s substantial personal expenses, including cash withdrawals, gambling debts, vacations, luxury vehicles and tuition.

The Commission first filed this action on April 30, 2013, seeking a temporary restraining order, asset freeze, and other emergency relief – which the Court granted. On May 15, 2013, the Court also issued an escrow order, which ordered Defendants to deposit all funds and assets in their possession into an escrow account. The asset freeze and escrow order have remained in effect at all times since April 30, 2013 and May 15, 2013, respectively. On July 15, 2013, the Court held that Defendants’ conduct violated securities anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. On November 18, 2013, the Court entered orders that enjoined Defendants from further violations of the antifraud provisions of the securities laws and ordered them to pay disgorgement of $9,701,738, plus prejudgment interest of $122,370.

On September 4, 2013, the Commission filed a motion for contempt against Palladino for violations of the asset freeze and the escrow order. The motion alleged that Palladino violated the asset freeze by transferring three vehicles that he owned (solely or jointly with his wife) into his wife’s name and using the vehicles as collateral for new loans – effectively cashing out the equity in these vehicles. The motion also alleged that Palladino violated the escrow order by failing to deposit all cash in his possession into the escrow account. On November 15, 2013, the Court held Palladino in contempt and ordered that he restore ownership of the vehicles that he had transferred into his wife’s name. Subsequently, Palladino restored ownership of two of the vehicles but has failed to restore ownership of one vehicle. As a result, the Court refused to dismiss the contempt finding against him at hearings on December 3, 2013 and January 17, 2014. The Court has set a further hearing date of February 20, 2014 to address, among other things, whether Palladino remains in contempt.

Securities Lawyer 101 Blog

On January 23, 2014, the Securities and Exchange Commission (“SEC”) announced that a Staten Island man who was a SEC enforcement target was held in contempt of court and arrested for failing to comply with subpoenas requiring him to produce documents and give testimony. Read More

Securities Lawyer 101 Blog

Kimberly Fontenot of Texas has been convicted of defrauding clients of her so-called investment advisory firm, Stellar Grants Inc. According to the FBI, Fontenot lured potential clients by falsely claiming to know numerous wealthy investors located throughout the United States. She offered access to these wealthy investors, whom she called her “angel investors,” to potential Stellar Grants clients in exchange for money. Read More

Securities Lawyer 101 Blog

On January 16, 2014, a federal grand jury in San Jose returned a 12-count indictment charging two antique dealers with conspiracy to commit mail fraud and wire fraud, mail fraud, and wire fraud relating to a multi-million-dollar investment scheme, announced United States Attorney Melinda Haag, Federal Bureau of Investigation Special Agent in Charge David J. Johnson, and United States Postal Inspection Service Acting Inspector In Charge Rafael Nunez. Read More

Securities Law 101 Blog

On January 14, 2014, the Securities and Exchange Commission filed a civil injunctive action in federal district court Milwaukee, Wisconsin, charging Christopher Hohol (“Hohol”) and Brian Poshak (“Poshak”), formerly the senior vice president for operations and the controller, respectively, of Veolia Special Services (“Special Services”), a fourth-tier United States subsidiary of Veolia Environnement S.A. (“Veolia”), a multinational utilities and environmental services company, with falsifying books, financial records, and accounts and circumventing internal controls in order to overstate Special Services’ earnings before taxes (“EBT”) over a period of at least three years.

According to the SEC, beginning no later than January 2008 and continuing through February 2011, Hohol and Poshak, among other things, made and caused others to make false accounting entries in Special Services’ general ledger. Read More

Securities Lawyer 101 Blog

On January 10, 2014, the Securities and Exchange Commission (“SEC”) announced a $300,000 settlement against Belmont Partners LLC, an alleged “shell packaging” company and Joseph Meuse, its Chief Executive Officer. Belmont and Meuse were charged with facilitating a penny stock scheme involving a reverse merger.  According to the SEC, Virginia-based Belmont Partners LLC and its CEO Joseph Meuse are in the business of identifying and selling public shell companies for use in reverse mergers. Belmont’s marketing materials reflect it assisted more than 100 companies complete reverse mergers. Many of these reverse mergers involved China based penny stock issuers.  Public shell companies for reverse merger transactions sell for as much as $450,000 each. Read More

Securities Lawyer 101 Blog

The Financial Industry Regulatory Authority (“FINRA”) recently suspended and fined Advisor Thomas Mikolasko, (“Mikolasko”) of HFP Capital Markets LLC (“HFP”).  According to FINRA, Mikolasko made material misrepresentations and omissions of material fact in connection with $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (“MMM”) in a private placement offering. Read More

Securities Lawyer 101 Blog

On October 23, 2013, the Securities and Exchange Commission (“SEC”) proposed Regulation Crowdfund, setting forth the rules governing the offer and sale of securities through crowdfunded offerings, pursuant to Title III of the Jumpstart Our Business Startups Act (“JOBS Act”).

Within days, FINRA published its proposed rules for the licensing and regulation of “funding portals.” The Read More

Securities Lawyer 101 Blog

On October 23, 2013, the Securities and Exchange Commission (“SEC”) proposed Regulation Crowdfund, setting forth the rules governing the offer and sale of securities through equity crowdfunded offerings, pursuant to Title III of the Jumpstart Our Business Startups Act (“JOBS Act”). Read More

Securities Lawyer 101 Blog

The holidays are over.  As the new year begins, investors find themselves bombarded with media coverage related to the legalization of marijuana for medical and recreational purposes in a number of states. Along with the increase in media coverage have come active promotions of marijuana-related penny stocks.  So far, all of the public companies associated with medical or recreational weed are OTC issuers.

Presumably the reason for this is that the sale of marijuana for any purpose is still illegal under federal law.  In the absence of exchange-listed alternatives, investors interested in the sector have turned to these OTC microcaps.

Volume and price for some thinly traded marijuana-related companies increased dramatically despite their volatility.

This week FINRA published a risk warning about pot stocks, noting that with “medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention—including the attention of scammers”.

Last September, FINRA cautioned investors about the growing number of pump-and-dump schemes involving penny stocks that purport to be in the high-profile medical marijuana business.  While these scammers urge investors to buy, and tout the potential of their fabricated or exaggerated medical marijuana business and/or opportunities, they dump their own shares into the public markets.

Scammers pushing medical marijuana scams use the same tactics as all stock touts.  These include hard mailers, spam and other email messages, text messages, webinars, infomercials, tweets, message board and blog posts.

How the Touts Do It

Scammers use the same techniques used in any other penny stock scam to promote their medical marijuana plays.  These include sponsored links, investment profiles and spam email, including one promotional piece claiming the stock “could double its price SOON” and another asserting the stock was “poised to light up the charts!”  Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.  One penny stock scam company issued more than 30 press releases announcing its medical marijuana business in the first half of 2013, while touting its prospects and growth potential.  According to FINRA, these releases touted “rosy financial prospects and the growth potential of the medical marijuana market”.

In its alert, FINRA published a list of “Smart Tips” to help investors to avoid medical marijuana scams.  FINRA’s Smart Tips are set forth below.

Smart Tips – To avoid potential marijuana-related stock scams:

Ask: “Why me?” – Why would a total stranger tell you about a really great investment opportunity?  The answer is there likely is no true opportunity.  In many scams, those who promote the stock are corporate insiders, paid promoters or substantial shareholders who profit handsomely if the company’s stock price goes up.

Consider the source – It’s easy for companies or their promoters to make exaggerated claims about lucrative contracts, the company’s revenue, profits or future stock price.  Be skeptical about companies that issue a barrage of press releases and promotions in a short period of time.  The objective may be to pump up the stock price.  Likewise, be wary of information that only focuses on a stock’s upside with no mention of risk.

Do your research – Search the names of key corporate officials and major stakeholders, as well as the company itself.  Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags.  For example, the CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history.  The former CEO of a similar company was recently indicted for his role in a multi-million dollar mortgage-based Ponzi scheme.  Check the Federal Bureau of Prisons Inmate Locator to determine if a solicitation is coming from someone who has served time in a federal prison. Many states also have similar prisoner locator systems.

Know where the stock trades – Most unsolicited spam recommendations involve stocks that do not trade on The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange (NYSE Euronext) or other registered national securities exchanges.  Instead, these stocks may be quoted on an over-the-counter (OTC) quotation platform like the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc.

Generally, there are no minimum quantitative standards that a company must meet to have its securities quoted in the OTC market.

Many of the securities quoted in the OTC market don’t have a liquid market.  They’re infrequently traded and can move up or down in price substantially from one trade to the next.  This may make it difficult to sell your security at a later date.

Read a company’s SEC filings, if available – Most public companies file reports with the Securities and Exchange Commission (SEC).  Check the SEC’s EDGAR database to find out whether the company files with the SEC.  Read the reports and verify any information you have heard about the company.

Remember that just because a company has registered its securities or has filed reports with the SEC does not mean it will be a good investment—or the right fit for you.  Also, be aware that not all financial information filed with the SEC, or published elsewhere, is independently audited.  Unaudited financials are just that—not reviewed by an independent third party.

Many OTC companies are not SEC reporting issuers; most of the currently popular marijuana companies fall into that category.  Rather than filing a registration statement with the SEC and then submitting periodic reports, they follow OTC Markets’ “alternative reporting standard,” posting often-inadequate reports on the OTC Markets website.

Be wary of frequent changes to a company’s name or business focus – Name changes and the potential for manipulation often go hand in hand.  One low-priced stock now claiming to be in the medical marijuana business has had four name changes in the past 10 years.  Another company switched from the coffee business to focus “on the rapidly emerging medical marijuana industries.”  Name changes can turn up in company press releases, internet searches and, if the company files periodic reports, in the SEC’s EDGAR database.

Check out the person selling the stock or investment – A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with FINRA, the SEC and a state securities regulator—depending on the type of business the firm conducts.  To check the background of a broker or investment adviser, use FINRA’s BrokerCheck.  You can also call your state securities regulator.  When using BrokerCheck, research the name of the person who contacted you, as well as the name of the firm they claim to work for.  Verify the caller’s identity using the phone number on the firm’s website or in a publicly available telephone directory.

If a Problem Occurs – If you believe you’ve been defrauded or treated unfairly by a securities professional or firm, file a complaint.  If you suspect that someone you know has been taken in by a scam, send a tip.

In the past week, following the first sales of recreational pot in Colorado, even CNBC dedicated some air time to a couple of the OTC marijuana-related companies. They and their peers skyrocketed, and then dropped dramatically.  It’s a good time for investors and potential investors to be careful, and heed FINRA’s words of caution.

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

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com

Securities Lawyer 101 Blog

Regulation Crowdfunding provides for two types of intermediaries, the registered broker-dealer and the funding portal.  Broker-dealers do not need to register in order to engage in crowdfunding offerings, but their activities in this area are governed by Read More

Securities Lawyer 101 Blog

On January 9, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it ordered two St. Louis-based broker-dealers, Stifel, Nicolaus & Company, Incorporated and Century Securities Associates, Inc., to pay combined fines of $550,000 and a total of nearly $475,000 in restitution to 65 customers in connection with sales of leveraged and inverse exchange-traded funds (ETFs).  Stifel and Century are affiliates and are both owned by Stifel Financial Corporation. Read More

Securities Lawyer 101 Blog

On January 4, 2014, the Securities and Exchange Commission (“SEC”) announced its examination priorities for 2014, which cover a wide range of issues at financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents.

Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations stated, “We are publishing these priorities to highlight areas that we perceive to have heightened risk… Read More

Securities Lawyer 101 Blog

A fundamental principle of the federal securities laws is that the purchase or sale of a security must be subject to a registration statement under the Securities Act of 1933 (“Securities Act”) or exempt from registration.  Section 4(a)(2) provides an exemption from securities registration for transactions by an issuer not involving a public offering. Rule 506 of Regulation D under the Securities Act provides an Read More

Securities Lawyer 101 Blog

Recently, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued guidance concerning Rule 105 (“Rule 105”) of Regulation M of the Securities Exchange Act of 1934, as amended. Rule 105 prohibits the purchase of securities in a secondary offering if the purchaser has a short position of the same securities established during a specified restricted period. A short sale is defined as the “sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.” The SEC’s guidance and recent cases indicate that the SEC will likely direct its attention to Rule 105 violations in firm examinations and SEC investigations. Read More