Category: Fraud

See my earlier post on this lawsuit for background on this lawsuit. Since that post there have been four documents filed with the court. In reverse chronological order:

July 7, 2012: Plaintiff’s notice of dismissal (pdf)
June 28, 2012 Amended complaint (pdf)
June 27, 2012 Plaintiff’s response to defendant’s motion to dismiss (pdf)
June 26, 2012 Order on scheduling conference (pdf)

The order on the scheduling conference is unimportant — it just sets a date for the scheduling conference wherein the parties decide on the schedule for the trial; that was set for August 27th.

The plaintiff’s response to the motion to dismiss is simply the plaintiff’s argument for why the case should not be dismissed, in which they argue that they have alleged the wrongdoing with enough specificity and that they have done enough to connect defendant Mesa Marketing (the only respondent among the defendants) to the wrongdoing. This is an expected response to defendant Mesa Marketing’s motion to dismiss.

The amended complaint appears to add some details to the previously submitted initial complaint and amended complaint.

The plaintiff’s notice of dismissal is confusing to me. I really do not understand why they would dismiss the case now. From the notice:

 8. This dismissal is without prejudice to re-filing as to Plaintiff’s claims against Defendants for misappropriation of Plaintiff’s trade secrets, and violations of the Stored Wire and Electronic Communications Act, 18 U.S.C. §§ 2701-2710, and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and for any other claim that Plaintiff has, known or unknown, against Defendants.

 

Disclaimer: No relationship with any parties in the suit. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

[Note: As of 7/11/2012 Awesomepennystocks.com has been removed from the SpamHaus DBL]

Many people were surprised when Awesomepennystocks.com and the related group of 20 or more websites stopped promoting pump and dump stock Great Wall Builders (GWBU). The last email I received from Awesomepennystocks.com was at 2:30pm EST on June 24th. Just yesterday I saw a mention of a blog post by a noted spam fighter posted on the iHub Fraud Research Team / Due Diligence message board (the only good message board on iHub). The blog post is the SpamBouncer MainSleaze blog.

The post itself is fairly ordinary — a spam fighter indicated that an email address used only to check for spam received email from Awesomepennystocks.com. The blog post is also fairly old: it was posted on June 5th. The comments are the interesting part. Andrew Barrett, a higher-up at iContact (Director, ISP Relations & Deliverability) replied the same day, saying:

 Thanks for the heads-up, Catherine. I’m in Berlin at the moment, but I’ll have our compliance team drop a hammer.

Then there are a few comments from “centroazteca”, purportedly written on behalf of Awesomepennystocks.com (Centro Azteca S.A. is the entity listed at the bottom of their emails). Those comments are quite funny, especially where “centroazteca” writes, “We work with large companies such as Goldman Sachs, and only profile legitimate small companies who are looking to succeed.”

The first reply from “centroazteca” was posted on June 23rd, presumably as the people behind Awesomepennystocks.com realized that Spamhaus Block List was about to add their domain name to its list of domain names that it recommends that email providers not accept emails from (see an explanation of how blocklists work). On June 24th, Andrew Barrett posted the following comment on the blog post:

Hi Catherine,  I have killed the account. I apologize for the length of time it has taken to correctly and permanently remediate the issue. I will be working with management to identify all the points at which our processes broke down, and to correct them.  All the best, Andrew.

The blogger then asked why “centroazteca” had shown up three weeks after the blog post to comment, and Barrett responded by saying:

Well, I hate to name names, but it rhymes with “Spamhaus”

Tom Mortimer of Spamhaus replied to that comment (bold added):

SBL listings are public record, Andrew. It’s quite alright with us if you name names, although we do appreciate the discretion on other issues.  Speaking of which, there were some other issues than simple spam in this case. I can’t go into detail, but suffice it to say that this was most certainly a customer that no reasonable ESP or ISP would want on their network. :/

Right before posting this blog post, I checked the Spamhaus block list and found that AwesomePennyStocks.com is listed as being on the list (marked as a spammer). However, none of their other domain names or IP addresses of which I am aware appear on the list. Check here to see if it is still on the list. I think it is likely that having their main domain name added to the Spamhaus block list forced Awesomepennystocks.com to change internet hosting providers and judging from Barrett’s comments it is likely they are being forced to find a new email service provider.

A cursory check of a few of the websites of Awesomepennystocks.com shows that the welcome emails they are currently sending to new subscribers are being sent using Aweber.com, which is further evidence that iContact is no longer doing business with them.

Consider the timing of the last pump email on GWBU and the comment from Andrew Barrett. I do not think it is a coincidence that Awesomepennystocks.com and related websites have not sent any emails since Barrett wrote that he had “killed the account”. This is an interesting development and may mark a turning point in the effort to fight pump and dumps.

Disclaimer: No relationship with any parties named above (except that I trade pump and dumps) and no positions in any stocks or funds mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

 

 

In terms of how long it has been promoted, how long the stock did not go down, and the likely profits of insiders who paid for the stock promotion, UAPC has been one of the more successful stock promotions of 2012. As with all stock promotions, however, the end result is that investors get killed, the insiders who paid for the stock promotions make easy money by selling their shares at inflated prices, and the company never achieves any of the things the stock promoters said it would.

UAPC was featured as Chuck Jaffe’s stupid investment of the week last week. The best part was the response from Barry Gross, who handles the company’s investor relations:

 “We would not want anyone to invest on the basis of that [flyer],” Gross said. “But you would be amazed at how many people have received it — or seen something written about us — called us, been told that what they’re looking at is fraudulent and not a good or fair representation of the company, and then they say ‘But where can I buy shares.?’”

This kind of mindset is why stock promotions work. People believe too easily in the beautiful lies told by the stock promoters.

(click chart to embiggen)

Here is what one of the idiots who bought the stock had to say about UAPC (emphasis mine):

 He understood that the “newsletter” he was looking at was hype and even figured — correctly as it turns out — that by the time he was looking at the pamphlet, the stock had already popped and the buzz might be wearing off.  That said, he felt that if he could buy the company back in the $1 range talked about in the pamphlet, he would benefit when the buzz is gone and the intrinsic value of the company is left for the market to see.  “United American really does seem to have locations on the biggest oil deposit in the United States,” Richard wrote, “and the stock is cheap, so what is the harm in taking a flyer? If they hit on one of the properties, wouldn’t the stock do just what [the letter] says?”

The problem is that the stock was not cheap. The stock price doesn’t matter. Stocks are like pies — what matters is not the price per slice (they can be arbitrarily large or small) but the price of the whole pie. With over 45 million shares outstanding as of May and a price around $1, UAPC had a market capitalization of over $45 million despite having almost no assets and no revenues. Even without the pump such a company (unless it was led by someone with tons of experience) wouldn’t be worth $1 million, let alone $45 million.

If you ever have the urge to invest in a penny stock that is touted by a stock promoter, please give me a call. I would be glad to write you a very, very cheap one-year European call option on the stock.

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned (unfortunately — I would’ve loved to short UAPC and I was previously short but my brokers have not had shares to short for over a month). This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

While I remain primarily a short seller, I also buy pump & dumps sometimes. However, I usually only hold for short periods of time — minutes or hours. While the vast majority of traders of penny stocks lose money (and most of that money is made by the stock promoters themselves, and a small bit goes to short sellers), sometimes buying penny stocks can be lucrative — but only if you are quick and know what you are doing. The chance of outsized gains, no matter how small, leads to a sizeable group of traders who try to make money by buying stock promotions. So while a large stock promotion budget tells me that there are holders of a huge number of shares who want to sell, traders who look to buy stock promotions will see a large budget (not incorrectly) as a sign that more people will receive the stock promotion and buy, sending the price up. Most pump and dumps never go up much, if at all, but that doesn’t keep people from buying them.

Of course, if you are a small shareholder of a penny stock company and want to get the share price to go up, but can’t afford to pay for a stock promotion, what you could do is just put together a fake promotion and then post it on Twitter and internet message boards like iHub (InvestorsHub, the cesspool of the internet). If you convince enough people that the pump is real, you could get the price of your stock to move up. Of course, the SEC might come knocking on your door if you are successful, accusing you of market manipulation.

I came across this post on iHub earlier today and was amused by how badly faked the ‘hard mailer’ was. (For those who don’t know, that is the common term for pump and dump brochures sent through postal mail rather than email). I looked at the image and it was obvious that rather than even printing out and then scanning the faked mailer, the person had simply used image editing software to paste in new text over a scan of a different mailer. See the full image. While the image was obviously faked (notice the lack of any sort of smudge except in a areas where there is no text; also note the different font used for the company name and ticker in the disclaimer at the bottom), I thought it would make for a nice test of image error level analysis.

Here is what that shows us on a small section of the disclaimer (see original at the FotoForensics website):

What this analysis essentially does is it degrades the image down to show just the digital noise. In an unedited image the noise will be random (you will be able to notice original shapes in the image but around those shapes there should be just random noise). An image that combines two images of different quality levels will allow us to see where the two images are combined. Many common editing techniques such as smoothing/blurring will also be quite obvious through this analysis. The above image shows that the company’s name and ticker came from another image with less noise — and most likely were from an undegraded image (i.e., they were created in the image editing program).

Above is another example taken from the fake mailer (see it on the FotoForensic website). The paper crease shows a decent amount of error, as does the two lines just below it, but there is much less error around the other text, including the ticker symbol.

In this case, I didn’t need image error level analysis to tell that the image was manipulated. But it is a powerful tool that can help identify manipulation even in better fakes.

Disclaimer: I have no position in any stocks mentioned. I trade pump and dumps and OTCBB / Pinksheets stocks. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

See the SEC’s litigation release in full below. See also the full complaint (pdf). My comments, along with excerpts from the legal complaint, are below the litigation release.

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 22370 / May 16, 2012  Securities and Exchange Commission v. Nicholas Louis Geranio, et al.

Civil Action No. CV-12-4257-DMG (JCx) (C.D. Cal.)

SEC CHARGES U.S. PERPETRATORS IN $35 MILLION INTERNATIONAL BOILER ROOM SCHEME

The Securities and Exchange Commission announced that the SEC filed an action today against SEC recidivist Nicholas Louis Geranio, Keith Michael Field, The Good One, Inc. and Kaleidoscope Real Estate, Inc. for their roles in a $35 million scheme to manipulate the market and to profit from the issuance and sale of certain U.S. companies’ (“Issuers’”) stock through offshore boiler rooms. The scheme ran from approximately April 2007 to October 2009.

According to the SEC’s complaint, the scheme worked as follows:  Geranio organized eight U.S. Issuers, installed management (including Field), and entered into consulting agreements with them through his alter-ego entities The Good One and Kaleidoscope.  Geranio then allegedly set up a common system to raise money through the Issuers’ sale of Regulation S shares to offshore investors by boiler rooms that Geranio recruited.  Field allegedly drafted materially misleading business plans, marketing materials, and website material for the Issuers, which the offshore boiler rooms provided to investors as part of their fraudulent solicitation efforts.

The complaint further alleges that Geranio directed traders, including Field, to engage in matched orders and manipulative trades to establish artificially high prices for at least five of the Issuers’ stock and to deceptively convey to the market the impression that legitimate transactions had created bona fide prices for the stock.  According to the complaint, this manipulation of the publicly-traded stock price allowed the boiler rooms to sell the Regulation S shares at a higher price to the overseas investors.   The complaint alleges that the boiler rooms, teams of unregistered telemarketers operating mostly from Spain, used high-pressure sales tactics and materially false statements and omissions to induce the investors (many of them elderly and located in the United Kingdom) to buy the Issuers’ Regulation S stock.  Investors then sent their money to U.S.-based escrow agents, who paid 60% to 75% of the approximately $35 million in proceeds to the boiler rooms as their sales markups, kept 2.5% as their fee, and paid the remaining proceeds to the Issuers.  The Issuers (or in some cases the escrow agents) then funneled approximately $2.135 million of the proceeds of the Regulation S sales to Geranio, through The Good One and Kaleidoscope, and paid Field approximately $279,000.

The SEC filed its action in the U.S. District Court for the Central District of California, alleging that: Geranio, Field, The Good One and Kaleidoscope violated Sections 17(a)(1) and (3) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5(a) and (c) thereunder; Field also violated Section 17(a)(2) of the Securities Act and aided and abetted the Issuers’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder; and Geranio also is liable as a control person of The Good One and Kaleidoscope under Exchange Act Section 20(a). The SEC seeks in its action permanent injunctions, disgorgement plus prejudgment interest, civil penalties, and penny stock bars against all defendants, and also officer and director bars against Geranio and Field. The complaint further seeks disgorgement and prejudgment interest against relief defendant BWRE Hawaii, LLC based on its alleged receipt of investor funds.

The Issuers from April 2007 through October 2009 were: Green Energy Live, Inc.; Spectrum Acquisition Holdings, Inc.; United States Oil & Gas Corp.; Mundus Group, Inc.; Blu Vu Deep Oil & Gas Exploration, Inc.; Wyncrest Group, Inc.; Microresearch Corp.; and Power Nanotech, Inc.

In 2000, the United States District Court for the Central District of California enjoined Geranio from future violations of the antifraud and securities registration provisions of the federal securities laws as part of his settlement of an enforcement action that the SEC brought against him and California Laser Company. See Litigation Release No. 16628 (July 14, 2000).

One of the more interesting things about this lawsuit is that it shows just how much control the ‘man behind the scenes’ has over penny stocks. The SEC alleges that Geranio bought up the corporate shells used in the pump and dumps, chose the CEOs, and gave those CEOs detailed instruction on what to do. He also allegedly orchestrated the boiler rooms and directed manipulative trading.

32. During the relevant time period, Geranio located and acquired shell companies through a “prospecting” system that he developed. As part of this system, Geranio sent out letters to shell companies he identified from lead-lists. Geranio found the companies that became the Issuers through these prospecting efforts.

33. Geranio then found and appointed management for the Issuers, which typically consisted ofField as a director and/or officer and a CEO who performed administrative recordkeeping duties related to Regulation S sales and prospecting for acquisitions. In some cases, Geranio appointed friends or business associates as officers of the Issuers. For example, the former CEO ofBlu Vu was someone Geranio met “kite surfing” in Malibu.

34. During the relevant time period, Geranio also hired the CEOs of Spectrum, Green Energy, Blu Vu, USOG, and Mundus; the presidents ofPower Nanotech and Wyncrest; and an interim president ofMicro research.

…

74. Geranio instructed Traders A, B, C and D and others to engage in a total of at least five matched orders. In addition, Geranio made at least four additional manipulative trades through The Good One.

75. “Matched orders” are orders for the purchase or sale of a security that are entered with the knowledge that orders of substantially the same size at essentially the same price have been or will be entered by the same or different persons for the sale or purchase ofthe same security.

The alleged operation of the boiler rooms is particularly interesting: according to the SEC, the boiler rooms were in Spain, and the shares that were sold were Regulation S shares (exempt from registration because they are sold to people outside the USA). These shares were mostly sold to British investors, often at a discount to the (artificially high) market price. The boiler rooms used not only high pressure sales tactics but allegedly engaged in outright fraud and lies.

 125. Geranio recruited the boiler rooms to raise money for the companies. Prior to the creation of Green Energy, Geranio traveled to Spain to talk to overseas advisors to find investors or ways to raise capital without having to go through investment bankers.

126. Geranio recruited, and negotiated the terms ofthe agreements with, at least two boiler room teams and with the persons who served as liaisons with three other boiler room teams.

127. The fonner CEOs of Green Energy ‘and Spectrum asked Geranio about one boiler room’s exorbitant 80% sales commissions and Geranio responded by claiming that the boiler room would not work for less and adding, “As we get bigger and more established, we’ll get better deals …. Trust me, this is what -this is good as you’re going to get -or we’re going to get.”

…

140. First, the boiler rooms made explicit additional false statements to investors about the Issuers, such as claims that:

• Mundus, Microresearch and W AM traded on the NASDAQ stock exchange when, in reality, none ofthose companies has ever traded on a listed exchange;

• Blu Vu had discovered oil seventy miles off the coast of Miami;

• the u.S. government provided research grants and the US Navy provided facilities for Mundus; • Green Energy was doing test runs with McDonalds restaurants to convert its refuse into petroleum;

• W AM had projects in South Africa and Mongolia and had received two large investments by Barclays and an additional $26 million infusion;

• Boeing had developed a 747 aircraft to run on fuel developed by Power Nanotech; and

• the U.S., German, and Swiss governments were interested in Power Nanotech’s technology.

…

142. Third, in telephone conversations with investors, the boiler rooms failed to inform the investors up front that their shares were restricted shares, and therefore subject to a one-year holding period pursuant to Regulation S. For example, one investor expected to receive Initial Public Offering shares and was surprised to see any restriction.

The main defendant in the lawsuit, Nichoals Geranio, is no stranger to the SEC:

13. Defendant Nicholas Louis Geranio, also known as Nick Louis, is a resident ofHaleiwa, Hawaii. During the relevant time period, he controlled The Good One and Kaleidoscope. On July 14, 2000, Geranio settled an emergency enforcement action that the Commission filed against him on April 30, 1999, consenting to an injunction against future violations ofthe antifraud provisions for his role in an alleged offering fraud involving California Laser Company. SEC v. Nicholas L. Geranio and California Laser Company, Civil Action No. 99-4702 WJR (AIl) (C.D. Cal. Jul. 7, 1999), SEC Lit. ReI. No. 16628 (Jui. 14,2000). On at least one occasion during the relevant period, Geranio used an address at a UPS Store in Calabasas, California to procure services for Green Energy Live.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Today the SEC suspended trading in 379 publicly traded shell companies. See the press release (copied in full below). See also the trading suspension order (pdf). I have highlighted some sections below with bold font. The companies lacked current financial information or details on their operating status, if any. Please note that this is a two-week trading suspension and not a revocation of registration, although presumably if these companies do not update their information their registration might be revoked. Also, actions such as this cannot remove fully-reporting shell companies, which are often used in pump and dump schemes.

SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant Shell Companies to Protect Investors From Potential Scams  

Massive Trading Suspension Is Largest in Agency History

FOR IMMEDIATE RELEASE 2012-91

Washington, D.C., May 14, 2012 — The Securities and Exchange Commission today suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The trading suspension marks the most companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.

Microcap companies typically have limited assets and low-priced stock that trades in low volumes. An initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division’s Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud.

“Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors.”

Thomas Sporkin, Director of the SEC’s Office of Market Intelligence, added, “It’s critical to assess risks to investors in the capital markets and, through strategic planning, develop ways to neutralize them. We were able to conduct a detailed review of the microcap issuers quoted in the over-the-counter market and cull out these high-risk shell companies.”

The SEC’s previously largest trading suspension was an order in September 2005 that involved 39 companies. The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.

Pump-and-dump schemes are among the most common types of fraud involving microcap companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

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.

“This mass trading suspension is an effective and novel way for the SEC to neutralize potential threats to investors,” said Chris Ehrman, Co-National Coordinator of the SEC’s Microcap Fraud Working Group. “With the ability to leverage staff expertise throughout the agency’s offices and divisions, the Working Group is uniquely positioned to take on risk-based matters like these and focus resources where they are needed most.”

This SEC enforcement effort has been led by Mr. Ehrman, Robert Bernstein, Jessica P. Regan, Leigh Barrett, and Megan Alcorn in the Office of Market Intelligence along with Microcap Fraud Working Group staff from each of the SEC’s regional offices: Tanya Beard, David Berman, Sharon Binger, Melissa Buckhalter-Honore, Lisa Cuifolo, Tracy Davis, Elisha Frank, Kurt Gottschall, Lucy Graetz, Jennifer Hieb, C.J. Kerstetter, Victoria Levin, Aaron Lipson, Michael Paley, Farolito Parco, Jonathan Scott, and Lauchlan Wash.

The SEC appreciates the assistance and cooperation of the Federal Bureau of Investigation’s Economic Crimes Unit.

# # #     http://www.sec.gov/news/press/2012/2012-91.htm

 

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. I trade pump and dumps and OTCBB / Pinksheets stocks. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Unbeknownst to many of my readers, Germany has for years had a big stock manipulation / penny stock scam industry, probably larger than any other country’s save the United States’ OTCBB / Pinksheets and the now closed Vancouver Exchange in Canada (most Canadian promoters now promote stocks on the OTCBB or pinksheets now, although there is some pump & dump activity on the Toronto Stock Exchange Venture Exchange).

Perhaps the most infamous of currently active stock promoters of American stocks, Awesomepennystocks.com (aka Centro Azteca S.A.) up until recently had a German version of its website, Awesomepennystocks.com/de/ (the website now just shows up in English). The same stock promoter also ran the now-defunct German-language pump websites LoveforStocks.com (see a screenshot of how it looked on Feb 7, 2011 from Archive.org), AwesomePennystocks.de, and SmallCapSpecialists.com (see a screenshot of how it looked on March 1, 2011 from Archive.org). These websites were hosted on the same server that hosts other Awesomepennystocks pump websites. See the screenshot below from the wonderful website ReverseInternet.com.

Here is the iContact email list edit subscription / unsubscribe page from the emails I received from Awesomepennystocks.de:

(click image to view full-size)

Below is a screen shot of the Awesomepennystocks.de welcome email:

(click image to view full-size)

And here is a screenshot of the one stock promotion email I received from Awesomepennystocks.de:

(click image to view full-size)

Perhaps the reason why Awesomepennystocks.com has shut down their German websites is that Deutsche Börse is shutting down its least-regulated stock exchange, the First Quotation Board, which was rife with stock manipulation and pump and dump scams.

Established in 2008, the First Quotation Board was designed to make it easier for companies to trade publicly, and there was little regulatory oversight: companies were not required to file a prospectus or even to have any revenues (sounds a lot like the Pink Sheets here in the USA). Last year, the German financial regulator, BaFin, conducted 166 investigations, the majority of which involved companies trading on the First Quotation Board.

Michael Zollweg, the head of the Frankfurt Exchange’s trading oversight board, had this to say:

“By combining tips from investors who felt scammed with suspicious patterns in order books, we got a hint that much activity on the First Quotation Board was based on pump-and-dump strategies, like it can happen with pink sheets in the United States”

The regulatory crackdown on the various manipulative schemes failed to stop them, so Deutsche Börse decided to completely shut down the First Quotation Board and require companies to either uplist to the Entry Standard Board, which has significantly more requirements, or delist entirely.

For more details, see this New York Times Dealbook article.

Perhaps someday regulators in the USA will crack down on stock manipulation / fraud / pump and dumps, but that day will not come soon. The Pink Sheets and OTCBB will not be shut down by their owner because their owner (OTC Markets Group Inc.) does not also own more prestigious stock exchanges. Those of us who deplore stock fraud can only hope that OTC Markets Group Inc. decides that it would benefit by reducing the rampant manipulation of OTCBB and Pink Sheets stocks. But just like with the First Quotation Board, it is stock manipulation and pump and dumps that bring much of the volume to stocks traded on the OTCBB and Pink Sheets, so it is likely not in OTC Markets Group Inc.’s financial interest to eliminate them.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. I trade pump and dumps and OTCBB / Pinksheets stocks. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

See the SEC litigation release here and the legal complaint (PDF).

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v.

RECYCLE TECH, INC., KEVIN SEPE, RONNY J. HALPERIN, RYAN, GONZALEZ, OTC SOLUTIONS LLC, ANTHONY THOMPSON, PUDONG LLC, JAY FUNG, and DAVID REES,

Of the two stocks mentioned in the SEC legal complaint, Recyle Tech (RCYT) is the more interesting pump. I made money buying and shorting it when it was pumped back in February of 2010. It was pumped by Pennypic.com (owned at the time by Pudong LLC, which is owned by Jay Fung), Explicitpicks.com, and OxofWallstreet.com (owned at the time by OTC Solutions Inc., which was allegedly owned by Anthony Thompson at the time). All these websites are listed in the complaint but at least one other website associated with OTC Solutions Inc. (FreeInvestmentReport.com) was not listed in the complaint (while the pump emails did not mention OTC Solutions Inc. they all shared identical disclaimers).

4. OTC Solutions and Pudong, and their respective owners, Defendants Anthony Thompson and Jay Fung, actively participated in the scheme through their promotion of Recycle Tech stock. In January and February 2010, OTC Solutions and Pudong, both stock promotion companies, collectively issued five e-mail newsletters touting Recycle Tech. Thompson and Fung each received more than two million shares of Recycle Tech stock as compensation for their touting efforts. Their newsletters, however, did not adequately disclose their stock compensation or Thomson and Fung’s stock sales.

Also involved in the RCYT promotion, disclosing 2,475,000 shares in compensation but not mentioned in the complaint, were the following websites: StockPickTrading.com, TitanStocks.com, and Monsterstox.com, which months later started disclosing ownership by Golden Dragon Media Inc. (there is a Nevada corporation with Eric Van Nguyen as the sole officer that was dissolved on 16 April 2010; a company with the same name and also with Nguyen as the sole officer was formed in Quebec on 29 September 2009 and has a registration number or NEQ of 1166132507; its name was originally 7247257 Canada Inc. and was changed to Golden Dragon Media on 26 April 2010). I cannot verify what entity owned those websites in February 2010.

Furthermore, the following two websites promoted RCYT while not disclosing any compensation: PennyStockAdvice.com (disclaimer) and PennyStocksExpert.com (disclaimer). These websites have been involved in recent big stock promotions such as NSRS and SNPK. I have submitted evidence of these others promoters of RCYT to the SEC; it is possible that the SEC lawyers were aware of these other promoters but investigated them and found that they did not violate the law.

The charges against the stock promoters are familiar to those who follow these sorts of cases: scalping and inadequate disclosures. Here are the charges against OTC Solutions Inc:

12. OTC Solutions is a Maryland limited liability company formed by Thompson in 2007 as a marketing and advertising company. From no later than January through March 2010, it was associated with “Explicit Picks” and “Ox of Wall Street,” both stock promotional newsletters.

13. Thompson, age 35, is a resident of Bethesda, Maryland. From no later than January through March 2010, he was the sole member of OTC Solutions.

…

G. OTC Solutions and Pudong Tout Recycle Tech Stock without Properly Disclosing Their Stock Compensation or Intent to Sell

65. Four days after the February 18 press release, OTC Solutions and Pudong started touting Recycle Tech stock in their newsletters. Thompson and Fung, the respective owners of OTC Solutions and Pudong, had previously agreed to coordinate their touting with each other and with Sepe.

66. Before they issued their newsletters, Sepe agreed to provide Thompson and Fung with 2.325 million shares each of Recycle Tech stock. Halperin provided the actual shares to Thompson and Fung.

67. On February 22, 23, and 24, 2010, OTC Solutions and Pudong collectively issued at least five newsletters promoting Recycle Tech. Many of the newsletters reprinted portions of Recycle Tech’s false and misleading press releases, which Sepe had provided to Thompson and Fung.

68. Each newsletter included its own language hyping the stock. For instance, the various newsletters touted Recycle Tech as: a “golden opportunity;” “the type of GEM you want to research on before Wall Street gets a hold of it;” “a huge bargain that could be gone very soon!” and the Next EXPLOSIVE Stock.” None of the newsletters disclosed the newsletter owner’s intent to sell shares, or named the source of the stock the newsletter had received.

…

1. OTC Solutions’ Recycle Tech Touting and Scalping

69. Between February 22 and February 25, 2010, Thompson, through OTC Solutions, engaged in the fraudulent practice of “scalping,” specifically, selling the same stock his own reports on Recycle Tech were recommending that investors buy without disclosing the sales.

70. After receiving its 2.325 million shares, OTC Solutions issued at least four newsletters touting Recycle Tech. Specifically, on February 22, 2010 and February 24, 2010, -15- OTC Solutions touted Recycle Tech in two issues of “Explicit Picks” and two issues of “Ox of Wall Street.”

71. Also on February 22, 2010, OTC Solutions started selling its Recycle Tech shares. It sold all 2.325 million shares by February 25. These sales contradicted the recommendations OTC Solutions made regarding Recycle Tech.

72. None of OTC Solutions’ newsletters disclosed the stock compensation it received from Sepe for the promotional campaign, its ownership of Recycle Tech stock, or its stock sales. Instead, the four newsletters contained a brief disclaimer section regarding penny stocks in general and OTC Solutions’ registration status.

 

Here is the disclaimer from the Pennypic.com pump emails sent on February 23, 2010:

Pennypic has received from a third party non affiliate 2.325 million free trading shares of recycle technologies inc for advertising and marketing

The SEC legal complaint acknowledges the disclosure as correct but alleges that Jay Fung, who at the time owned Pennypic.com through his company Pudong LLC, scalped the shares by selling all his shares on the first day of the pump.

14. Pudong is a Florida limited liability company with its principal place of business in Delray Beach, Florida. From no later than January through March 2010, it was a marketing and advertising company associated with “Penny Pic,” a stock promotional newsletter.

15. Fung, age 37, is a resident of Delray Beach, Florida. From at least January through March 2010, he was the sole member of Pudong.

…

2. Pudong’s Recycle Tech Touting

73. On February 23, 2010, Fung, through Pudong, also engaged in the fraudulent practice of scalping.

74. On February 23, after receiving its 2.325 million shares of Recycle Tech stock, Fung’s company, Pudong, issued at least one “Penny Pic” newsletter touting Recycle Tech. On the same day, Pudong sold all 2.325 million of its Recycle Tech shares. This sale contradicted the recommendations Pudong made regarding Recycle Tech.

75. Moreover, the newsletter only contained a general disclaimer. The newsletter disclosed: [w]hen Pennypic.com receives free trading shares as compensation for a profiled company, Pennypic.com may sell part or all of any such shares during the period in which Pennypic.com is performing such services.” It then specifically disclosed that it “has received from a third party non affiliate 2.325 million free trading shares of [Recycle Tech] for advertising and marketing.

76. The newsletter did not, however, disclose the third party’s identity or Fung’s Recycle Tech stock sales.

…

84. On February 23, 2010, Pudong sold 2,325,000 shares for $456,457.

The SEC has consistently held that the practice of scalping (a promoter or trading service selling their own shares directly into their paid promotion or buy alert) is illegal. It has consistently argued that a general disclaimer saying something to the effect of “we may sell our shares at any time” is insufficient. The SEC has consistently won settlements with stock promoters and traders who have engaged in the practice. More interesting to me is line 76: I have not seen the SEC previously assert that failing to disclose the identity of the party that pays for the stock promotion is illegal. I do hope that this marks the beginning of the SEC getting more aggressive in suing those who commit what may seem to be smaller, technical violations.

Following are the details of the pump campaign’s affects on the stock:

H. Promotional Campaign Falsely Inflates the Market for Recycle Tech Shares

77. In the three-month period preceding the promotional campaign, Recycle Tech had experienced only four days of any reported trading of its stock.

78. The stock price remained consistently at ten cents per share from December 10, 2009 to February 1, 2010. From February 2, 2010 to February 16, 2010, the price of Recycle Tech stock stood at eleven cents per share.

79. From February 3 through 16, 2010, no shares of Recycle Tech were traded. On February 18, 2010, the day Recycle Tech issued its first press release, the company’s trading volume jumped to 35,000 shares from 6,000 the previous day. The day after the company issued its first press release, the stock volume soared to over more than 2,000,000 shares.

80. Over the next several days, with the addition of OTC Solutions and Pudong’s newsletters, the stock volume increased to more than 18 million shares traded, with an intraday high of 28 cents per share.

And here is a pretty chart:

Through March 1, 2012, emails from Pennypic.com disclosed the owner as Pudong LLC. It appears that the domain has been sold since then.

This is a really interesting lawsuit by the SEC and I cannot do it justice in this one blog post. Expect a follow-up post in the next day or two with details on how the insiders of the pumped companies allegedly put the companies together, issued false press releases, and used incorrect legal opinions to sell stock that was not registered.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.