SEC obtains final judgment against relief defendant in George Stubos case
On April 15, 2024, the U.S. District Court for the Southern District of New York entered a final judgment against relief defendant Dori-Ann Stubos, ordering her to pay more than $2.3 million in disgorgement and prejudgment interest. In June 2022, the Securities and Exchange Commission (the “Commission”) charged George Stubos for engaging in a deceptive scheme involving several microcap companies. Dori-Ann Stubos, George Stubos’ wife, allegedly received illicit proceeds from George Stubos’ fraudulent scheme for no legitimate purpose or consideration, including for the purchase of a house in California in the name of Dori-Ann Stubos.
The court previously entered a final judgment against George Stubos by consent. George Stubos’ judgment ordered him, among other relief, to pay disgorgement of $5,367,926 and prejudgment interest of $806,108. This concludes the litigation in this matter.
The Commission’s action alleged that Canadian resident George Stubos secretly gained control of several thinly traded microcap companies whose stock was publicly traded in the U.S. securities markets, hired stock promoters to create demand for his stock, and generated substantial illicit profits by selling the stock to unsuspecting investors. Stubos allegedly misled investors, brokers, and transfer agents (companies that maintain records of stock ownership) in order to convince these parties that his stock shares were eligible for trading in the public markets, when in fact he did not register his sales of those stock shares with the Commission and did not disclose accurate information about his control over the companies.
The complaint alleged that Stubos utilized the illicit services of Frederick L. Sharp and his employees (the “Sharp Group”) to facilitate each step of his fraud. The Sharp Group’s operators were sued by the Commission for violating the securities laws. See SEC v. Sharp, et. al., No. 1:21-cv-11276- WGY (D. Mass. filed Aug. 5, 2021). The SEC won a final judgment ordering Sharp to pay $52,925,214 in the case. Sharp and one of his employees, Courtney Kelln, were also charged criminally by the United States Department of Justice. See U.S. v. Sharp, et. al., 1:21- mj-07182-JCB (D. Mass filed Aug. 4, 2021). A new criminal indictment was filed against Sharp, Kelln and others on January 9, 2024 in connection with long-running international securities fraud schemes in which they sold millions of shares in multiple microcap—or “penny”—stock companies during pump-and-dumps, generating at least tens of millions of dollars in illicit proceeds.
According to the SEC, Stubos gained control of Petrosonic Energy Inc. (fka PSON) and Ener-Core, Inc. (ENCR) to use for his share-selling scheme.
The Petrosonic Fraud
Stubos became a Sharp client in 2012. Shortly after becoming a client, Stubos began transferring his controlling position in Petrosonic to the Sharp Group. Stubos transferred a total of 44.2 million shares to the Sharp group, accounting for 56% of the shares outstanding in Petrosonic at the time, making Stubos an affiliate of Petrosonic. Because Stubos owned more than 50% of its outstanding stock, he was required to disclose his holdings on filings with the Commission. Stubos was also required to disclose all of his trading of Petrosonic stock and was subject to limitations on the amount of Petrosonic stock he could sell. During the relevant period, Stubos never disclosed his control over Petrosonic stock and never registered any of the sales of his Petrosonic shares with the Commission as required under the securities laws.
To hide Stubos’ controlling interest in Petrosonic, the Sharp Group split the shares between several anonymous foreign entities, keeping the holdings of each individual foreign entity under 5%. Breaking the shares into blocks of less than 5% ownership was done to avoid reporting requirements and restrictions and scrutiny by brokerage firms and other market participants like transfer agents.
From 2012 through 2014, Stubos secretly funded multiple stock promotions of Petrosonic to create interest in the stock among investors, increase demand for the stock, and thus, drive up Petrosonic’s stock price and trading volume. Stubos hid his involvement in funding stock promotions in various ways. First, Stubos used the Sharp Group to make payments to various stock promoters, thus concealing his role in funding the promotions. Second, he funneled Sharp Group proceeds to a Washington state corporation that he controlled to pay U.S. promoters, including many of the same promoters he paid via the Sharp Group. These promotions were misleading because they did not disclose that Stubos, the largest stockholder and an affiliate, was funding the promotions that encouraged potential investors to buy the stock at a time when he would be selling the stock. Third, Stubos used a foreign entity created by the Sharp Group (the “Belize Nominee”) to hire stock promoters. Additionally, in June 2013, Stubos asked Sharp to create a nominee entity for Stubos to use to hire stock promoters, adding yet another layer of disguise between Stubos and the stock promotions. Sharp set up the Belize Nominee in Belize on behalf of Stubos.
From June 2012 through October 2014, Stubos directed at least $3.3 million in payments to various promoters from his illicit Petrosonic trading proceeds using the methods described above.
As the price and trading volume of Petrosonic stock began to rise in response to each of those promotions, Stubos began selling his shares into the market via the Sharp Group-administered nominee companies. From June 2012 through April 2015, Stubos sold over 23 million shares of Petrosonic using the Sharp Group, generating approximately $18.5 million in net trading proceeds. The graph below illustrates a series of increases in trading volume and price that occurred from June 2012 through October 2014 as a result of Stubos’ conduct:
While Stubos was selling millions of Petrosonic shares through the Sharp Group during the promotions he funded, he also directed manipulative trading to drive up the price and liquidity of the stock he was trying to sell. This manipulative activity was designed to deceive investors about the existence of an active market in Petrosonic stock. Specifically, Stubos directed Sharp Group traders via encrypted messages strategically to buy Petrosonic stock on numerous occasions in order to support and/or inflate its price. For example, on September 9, 2013, Stubos directed a Sharp Group trader to stop selling Petrosonic stock and switch to buying the stock instead. The buy orders and sell orders were placed from different Sharp Group nominees’ brokerage accounts in different countries so that they would not appear linked. By purchasing small amounts of Petrosonic stock, Stubos was able to increase or maintain its price. Later, Stubos was able to capitalize on the manipulated price and continue to sell.
In addition to the conduct described above, Stubos also partnered with Morrie Tobin in the Petrosonic scheme in 2013. Tobin agreed to raise money for Petrosonic from private investors. These private investors provided an influx of $3 million to Petrosonic, after which Stubos’ promotional efforts and corresponding stock sales increased substantially. Stubos paid Tobin approximately $3.4 million dollars generated from Petrosonic trading proceeds in exchange for Tobin’s services related to the private investments.
Morrie Tobin was charged by the Commission in November 2018. See v. Morrie Tobin et al., Civil Action No. 1:18-CV-12451 (D. Mass. filed November 27, 2018) in connection with activities involving Roger Knox. Tobin was also criminally charged in November 2018. More here and here. An interesting side note is that it was through Morrie Tobin that the FBI gained information that led to the College Admission Scandal bust. Tobin, who had 3 children who studied at Yale, tipped off the FBI in an effort to obtain leniency.
The Ener-Core Fraud
From 2013 through 2014, Stubos engaged in a fraudulent scheme to sell the securities of a second issuer, Ener-Core. In April 2013, Stubos acquired the public shell company, which would later become Ener-Core, from another Sharp Group client for $325,000. By acquiring the Ener-Core shell, Stubos gained control of its outstanding stock. Following the purchase, Sharp Group accounting records show Stubos’ account received virtually all the purportedly unrestricted and restricted shares of Ener-Core that had been issued by the company. As of June 2013, Stubos controlled 99.7% of Ener-Core’s purportedly unrestricted stock.
Beginning in May 2013, for the benefit of Stubos, the Sharp Group transferred his Ener-Core shares to the nominee companies it supplied, strategically split those shares into blocks of stock of less than 5% of the total outstanding stock for each nominee shareholder, and then deposited those shares with brokerage firms in order to be ready for market sale.
From November 2013 through October 2014, Stubos directed at least $1.1 million in payments to stock promoters, including many of the same promoters he used to promote Petrosonic. Like Petrosonic, Ener-Core promotional newsletters’ fine print misleadingly stated that the Belize Nominee was the paying party for the promotion. Similar to the Petrosonic scheme, Stubos continued to direct all trading in Ener-Core using the Sharp Group and sold the stock during each promotional campaign that he orchestrated in order to profit from the demand he had created. From June 2013 through October 2014, Stubos dumped 9.4 million shares of Ener-Core into the market, generating $2.9 million in net trading proceeds.
Before Stubos began aggressively selling Ener-Core shares into the market, he engaged in manipulative trading to inflate the price of Ener-Core stock and to give a false appearance of active trading in the market. The chart below shows examples of Stubos’ trading over that period of time compared to the total market trading volume and the daily closing price.
Over the next several months, Stubos continued to direct the buying and selling of Ener-Core shares in Sharp Group-administered overseas brokerage accounts. Records show that the buy orders and sell orders for these trades were placed through different Sharp Group nominees’ brokerage accounts in different countries so they would not appear to be connected. From September 5, 2013 through December 31, 2013, Stubos was on both sides of Ener-Core trading for 54 of the 72 possible trading days.
Additional Penny Stocks sold by Stubos
In addition to the stock of Petrosonic and Ener-Core, Stubos’ scheme involved utilizing the Sharp Group to control and sell the penny stock of other Issuers. For example, in 2013, Stubos, directly or indirectly, transferred purportedly unrestricted stock of Homie Recipes, Inc. (“Homie”) to the Sharp Group. The stock was divided and distributed to Sharp Group-administered nominee companies in blocks of less than 5% of the company’s outstanding stock. In December 2015, Stubos expressed displeasure to Sharp about the amount it was costing him to maintain Homie and its stock in Sharp’s custody and Sharp suggested that Stubos might be able to sell the Homie shell company to another of his clients. Stubos responded that he would be “happy” to sell.
In August 2017, Sharp managed the sale of Homie and its stock to another one of his clients. Stubos received a payment of $260,000 for the shell. The Sharp client who bought the Homie shell changed its name to Stevva Corp (STVA) and then sold its stock in connection with his own promotional activities. On July 17, 2023, the Commission charged James P. Anglim in connection with the manipulative trading of STVA stock. See SEC v. James P. Anglim, Civil Action No. 1:23-cv-11598 (D. Mass. filed July 17, 2023)
According to the SEC, there is some evidence that Stubos was also involved in a similar scheme involving a fourth issuer, Synergy CHC Corp (“SYNR”).
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Park Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
