A Tale of Two Stings: The Amogear and CitySide Reverse Merger
Down the Rabbit Hole We Go
Last year, the Securities and Exchange Commission and the U.S. Attorney for the District of Massachusetts charged against five individuals whose attempt to manipulate shares of Amogear Inc. was caught in an FBI undercover operation. The defendants, stock promoters Andrew J. Affa, Michael A. Affa, Mitchell H. Brown, Christopher R. Putnam, and Christopher G. Nix, were charged with conspiracy to commit securities fraud.
The arrests and criminal charges were only the tip of the iceberg. The case began and was developed as a sting that started at least several years earlier and which involved the FBI’s use of dormant public companies. Court documents reflect that in order too facilitate the sting, the FBI took control of a Nevada custodianship shell which housed a dormant public company with the name Kitcher Resources, Inc., a purported mining company. While the government was quick to point out no investor lost funds as a result of the pump and dump of Amogear’s shares, the shareholders of Kitcher were harmed dramatically because their ownership interests were eliminated. Schemes using custodianship proceedings aren’t complicated and don’t involve gray areas.
Nevada state court judges have expressed outrage at the same practice used by the custodian to obtain control of Kitcher Resources. Custodianship schemes first hit the microcap markets with the assistance of convicted felon and securities lawyer, Peter Berney. In one case involving Berney, a Nevada judge was so outraged by the custodianship scheme that he ordered the transcript of the hearing be delivered to federal authorities. The transcript of that proceeding can be read here. Pages 109-115, provide a nice summary of the scheme.
As reflected in the transcript, the scheme is simple. Fraudsters seeking to create reverse merger inventory submit an application to a state court judge seeking to be appointed as a custodian of an inactive issuer claiming to act for the benefit of the corporation and its stockholders. After appointment, the custodian eliminates the stockholders they promised to protect by enacting illegal reverse stock splits and issuing shares to themselves or their accomplices. After this, the custodian and other participants sell the shell company and pocket the proceeds.
According to the Amogear indictment, the FBI took control of Amogear at some point after the Nevada custodianship proceeding ended. Even after taking control of the public shell, no actions were taken to restore the ownership interests of the stockholders or provide them with the proceeds from the sale of public shell in exchange for their interests. In Amogear and other recent cases, the government takes no steps to remedy the harm caused to the victims of the scheme-the stockholders who were eliminated.
The Corporate Hijacking – Fleecing the Stockholders
Joseph Arcaro filed the original application for appointment of a custodian on April 11, 2011. Arcaro is an old hand at creating and peddling public shells; he’s in fact known in some circles as “The Shell King.” In his petition for custodianship of Kitcher, he stated that the purpose of the action was “to continue the business of the corporation for the benefit of the corporation and its stockholders.” Interestingly enough, in support of the motion to be appointed as custodian (a fiduciary), Arcaro failed to disclose that he would not continue the business of the company and instead would create a public shell company to sell for use in a reverse merger transaction. The creation of the shell company would require that the interests of the company’s legitimate shareholders be wiped out with reverse stock splits while issuing new shares to Arcaro and/or the final shell purchaser. What is also interesting is that in two of those five cases, the custodianship action was stopped when the companies’ transfer agents—who are encouraged by the SEC to act as “gatekeepers”—objected, declining to provide shareholder lists to Arcaro. As is true in all custodianship hijackings, Arcaro committed fraud to obtain control of the public shell as a custodian.
The illegal Kitcher state court proceeding went without a hitch, and Arcaro was granted custodianship of the shell a little more than a month later, on May 24. Arcaro enacted a 1:40 reverse split on June 13, 2011. He then lost no time finding a buyer for the shell. On October 14, he entered into a stock purchase agreement with Michael Ceccon, by the terms of which he sold 1 million shares of common stock to Ceccon. Three days later, Ceccon became the company’s sole officer and director, controlling the company with 57.14% ownership. A glaring omission in the filing is any account of Ceccon’s background. There’s a section for it, titled “Business Experience,” but all that’s noted below is “insert.”
Ceccon, who is purportedly from Massachusetts, announced that he planned to turn Amogear into a martial arts apparel company. We know now that it did no business, and never planned to do any business.
Arcaro’s custodianship was terminated on February 24, 2012. By that time, despite the fact that no disclosure was made to the Nevada court in the custodianship procceding, Amogear had already applied to FINRA for approval of a 1:500 reverse stock split that would reduce its outstanding shares from 1,750,005 to 3,512 shares of common stock! The split became effective on March 1, 2012. Needless to say, the investments of any old holders of the Kitcher shell were wiped out, or nearly so.
Our understanding of what happened next depends on an interpretation of Amogear’s SEC filings, taken along with the SEC litigation and Department of Justice indictments related to the AMOG fraud. On June 24, 2014, the DOJ announced its criminal action against the Affa brothers, Putnam, and Brown. The SEC followed up with a civil lawsuit filed on 11 July. Months passed, and then on November 6, 2014, the agency brought seemingly unrelated litigation against California attorney Richard Weed, and Massachusetts resident Thomas Brazil for their pump and dump manipulation of a company called CitySide Tickets, Inc. (CIST; now UBEX). In a surprise twist, on December 4 the DOJ announced the criminal indictment of Weed—but not Brazil or Flaherty—for securities fraud in connection not only with CitySide, but also with Amogear.
Weed began the CitySide scam as early as 2006. The Nevada shell had been formed in 1993 as Petrex Corp, and thereafter underwent a dizzying number of mergers, reinstatements, and name changes. It went dormant between 2004 and 2006. In April of that year, it was reinstated, and its name changed to GFY Foods, Inc. According to the SEC, in February, Weed had become the beneficial owner of 45 percent of GFY’s float; his first act upon taking control was to terminate the company’s SEC registration. Upon reinstatement, he became its sole officer and director. No further explanation of how these changes came about is offered in the SEC’s complaint. The shell remained inactive until late 2009, when Brazil and Flaherty purchased a controlling interest in the company for $115,000. There followed a reverse merger with The UpTurn, Inc. UpTurn’s CEO was Jeffrey Eckman of Cambridge, Massachusetts, but he seems to have been meant to act as nothing more than a figurehead. He turned out to be one of the rare figureheads who make trouble.
Flaherty claimed he held convertible notes worth approximately $170,000; they would convert into 50 million shares of UpTurn stock. No such notes existed, so Weed suggested that backdated notes be created. He drafted ten of them, but unfortunately for the co-conspirators, Eckman refused to sign them. The SEC alleges that Weed then took the unsigned notes and forged Eckman’s signature to them. Weed then wrote opinions fraudulently claiming the debt was appropriately aged, and sent them to the company’s transfer agent, who delivered the 50 million shares of stock to Flaherty. By July, Eckman had resigned, and was replaced by Weed. Flaherty and Brazil went looking for a new private company to merge into UpTurn and manipulate.
They found it in CitySide Tickets, Inc. Like UpTurn, it was located in Boston, and its owner, Mike DeAmicis, had approached Flaherty for financing. Flaherty and Brazil promised that a reverse merger could provide $250,000 for the company, and DeAmicis eagerly agreed to the deal. In December 2009, CitySide began to trade as CIST. More notes were converted into unrestricted shares. Several of them were held by Flaherty’s Trinity Alliance Ltd., Trinity International LLC, and 24-7 Media. Much of this stock was distributed to entities he and Brazil controlled, or planned to use in a pump and dump operation.
Weed continued to write opinion letters for Flaherty’s conversions, fraudulently stating that Flaherty was not an affiliate of the issuer. Meanwhile, Flaherty and Brazil had engaged a company referred to in the SEC complaint only as “the Group” to promote CIST. As the pump began in February 2010, Flaherty sold stock through the entities he controlled, and Brazil sold through his own Boston Financial Partners. Toward the end of the month, Brazil and Flaherty attended a meeting to coordinate the promotion. Unaware that the meeting was being recorded, as the SEC says, “by federal law enforcement agents as part of an undercover investigation,” they chattered on about how they were funding the promo, and how they intended to abandon CitySide once it was over.
The pump had petered out by the end of April. According to the SEC, Flaherty and Brazil collected about $3 million in ill-gotten gains. Weed had also profited, in payments for his legal work and also for his help with the pump and dump scheme. A few months later, in November 2010, the group took another shot at running the stock, which by then had a new name: Causeway Entertainment Company. The ticker remained the same. In early 2011, the shell became United Bullion Exchange, Inc. (UBEX). On March 2, 2015, the SEC suspended trading in UBEX, along with 128 other Pinks, most of them inactive for years.
UBEX barely got off the ground, though Weed continued to write opinion letters making it possible for Brazil and Flaherty to convert notes and sell the resulting stock. By the summer of 2012, he was ready to write opinion letters for the fraudsters behind Amogear. Those fraudsters included Flaherty.
Amogear Heats Up
We know now, though only from a single line in the SEC’s complaint against Weed, Flaherty, and Brazil, that individuals involved in the CitySide fraud were targeted in an FBI sting. So far, Weed is the sole named defendant in the criminal case, but Flaherty and Brazil are identified as “co-conspirators” in the indictment. They may have been charged in sealed indictments; they may already have agreed to a plea bargain.
Weed’s criminal case was filed as part of the action against the Amogear promoters. With the information we’ve so far been provided, it’s impossible to know whether the investigation of the CitySide promotion flowed seamlessly into the Amogear investigation, or whether the two became linked at some later stage, when it became clear that they shared some of the same players.
Preparations for the AMOG pump and dump apparently began in early 2012, when the second reverse split of the company’s stock reduced the company’s issued and outstanding stock to a mere 3,512 shares, nearly all of them owned by Michael Ceccon, the new CEO. On March 12, a few days after the split became effective, 40 million new shares were issued. According to the SEC, the FBI got its foot in Amogear’s door through a confidential informant, referred to in the relative complaint as “the CI.” The CI, they say, had acquired the shell, and “subsequently acted in an undercover capacity in concert with special agents of the FBI.” The CI, therefore, seems to be Ceccon. Amogear’s 10-K for fiscal 2012 notes in its subsequent events section that the 40 million shares issued in the aftermath of the reverse split went to Ceccon “in exchange for services,” but the SEC tells a different story. Their investigation revealed that the certificate for those shares “had been issued in the name of an associate of the CI, but [by August 2012] had been delivered to the CI’s office by a transfer agent pursuant to the associate’s instructions.”
The stock issuances didn’t stop there. On March 14, the company had settled a debt owned to its transfer agent in the principal amount of $1,700. The debt was held in the form of a convertible note that Holladay had sold to Trinity International. By the end of the month, AMOG had 42,223,512 shares of common issued and outstanding.
Ceccon, his work apparently done, resigned all of his offices on March 27. He was replaced by Richard Brutti. Brutti has a more extensive public biography than Ceccon. He’s described in the 10-K for 2012 as an “independent management consultant” with 30 years’ experience, but is better known to penny stock traders as the founder and co-host of Mind Your Own Business The Radio Show, a program that often promoted cheap OTC issues.. He was also for a time CEO of VizStar, Inc. (now KPOC), and had just left that position when he took over at AMOG. During his tenure with VizStar, he pumped the stock vigorously. Brutti even “interviewed” promoter Geoffrey Eiten on his MYOB program about the company, without making it clear he was the CEO. Eiten went so far as to suggest that the lowly penny might be Warren Buffet’s next buyout candidate. Eiten was sued by the SEC in 2011; the action settled eventually, and Eiten received a large fine and a penny stock bar. Interestingly, it’s clear from Eiten’s disclaimers at his website and in his email alerts that he was in some way connected to Flaherty’s Trinity International, which he claimed to be his “publisher.”
When Brutti took over, what happened to the 40 million shares the company said it paid Ceccon for his services? In the 2012 10-K, Ceccon is shown as the only greater-than-10-percent holder, with a 57.14% ownership and 40,003,333 shares. It could be argued that he stepped down as an officer and director because he wanted to be able to dispose of that stock. Had he still held those positions, he’d have been unable to sell more than the equivalent 1 percent of the shares outstanding each quarter. If he resigned, and then distributed the stock among nominee entities, each holding less than 9.99 percent, an attorney willing to write fraudulent opinions could say those entities were not affiliates, and were therefore free to sell as much as they wanted. That is, in fact, exactly what Weed had done for Flaherty and Brazil when they wished to dump their CitySite stock.
In May 2013, when Amogear filed its 10-K for fiscal 2012, Ceccon’s beneficial ownership had not changed. Brutti was not listed as a beneficial owner, and there is no indication he received any salary for his work. None of that makes much sense, but in light of the current litigation and criminal prosecution, it’s likely the company filings are not entirely truthful.
While a quick reading of the documents suggests that Ceccon was the CI who was so useful to the authorities, that would be a misidentification. The SEC says that in August 2012, the “CI held in his office the physical stock certificate for 40,000,000 restricted shares of Amogear stock.” They add that the certificate was in the name of an associate of the CI. The CI also “held a convertible promissory note through a company he owned and controlled which was converted into 17,000,000 purportedly unrestricted shares of Amogear stock between March 19, 2012 and October 29, 2013.” It thus appears that the CI was not Ceccon, who by August 2012 was no longer an officer of the company, and so would not have held that very large certificate “in his office.”
The SEC makes clear that by August 2012 the CI was on board. In the summer of 2012, he’d begun laying plans for a stock promotion, and had talked to Nix, Putnam, and others about the proposed campaign. He knew Nix and Putnam because he’d worked with them in the past.
The Amogear Promotion
At the end of August, Nix and Putnam went to Boston to discuss the upcoming pump and dump with the CI. An undercover FBI agent was present at their meeting, which was secretly recorded. The group discussed technical aspects of their project, and solemnly agreed to purchase burner phones in the hope of avoiding detection by the authorities.
A few months later, implementation of the plan was delayed when one of the participants decided to withdraw. Discussions were not resumed until the fall of 2013, when the CI and Putnam once again spoke. The CI had by then involved another individual and his associates. He explained in a later call to Putnam and Nix that they’d receive stock for their trouble and, if all went well, would be able to sell it for a very healthy profit. The Affa brothers also flew to Boston, where they met with the CI and the FBI undercover agent.
During September 2013, the agent received a promotion: he replaced Brutti as CEO of the company. His appointment was never officially announced, and, since AMOG conveniently stopped filing with the SEC in the month he took over, Edgar offers no information about him. In a single surviving press release from February 2014, he’s called “recently appointed CEO John Kennedy.” While that’s most certainly not his real name, it’s a perfect moniker for an FBI agent, and, of course, for the leader of a Boston-based company. One thing is certain: he wasn’t Ceccon, and he wasn’t Brutti.
So far, so good. But this is where the official accounts—that offered by the SEC in its complaint against the Amogear promoters, and that offered by the DOJ in its indictment of Weed—differ in important ways.
According to the DOJ, Flaherty asked Weed for help assigning the debt to three entities controlled by him: Chateau Properties Ltd., Backwoods Ventures Inc., and Partners Consultants Inc. That was a necessary step, because had the stock not been divided, Flaherty, as a greater-than-10-percent owner, would not have been able to sell all of it. Weed provided three fraudulent opinions, and on October 29, 2013, AMOG’s transfer agent issued free trading stock to the three entities. The DOJ sustains that the opinions were fraudulent precisely because Weed knew that the three nominee companies were controlled by Flaherty.
But the SEC says that was not the case: “[T]he CI assigned the convertible promissory note held by the CI’s company to three foreign entities that Mike Affa designated: Backwoods Ventures, Inc., Partners Consultants Inc., and Chateau Properties Limited.” The transfer agent cut three certs, each for about 4.9 million shares of free trading stock. The certificates were sent to Titan International Securities in Belize for deposit.
Once the stock was in the promoters’ accounts, the promotion was ready to go. There’d been no market for Amogear’s stock, so in January 2014, the Affas and their business partners arranged to create one, giving the appearance of activity by trading among themselves. On February 9 and 10, email blasts cooked up much earlier were sent out to subscribers of the promoters’ “tips” services. But the anticipated one-week initial promotion was not to be. On February 10, the SEC nipped it in the bud by suspending trading in Amogear’s stock, citing the email spam and potentially manipulative trading in the stock as the reason for the action.
Lessons Learned
The tawdry story of CitySite and Amogear offers several lessons, and raises more than a few questions. First, it illustrates once again that fraud is a predictable component of corporate hijackings using custodianship actions. The Kitcher shell, used in the Amogear scam, was provably hijacked. The CitySide shell, acquired by Richard Weed as GFY Foods, may have been hijacked. A glaring figure in the SEC’s highly publicized “Operation Shell Expel” is that it has failed to charge any of the custodianship hijackers despite that they are engaged in fraud.
Another lesson is that while SEC filings at least leave an indelible record, they aren’t an infallible guide to the truth. CitySide was a Pink, Amogear an SEC registrant. Yet the filings of both are frequently mendacious and often incomplete. At no time between early 2012 and early 2014 were AMOG’s filings reviewed by the SEC’s Division of Corporation Finance. Had they been, a number of inconsistencies would no doubt have come to light. Perhaps this omission was deliberate despite the harm to stockholders, because scrutiny might have interfered with the sting.
Similar sting operations were put in place with both CitySide and Amogear. Undercover FBI agents were introduced as participants in the planned pump and dump scheme. Yet in the case of CitySide, the pump and dump was allowed to proceed unhindered. Why? Simply because the authorities knew the perps would try it again, and decided to let them have another shot?
We believe it would be fair to say that so far, the results obtained from these elaborate operations have been modest when weighed against the harm to stockholders of the public shell and fraud committed in the custodianship proceedings. Five promoters and one attorney were criminally charged. The promoters were hired to run a pump and dump scam; that’s what promoters generally do. Weed was an enabler, fronting for his clients and writing opinion letters. Both were working for bigger fish who, as things stand now, will apparently not be going to prison. Flaherty and Brazil made $3 million on the CitySide scheme. Weed collected $5000 a month as legal counsel, and a few thousand more for helping out with the promo. The Affas and their associates made nothing on the Amogear pump and dump, but Flaherty had promised them only about $250,000.
Flaherty and Brazil, in this case, were the big fish. They’ve been sued by the SEC. In the Weed indictment, they’re referred to as “co-conspirators,” leaving open the possibility they’ve already agreed to guilty pleas. Despite the obvious illegal takeover of Amogear, the hijacker was not charged. But wouldn’t it be more efficient simply to go after these big fish to begin with, rather than hope they can be forced into cooperating with the Feds? Why not seek cooperation from the little guys, and send their employers and the corporate hijackers up the river without the benefit of “licenses to swindle” and reduced sentences?
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
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