The Use of Testimonials in Social Media by Investment Advisers
Generally, SEC rules prohibit investment advisers from using testimonials in their advertisements. In the past several years, the SEC has encountered a number of questions concerning investment advisers’ use of social media. Social media has facilitated consumers’ ability to research and conduct their own due diligence on current or prospective service providers. The use of social media has increased the demand by consumers for independent, third-party commentary or review of any manner of service providers, including investment advisers. Read More
Forex Scams 101 l Brenda Hamilton, Attorney
The Commodity Futures Trading Commission (CFTC) and the North American Securities Administrators Association (NASAA) warn that off-exchange forex trading is at best extremely risky, and at worst, outright fraud. Forex scams are on the rise and a hot new target for the Justice Department and state regulators. Forex scammers often operate multiple businesses and it is common for these fraudsters to operate other types of scams domestically and internationally including boiler rooms, pay day loan stores, credit repair services and penny stock manipulation schemes.
Section 302 and 906 Certifications l Brenda Hamilton Attorney
Chief Executive Officers (“CEO”) and Chief Financial Officers (“CFO”) of public companies must certify the issuer’s annual report on Form 10-K and quarterly report on Form 10-Q. Each issuer must also have disclosure controls and procedures and internal control over financial reporting.
The issuer’s CEO and CFO are each required to make two certifications in the issuer’s Form 10-Q and 10-K reports. These are the “Section 302” and “Section 906” certification. Read More
The Laws That Apply to Finders l Securities Lawyer 101
Companies seeking capital are frequently approached by finders who offer to locate investors in exchange for a fee. This is particularly true in going public transactions. Most finders are not registered as broker-dealers with the Securities and Exchange Commission (“SEC”).
The possibility of receiving capital even through the efforts of a finder creates a tempting opportunity for issuers who need capital. Read More
U.S. Issues Indictment Against Caribbean Money Laundering Operators
Joshua Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens, were indicted for conspiracy to launder monetary instruments, the Department of Justice and Internal Revenue Service (IRS) announced on March 24, 2014. Read More
Summary Financial Information in Form S-1 Registration Statements
Under the JOBS Act, an Emerging Growth Company may provide two years of summary financial information in its SEC registration statement or for the period from the date of the company’s inception, if shorter, and any interim periods that are included in the financial statements. Read More
Form S-1 Risk Factor Disclosures l Securities Lawyer 101
Form S-1 Risk Factor Disclosures l Securities Lawyer 101
The Securities Act of 1933 is often called the “truth in securities” law. It has two basic objectives: to require that investors receive financial and other important information about securities being offered for sale, and to prohibit deceit, misrepresentation, and other fraud in the sale of securities. Read More
SEC Suspends Grow Life l PHOT
On April 10, 2014, the U.S. Securities and Exchange Commission (“SEC”) announced the trading suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (“Exchange Act”), of trading of the securities of GrowLife, Inc. (“PHOT”) of Woodland Hills, California.
The suspension commenced at 9:30 a.m. EDT on April 10, 2014, and terminates at 11:59 p.m. EDT on April 24, 2014.
Beware of False Claims About Registration Statements
Securities Lawyer 101
The SEC issued a recent investor alert to warn the public about potentially fraudulent investment schemes that involve individuals or firms misrepresenting that they have filed registration statements with the SEC. Investors should be careful to check the background, including license and registration statement status, of any person who tries to sell them an investment product or service, and should avoid investing with anyone who falsely represents that they are registered with the SEC. Read More
Criminal Prosecution in Corporate Hijackings
The Justice Department has selectively pursued criminal charges against fraudsters using corporate hijackings for illegal takeovers of publicly traded shell companies. In many instances, a transfer agent have been charged in connection with the schemes. Recent examples include the criminal conviction of Lawrence S. Hartman, a Florida securities lawyer. Hartman recently pled guilty to a charge of conspiracy to commit mail and wire fraud in connection for a scheme involving corporate hijackings and shell trafficking.
Hartman faces up to 20 years’ imprisonment and a maximum fine of $250,000.
According to the charges, the defendants in the case conspired to steal the identities of dormant, publicly-traded shell companies, use the corporate identities they had stolen to create fraudulent empty-shell companies which had the appearance of being publicly-traded, and sell those fraudulent empty-shell companies for use in reverse merger transactions. Read More
Corporate Hijackings & The Assault On Small Companies
Corporate hijackings, also known as corporate identity theft, of public shell companies has been around for more than a decade. It is a growing method used by fraudsters to acquire control of publicly traded shell companies to use in reverse merger transactions involving private companies seeking to go public.
Recent SEC cases against hijackers have unraveled a myriad of hijacking schemes varying in sophistication. Read More
SEC Charges Joseph Signore in Ponzi Scheme
On April 8, 2014, the Securities and Exchange Commission announced fraud charges and an asset freeze against the operators of a South Florida-based Ponzi scheme targeting investors through YouTube videos and selling them Read More
SEC Charges Empire Stock Transfer l Securities Lawyer 101 Blog
On April 8, 2014, the Securities and Exchange Commission announced enforcement actions against two leaders at a Las Vegas-based transfer agent firm who were responsible for disclosure failures in registration forms filed with the SEC. Empire Stock Transfer Inc. and the two individuals agreed to settle the SEC’s charges. Publicly traded companies typically use transfer agents to keep track of individuals and entities that own their stocks and bonds. Transfer agents generally act as an intermediary for the company, issue and cancel certificates upon changes in ownership, and handle certificates that are lost, destroyed, or stolen. Read More
SEC Settles Fictitious Offering Case Against Mia Baldassari
Securities Lawyer 101 Blog
The Securities and Exchange Commission (SEC) announced that on March 4, 2014, Judge Rosemary Collyer entered a final judgment against relief defendant Mia Baldassari. The SEC’s complaint alleged that Baldassari received $24,500 in investor funds to which she had no lawful claim.
Without admitting or denying the allegations of the complaint, Mia Baldassari consented to the entry of a final judgment that orders that she is liable for disgorgement of $24,500, and that such amount shall be deemed satisfied from funds she deposited into the court’s account. Read More
SEC Charges Firm with Spoofing & Layering
On April 4, 2014, the Securities and Exchange Commission charged Joseph Holmdel and others, including a New Jersey based brokerage firm, with manipulative trading of publicly traded stocks through an illegal practice known as “layering” or “spoofing.”
The SEC also charged the owner and others for registration violations. Two firms and five individuals agreed to pay a combined total of nearly $3 million to settle the case. Read More
SEC Charges Two Friends With Insider Trading of Chicago Bridge & Iron
On April 4, 2014, the Securities and Exchange Commission charged two friends with insider trading on confidential information from an investment banker about an impending transaction between engineering and construction companies. Read More
SEC Charges Two With Insider Trading
On March 31, 2014, the Securities and Exchange Commission (“SEC”) announced two separate cases against men who profited by insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies.
“Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office. Read More
Promoters Indicted in Connection with Super Nova Resources
On April 1, 2014, United States Attorney Zane David Memeger announced an indictment charging a market manipulation scheme against six defendants in connection with the trading of stock in Super Nova Resources, Inc. (“SNRR”).
Charged with conspiracy, wire fraud, and securities fraud are: Carl Marciniak, 50, of California, Jeffrey Weinfurter, 46, of Yorba Linda, CA, James Wheeler, 54, of Corona, CA, Daniel Starczewski, 67, of Cornelius, NC, Danny Colon, 46, of Edgewater, NJ, and Louis Buonocore, 59, of Woburn, MA. Read More
SEC Director Keith Higgins Addresses Rule 506 (c)
On March 28, 2014, Keith Higgins, the Director of the SEC’s Division of Corporation Finance, delivered a speech at the closing session of the 2014 Angel Capital Association Summit. One focus of the speech was the elimination of the prohibition against general solicitation and investor verification procedures in Rule 506(c) offerings. Read More
Securities Lawyers Gone Wild l John Silvia Indicted
On March 28, 2014, the FBI announced that John Silvia, 55, purportedly the “managing member” of Richardson Consulting LLC, was charged with securities, mail, and wire fraud. He was arrested on February 7, 2014. Read More
What is a Wells Notice ? Securities Lawyer 101
After the staff of the Securities and Exchange Commission (“SEC”) Division of Enforcement staff has completed its investigation, it may send a notice (“Wells Notice”) to the party being investigated notifying them that it intends to recommend an SEC enforcement action. Under SEC Rules, in response to a Wells Notice, the recipient is entitled to reply by providing a “Wells Submission”. A Wells Submission presents facts and arguments to persuade the SEC’s staff to not pursue an enforcement action.
If the SEC staff proceeds with its recommendation the SEC’s Division of Enforcement will review the recommendation and the Wells Submission.
After its review it will decide whether to an enforcement proceeding should be pursued. Accordingly, the receipt of a Wells Notice does not necessarily indicate that charges will be filed. Recent data suggests that the SEC does not act on 20% of the wells notices issued.
Issuers must determine whether they should publicly disclose a Wells Notice in their SEC or OTC Markets filings.
Wells Notice Disclosure Obligations
The securities laws do not require disclosure of every fact. An issuer is under no duty to disclose a specific material fact except where disclosure:
(1) is dictated by a specific statute or regulation;
(2) would be necessary to render what the issuer previously disclosed is not misleading; or
(3) when the issuer is trading in its own stock.
Public companies are required to make disclosures necessary to prevent existing disclosures from being misleading. Thus, an issuer may have a duty to disclose the existence of the receipt of a Wells Notice if the issuer’s prior statements would be rendered inaccurate or incomplete without such a disclosure.
The Court in Richman v. Goldman Sachs Group, Inc., et al., No. 1:10-cv-03461-PAC, slip op. (S.D.N.Y. June 21, 2012) rejected the argument that the issuer had an affirmative duty to disclose the receipt of Wells Notices directed to it and to two of its employees, under Regulation S-K Item 103, FINRA Rules. The court held that under Regulation S-K, Item 103, a governmental investigation, even one in which a Wells Notice has been issued, does not rise to the level of a “pending legal proceeding.” The court explained that while a Wells Notice “may be considered an indication that the staff of a government agency is considering making a recommendation” to institute a legal proceeding, such a notice is “well short of litigation.” Until an SEC investigation “matures to the point where litigation is apparent and substantially certain to occur…disclosure is not required.” In its ruling, the court noted that “no court has ever held that Regulation S-K Item103 creates an implicit duty to disclose receipt of a Wells Notice.”
The court also rejected the plaintiffs’ argument that the issuer’s existing public disclosures triggered the duty to disclose its subsequent receipt of a Wells Notice. The issuer had disclosed that there were governmental investigations concerning certain of its business practices. The issuer did not, however, update its public disclosures when it received a Wells Notice from the SEC. The plaintiffs argued that by failing to disclose that the government inquiries resulted in a Wells Notice, the issuer’s public disclosures were misleading. The court noted that the plaintiffs did not, and could not, allege that the Wells Notice was an indication that litigation was substantially certain to occur. “At best,” the court noted, “a Wells Notice indicates not litigation but only the desire of the Enforcement staff to move forward, which it has no power to effectuate.” Thus, the issuer’s receipt of the Wells Notice merely indicated that “governmental investigations were indeed ongoing,” which was consistent with its disclosure of the existence of governmental investigations.
The court stated “a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.” Issuers are “not obligated to predict and/or disclose their predictions regarding the likelihood of suit,” and a Wells Notice is a “contingency that need not be disclosed.”
For more information about the SEC investigations and responses to SEC subpoenas and Wells Notices, see:
http://www.sec.gov/divisions/enforce/enforcementmanual.pdf
Securities lawyer, Brenda Hamilton provides legal advice to market participants about securities matters including SEC investigations and testimony.
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 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
SEC Charges L&L Energy and Its Managment
On March 27, 2014, the Securities and Exchange Commission announced fraud charges against a Seattle-headquartered coal company, L&L Energy, and its founder for making false disclosures about who was running the company. Read More
SEC Suspends Advanced Cannabis Solutions
On March 27, 2014, the Securities and Exchange Commission (“Commission”) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (“Exchange Act”), of trading in the securities of Advanced Cannabis Solutions, Inc. (“Advanced Cannabis”) of Colorado springs, Colorado, at 9:30 a.m. EDT on March 27, 2014, and terminating at 11:59 p.m.EDT on April 9, 2014. Read More
OTCQB Fees & Listing Requirements
OTC Markets Group has announced it is making significant changes to its OTCQB. Companies seeking to be quoted on the OTCQB will be required to meet eligibility standards and pay an initial listing fee of $2,500 to the OTC Markets if not listed on the OTCQB and pay annual fees of $10,000 per year. Issuers currently listed are exempt from the one-time applicationOTCQB fee and the annual fee for the first two years is $7,500. Read More
Whistleblower Awarded $64 Million in JPMorgan Case
A former JPMorgan Chase employee, Keith Edwards, is about to receive nearly $64 million for whistleblowing. Much has been written recently about the Whistleblower program now administered by the Securities and Exchange Commission (“SEC”), by Edwards pursued a different route.
He filed suit against the investment bank under the “qui tam” provision of the False Claims Act (“FCA”; also called the “Lincoln Law”). Read More
Reverse Merger and Public Float Scams l Securities Lawyer 101
When companies go public, insiders often employ various mechanisms to control the company’s free trading shares also known as the “public float”. When these mechanisms avoid the SEC’s registration and anti-fraud provisions, they are known as public float schemes. In recent years, forward stock splits and stock dividends have become a common tool in public float schemes. Forward stock splits and dividends require that the Company deliver the newly issued split or dividend shares to exisiting stockholders.
Instead of delivering the newly issued shares to existing stockholders, in forward split schemes, management causes the issuance and delivery of the newly issued shares to themselves or their co-conspirators.
In the penny stock markets, most successful pump and dumps are possible because a handful of individuals who control the public float.
Public float schemes involving penny stocks have been around for years and have become routine features of many going public transactions.
Public float schemes are found in going public transactions involving both reverse mergers as well as Form S-1 registration statements. There is little doubt that the SEC’s stop order proceedings against 20 purported mining companies recently was to prevent the issuers from being used in public float schemes involving reverse merger purveyors.
The Escrow Agents
Public float schemes can be structured in a number of ways, and a variety of steps can be taken to conceal the fraudsters’ control. One common method is to use an escrow agent, who is typically a complicit securities attorney. Regardless of how the transactions are structured, the escrow agent holds and transfers all or substantially all of an issuer’s unrestricted shares to the participants while the issuer avoids making required public disclosures about the control of the public float or the persons involved.
The Nominees
Where Form S-1 registration statements are used, the fraudsters simply park stock in the name of nominees under their control. Often times these are relatives or employees of the fraudster. These nominee names can be found in the selling shareholder section of the Form S-1. Once the S-1 is declared effective the shares are transferred to the fraudsters or the fraudsters simply control the disposition of the shares.
The Reverse Splits And Illegally Free Trading Shares
Often a large reverse split is done in conjunction with reverse merger transactions. Once the initial transaction is complete, illegally free trading stock is issued and delivered to a third party such as an escrow agent or other participant working in collusion with the shell purveyors. Fraudsters and incompetent and/or complicit attorneys find ways to remove legends without compliance with the SEC’s registration requirements. The fraudsters and these attorneys cause the issuance of free trading shares upon conversion of aged debt or convertible notes, using baseless legal opinions improperly applying the Rule 504 exemption and /or Rule 144′s safe harbor.
The Bogus Form S-1 Public Float Schemes
Fraudulent S-1 filings are commonly used in public float schemes. Fraudsters file bogus S-1 registration statements registering nominal amounts of shares held by selling shareholders to create free trading shares. These registration statements contain bogus business plans and nominee selling shareholders. Once the S-1 is deemed effective, the participants declare large forward stock splits or stock dividends and deliver the shares issued to themselves or to escrow accounts and/or complicit attorneys for delivery at a later date. In some of the most brazen frauds, the S-1 shell becomes the subject of an aggressive promotional campaign centered around a fabricated business plan.
After the public float scam is complete, the fraudsters can even resell the S-1 shell to a private company seeking to go public. In some circumstances, the private company may have no idea who really controls its public float.
The Role of the Investor Relations Firms & Promoters
It is common for stock promoters and/or investor relations firms to create shells using bogus S-1 registration statements and nominee shareholders, or to collaborate with the shell peddlers from the outset of the scam. Once they have their ticker symbol and bogus S-1, they pump and dump their shares.
Why They Want To Control the Public Float
Fraudsters need control of the public float because it is easier for them to manipulate the price and volume when it is under their control. They also make more money because investors are unaware of their public float scheme. Their object is to dump their shares while the investor is buying them. In the foregoing scenarios, fraudsters can obtain control of a company’s public float without making any misrepresentations to the public.
In some instance, fraudsters control the float in order to stabilize the issuer’s stock price. They control the buying and selling and create a higher stock price. Many investors do not understand that significance of trading volume and simply judge a company by its bid and ask price. This enables the fraudsters to sell shares to investors at inflated prices even where there is no trading volume or stable market. This has become an increasingly popular trend used by fraudsters particularly where foreign investors and boiler rooms are being used.
The End Goal
Regardless of which variation of the scheme is used, the end goal is the same: for the participants to gain control of the float so they can dump their shares into the public markets. Investors may have limited or no information about who controls the float and whether it is being manipulated.
Advanced Multilevel Concepts
A recent decision could change the climate for these activities. In Advanced Multilevel Concepts, Inc. et al. v. Edward Bukstel et al., Civil Action No. 11-3718, the Court found that the anti-fraud provisions of the federal securities laws can be applied to schemes to control the public float even if no misrepresentations are made. The Court determined that the Securities Exchange Act of 1934 (the “Exchange Act”) applies to a fraudulent scheme designed to obtain such control.
In the Advanced Multilevel case, the Federal District Court was presented with the issue of whether a violation of the anti-fraud provisions of Section 10(b) and Rule 10b(5) can occur when officers of a public company engage in a scheme to gain control over the company’s public float and enrich themselves to the detriment of the corporation.
The Court found that the Supreme Court’s broad holdings enforcing Section 10(b) and Rule 10b(5) extended to a corporate officer’s scheme to manipulate the stock’s float, artificially inflate its share price through fraud on the market and reap substantial gains by selling his shares, causing the public company and its other stockholders to suffer loss. As such, the Court denied defendants’ motion to dismiss the counterclaims.
With judges finding the anti-fraud provisions applicable to these schemes, it is likely that the Justice Department will pursue criminal charges against public float manipulators in the near future.
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 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
Hamilton & Associates to Publish OTC Pink Paper Series
BOCA RATON, Fla., March 21, 2014 /PRNewswire/ — Due to the fundamental changes in 2013 that continue to shape the new Securities landscape for capital raising and going public on the OTC Markets OTC Pinks, Hamilton & Associates Securities Attorneys has launched “OTC Pink Paper Series”, an e-book series by Securities Attorney, Brenda Hamilton, the founder of Securities Lawyer 101 Blog. Read More
SEC Suspends Citadel After Pumps and Dumps Report
On March 21, 2014, the Securities and Exchange Commission issued a trading suspension pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of trading in the securities of Citadel EFT, Inc. (“Citadel”), of Oceanside, California.
The SEC suspended trading in the securities of Citadel because of questions Read More
What is a Finder?
It is not unusual for a private or public company to be approached by person (“Finder”) who offers to locate investors in exchange for a fee. Most finders are not registered as broker-dealers with the Securities and Exchange Commission (the “SEC”). The possibility of receiving capital even through the efforts of a finder creates a tempting opportunity for issuers who need capital. Matching companies with investors can be a lucrative proposition for the Finder. While it may seem harmless enough, the SEC does not think so and in fact, the SEC frequently brings cases against unregistered Finders and those who aid and abet them. Read More
SEC Continues Trading Suspensions to Prevent Reverse Merger Custodianship Fraud
On March 21, 2014, the Securities and Exchange Commission (the “SEC”) announced the trading suspension of trading of the following issuers, commencing at 9:30 a.m. EDT on March 20, 2014 and terminating at 11:59 p.m. EDT on April 2, 2014: Read More
