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
SEC Suspends Petrotech Oil and Gas l Securities Lawyer 101
On March 14, 2014, the Securities and Exchange Commission (“SEC”) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of trading of the securities of Petrotech Oil and Gas, Inc (PTOG). The SEC temporarily suspended trading in the securities of PTOG because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things including PTOG’s operations. Read More
Securities Lawyer 101 Announces Redesigned Securities Law Blog
Hamilton & Associates, a law firm providing going public and securities related legal services announces its newly designed securities law blog. The blog has been redesigned in a new user friendly format to provide useful current information. The new blog includes information about the JOBS Act, going public and the SEC registration statement process.
The securities law blog is designed to assist market participants, securities professionals and private companies considering going public transactions. The new site is located at www.securitieslawyer101.com Read More
Albert Reda Sentenced to 26 Months
Albert Reda, the former treasurer and chairman of the board of directors of First Global Financial Corporation, was sentenced for his role in a fraudulent kickback scheme. After a six-day trial, Reda was convicted of wire fraud and mail fraud.
Reda was sentenced to 26 months in prison, one year of supervised release, a fine, and forfeiture of his illegal earnings. In November 2013, following a six-day trial, a jury convicted Reda of wire fraud and mail fraud. Read More
Offering Price & Dilution Disclosures in Registration Statements
Companies going public have several options in how to structure their transaction when filing a Form S-1 registration statement.
The issuer can seek to raise capital by registering shares to sell through an Initial Public or Direct Public Offering, it may register shares on behalf of existing shareholders or it can do both.
If the issuer seeks to raise capital using a registration statement it must disclose the criteria it used, if any, to arrive at the offering price.
If the issuer arbitrarily determined the offering price and no specific criteria was used in pricing the offering, this should be disclosed along with specific risk disclosures.
Some of the factors an issuer might consider in pricing an offering include: Read More
Use of Proceeds In Form S-1 Registration Statements
Companies going public have several options in how to structure their transaction when registering securities with the Securities and Exchange Commission (“SEC”). They can seek to raise capital using the registration or they can simply register shares on behalf of existing shareholders. If the issuer seeks to raise capital using the registration statement expansive disclosures are required of the use of proceeds. Read More
Securities Lawyers Gone Wild l Russell Adler Charged
On March 7, 2014, Russell Adler, a former name partner in Scott Rothstein’s now-defunct law firm was criminally charged for funneling illegal campaign contributions to Senator John McCain and Florida gubernatorial candidate Charlie Crist. Adler was charged with a single count of conspiracy to violate the Federal Election Campaign Act. Read More
What Are the Reporting Obligations After My Form S-1 ls Effective?
Once the SEC staff declares your company’s Securities Act registration statement effective, the company becomes subject to Exchange Act reporting requirements. These rules require your company to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the SEC on an ongoing basis.
If your company qualifies as a “smaller reporting company” or an “emerging growth company,” it will be eligible to follow scaled disclosure requirements for these reports.
Once your company begins reporting, it will be required to continue reporting unless it satisfies one of the following “thresholds,” in which case its filing obligations are suspended: Read More
John Babikian & Awesome Penny Stocks Charged in Scalping Scheme
On March 13, 2014, the Securities and Exchange Commission (“SEC”) announced fraud charges and an emergency asset freeze against a promoter behind a platform of affiliated microcap stock promotion websites.
The SEC alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively “Awesome Penny Stocks,” to commit a type of securities fraud known as “scalping.”
What is Form S-1 Summary Information? Securities Attorney 101
Form S-1 is the most commonly used registration statement statement filing with the Securities and Exchange Commission (“SEC”). This blog post addresses the summary information section of Form S-1. The requirements of the section are located in Items 501 and 502 of Regulation S-K. The goal of the summary section of Form S-1 is to highlight selected information that is presented in greater detail elsewhere in the registration statement.
The S-1 summary does not contain all of the information required under the specific headings addressed. As such, the Form S-1 summary section should reference the sections summarized. The section includes summaries of Business, Securities, Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and other material information.
Wwebnet CEO Pleads Guilty of $2 Million Securities Fraud
On March 11 ,2014, the Department of Justice announced that Robert Kelly, the chief executive officer of Wwebnet, Inc. (“Wwebnet”), a software development company, pled guilty today in Manhattan federal court to securities and wire fraud charges. According to the charges, Kelly diverted for his own personal use more than $2 million in investor proceeds that was intended for the development of a software program capable of transmitting music, videos, and movies over the Internet. He used the money to trade options, to pay his personal income taxes, and for other purposes unrelated to software development or other legitimate business expenses. Kelly was originally charged in September 2012, and he pled guilty today before United States District Judge Paul A. Crotty. Read More
Status of JOBS Act Rules & Proposals
The Jumpstart Our Business Startups Act (or JOBS Act) (“JOBS Act”), enacted in 2012, is intended, among other things, to reduce barriers to capital formation, particularly for smaller companies.
Among other things, the JOBS Act requires the SEC to adopt rules amending existing exemptions and creating new exemptions that permit companies to raise capital without filing a registration statement with the SEC. Read More
SEC Announces $7.2 Million for Rule 105 Short Selling Violations
On March 8, 2014, the Securities and Exchange Commission announced the largest-ever monetary sanction for Rule 105 short selling violations as a Long Island-based proprietary trading firm and its owner agreed to pay $7.2 million to settle charges. Read More
The Intrastate Exemption l Section 3(a)(11)
Section 3(a)(11) of the Securities Act is generally known as the “intrastate offering exemption.” The exemption is sometimes used by small issuers in going public transactions prior to filing a registration statement on Form S-1.
The intrastate exemption facilitates the financing of local business operations if certain requirements are met. Read More
SEC Suspends Global Earth Energy l Securities Lawyer 101
On March 4, 2014, the Securities and Exchange Commission (“SEC”)announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of trading in the securities of Global Earth Energy, Inc. (“Global Earth”), a Nevada corporation commencing at 9:30 a.m. on March 7, 2014, and terminating at 11:59 p.m. on March 20, 2104.
The SEC issued the trading suspension due to a lack of current and accurate information concerning the securities of Global Earth including questions regarding the accuracy of publicly available information about the company’s operations. The SEC acknowledges the assistance of the Alberta Securities Commission, Quebec Autorité des Marchés Financiers, and the British Columbia Securities Commission in this matter.
The SEC cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.
Further, brokers and dealers should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule. If any broker or dealer has any questions as to whether or not he has complied with the rule, he should not enter any quotation but immediately contact the staff in the Division of Trading and Markets, Office of Interpretation and Guidance, at (202) 551-5777.
If any broker or dealer is uncertain as to what is required by Rule 15c2-11, he should refrain from entering quotations relating to Suburban’s securities until such time as he has familiarized himself with the rule and is certain that all of its provisions have been met. If any broker or dealer enters any quotation which is in violation of the rule, the Commission will consider the need for prompt enforcement action.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
SEC Suspends Broadcast Live Digital l Securities Lawyer 101
On March 4, 2014, the Securities and Exchange Commission (“SEC”) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (“Exchange Act”), of trading in the securities of Broadcast Live Digital Corp (“BFLD”) of Toronto, Ontario commencing at 9:30 a.m. on March 7, 2014, and terminating at 11:59 p.m. on March 20, 2104. The SEC issued the trading suspension due to a lack of current and accurate information concerning the securities of Broadcast Live including questions regarding the accuracy of publicly available information about the company’s operations. Read More
SEC Suspends Suburban Minerals Corp
On March 4, 2014, the Securities and Exchange Commission (“SEC”) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of trading in the securities of Suburban Minerals Corp (“Suburban”), of Henderson, Nevada commencing at 9:30 a.m. on March 7, 2014, and terminating at 11:59 p.m. on March 20, 2104. Read More
SEC Obtains Summary Judgment Against StratoComm Penny Stock Defendants
On February 19, 2014, the United States District Court for the Northern District of New York in Albany, New York granted the Securities and Exchange Commission’s motion for summary judgment on liability against all defendants. Read More
SEC Charges Dewey & LeBoeu Executives with Securities Fraud
On March 6, 2014, the Securities and Exchange Commission (“SEC”) announces charges against five executives at Dewey & LeBoeuf,and finance professionals. They are are accused of facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, the international law firm where they worked. The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the economic recession and steep costs from a merger. Read More
SEC Shuts Down Pyramid Scheme Using Phony Companies l Securities Lawyer 101
On March 5, 2014, the Securities and Exchange Commission (“SEC”) announced an emergency enforcement action to stop a fraudulent pyramid scheme by phony companies masquerading as a legitimate international investment firm. The SEC has obtained a federal court order to freeze accounts holding money stolen from U.S. investors by Fleet Mutual Wealth Limited and MWF Financial – collectively known as Mutual Wealth. Read More
What are the OTC Markets Reporting Requirements?
Unlike securities listed on stock exchanges such as NASDAQ or the NYSE, securities may trade through the OTC Markets interdealer quotation system whether they are a Securities and Exchange Commission (“SEC”) reporting issuer or not. There are three reporting standards for companies quoted by OTC Markets which vary depending upon the level of disclosure provided to investors.
OTCMarkets OTCQB & OTCQX Reporting Standard Read More
SEC Announces Trading Suspension of Aventura Equities
On March 5, 2014, the Securities and Exchange Commission (“SEC”) announced the temporary trading suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (“Exchange Act”), of trading in the securities of Aventura Equities, Inc. (“Aventura”) commencing at 9:30 a.m. EST on March 5, 2014, and terminating at 11:59 p.m. EDT on March 18, 2014. The Commission temporarily suspended trading in the securities of Aventura because of questions concerning the adequacy and accuracy of publicly available information about Aventura. Read More
How Can I Remove a DTC Chill Or Global Lock? Securities Lawyer 101
DTC Chills and global locks continue to be a growing problem for small companies. The Depository Trust and Clear Corporation (“DTCC”), through its subsidiaries, provides clearing, settlement and information services for securities. DTCC’s subsidiary, the Depository Trust Company (“DTC”) was created to improve efficiencies and reduce risk in the clearance and settlement of securities transactions. Not all securities are eligible to be settled through DTC. Issuers must satisfy the criteria set by DTCC to be settled through DTC. All companies must satisfy this criteria in order to be DTC eligible, including both Securities and Exchange Commission (“SEC”) reporting and non-reporting issuers. Read More
Jerry Williams AKA Monk Ordered to Pay Over $9,600,000
On February 12, 2014, the Securities and Exchange Commission (“SEC”) announced that a Connecticut federal court entered judgments against a former Connecticut-based stock promoter, Jerry S. Williams, and two companies that he controlled, Monk’s Den, LLC and First In Awareness, LLC. Read More
What Is a Naked Short Sale? Securities Lawyer 101
The Short Seller Scape Goat
In recent years, the activities of short sellers have been the subject of controversy. While short selling is a simple process it is widely misunderstood. While the average investor profits when he invests in a stock whose price goes up, a short seller profits when it invests in a stock whose price goes down. Read More
