On January 13, 2017, the U.S. District Court for the District of Minnesota entered a final judgment against Minnesota resident James M. Louks and his company, FiberPoP Solutions, Inc. Louks and FiberPoP are defendants in an SEC civil enforcement action who were charged with raising money from investors under false pretenses while failing to produce the promised returns until the SEC’s emergency action stopped them from doing so.

In September 2015, the SEC announced fraud charges and an emergency order to halt Louks and FiberPop from continuing to raise money from investors. In its complaint, the SEC alleged that Louks and FiberPoP, since 2003, defrauded approximately 100 investors by promising them massive returns, while actually spending the investors’ funds on various schemes, which the SEC alleged typically bore the hallmarks of “prime bank schemes.” Prime bank schemes lure investors to participate in a sham international investing opportunity with phony promises of exclusivity and enormous profits. Read More

On December 27, 2016, the Securities and Exchange Commission charged three Chinese traders with fraudulently trading on hacked nonpublic market-moving information stolen from two prominent New York-based law firms, racking up almost $3 million in illegal profits.  The SEC also is seeking an asset freeze that prevents the traders from cashing in on their illicit gains.  The enforcement action marks the first time the SEC has charged hacking into a law firm’s computer network.

The SEC’s complaint alleges that Iat Hong, Bo Zheng, and Hung Chin executed a deceptive scheme to hack into the networks of two law firms and steal confidential information pertaining to firm clients that were considering mergers or acquisitions.  Read More

Posted by Brenda Hamilton

One December 29, 2016, the Securities and Exchange Commission announced that Kentucky-based General Cable Corporation agreed to pay more than $75 million to resolve parallel SEC and U.S. Department of Justice investigations related to its violations of the Foreign Corrupt Practices Act (FCPA). The company agreed to pay an additional $6.5 million penalty to the SEC to settle separate accounting-related violations.

According to the SEC’s orders instituting settled administrative proceedings, General Cable’s overseas subsidiaries made improper payments to foreign government officials for a dozen years to obtain or retain business in Angola, Bangladesh, China, Egypt, Indonesia, and Thailand. General Cable’s weak internal controls also failed to detect improper inventory accounting at its Brazilian subsidiary, causing the company to materially misstate its financial statements from 2008 to the second quarter of 2012. Read More

On November 28, 2016, the Securities and Exchange Commission (“SEC”) obtained a temporary restraining order and an emergency asset freeze in a $3 million offering fraud and Ponzi scheme orchestrated by Andrew Kelley, Paul Shumway and their company Blackbird Capital Partners, LLC, a former Commodity Trading Advisor located in Draper, Utah.

The SEC’s complaint, filed in federal court in Utah, alleges that since at least September 2014, Kelley and Shumway solicited several investors to invest at least $3.1 million with Blackbird, or through a separate “friends and family” account, which Kelley claimed he managed as a proprietary trading fund. Read More

On November 23, 2016, the Securities and Exchange Commission (“SEC”) filed a civil action charging brothers Matthew Griffin and William Griffin with fraudulently offering interests in two Texas partnerships.

The SEC alleges that, between November 2013 and July 2014, the Griffins, through their company, Payson Petroleum, Inc., conducted a fraudulent two-phase offering of interests in two Texas partnerships, raising $23 million from approximately 150 investors for the purpose of developing three oil and gas wells. The SEC further alleges that the Griffins misled investors about Payson’s promised participation in the program and about Payson’s compensation as the program’s sponsor and operator. Read More

On November 21, 2016, the Securities and Exchange Commission (“SEC”) charged Jason William Kumpf, the former CEO and president of microcap issuer Warrior Girl Corp. and a resident of San Francisco, California, with fraud based on his involvement in the issuance of false and misleading public statements concerning Warrior Girl.

According to the SEC’s complaint, filed on November 21, 2016 in the U.S. District Court for the Southern District of New York, Kumpf, along with two individuals that were previously charged by the SEC, drafted a press release that Warrior Girl issued on or about July 1, 2010. Read More

In September, we wrote about Guy Gentile, the owner of two successful stock brokerages, and his troubles with the U.S. Department of Justice (“DOJ”).  According to the DOJ, back in 2007-2008, Guy Gentile had become involved in the promotion of two penny stocks, Raven Gold Corporation (RVNG) and Kentucky USA Energy, Inc. (KYUS).  The Securities and Exchange Commission (“SEC”) opened an investigation into both, and the DOJ took an interest as well.  The individuals who paid for the promotions were different, but the promoters were the same:  Canadians Mike Taxon and Itamar Cohen.  Taxon and Cohen recruited Gentile because they needed a trader who could create the appearance of a market for their first play, RVNG.

The operation followed a pattern familiar to anyone who follows penny stock pump and dump operations.  The Canadians who controlled the RVNG shell gave a large block of unrestricted stock to the promoters, who would use it to get trading going, and eventually to pay for a hard mailer, other advertising, and manipulative trading.  Some friendly traders and stock touts were willing to accept free RVNG shares as kickbacks for open market purchases of the stock.  The company’s CEO began to issue press releases that would be used in the preparation of the mailer.  The mailer was distributed in mid-July 2007, and not surprisingly, it drove price and volume.  Before the promotion began, the stock price had hovered around $0.80 a share; at the promo’s height, it hit $1.73.   Read More

On November 14, 2016 and November 21, 2016, William Allen and Susan Daub pled guilty in federal court to criminal wire fraud and other charges in connection with an investment scheme involving fraudulent loans to professional athletes. The criminal charges arise from the same conduct alleged in a related SEC civil enforcement action.

Allen and Daub both pled guilty to two counts of wire fraud, one count of conspiracy to commit wire fraud, and one count of charging a money transaction in proceeds of a specified unlawful activity. Allen and Daub were arrested on these charges in June 2015. As part of the fraud, Allen and Daub collected funds from investors for certain fictitious or oversubscribed loans and created the false impression that athletes were repaying certain fictitious or oversubscribed loans on schedule by making scheduled monthly payments to investors from new investor funds. Read More

On November 18, 2016, Stanley Jonathan Fortenberry (a/k/a S.J., John, or Johnny Fortenberry) of San Angelo, Texas, pleaded guilty to an indictment charging him with obstruction of justice and other charges in connection with two investment companies he ran that defrauded investors out of approximately $900,000 over a four-year period.

On April 28, 2014, the SEC instituted public administrative and cease-and-desist proceedings against Fortenberry. The Division of Enforcement alleged that Fortenberry ran an investment company called Premier Investment Fund (Premier), which raised funds from investors for social media projects run by another company with ties to the country music industry. Read More

The Securities and Exchange Commission (“SEC”) charged Gavin Campion, the former president of KIT Digital Inc., with securities fraud.

The SEC’s complaint, filed in federal court in New York on November 15, alleges that over a one-year period ending in late 2011 Campion – along with Kaleil Isaza Tuzman, then KIT Digital’s CEO, and Robin Smyth, then its chief financial officer – caused KIT Digital to recognize more than $25 million in false revenue from at least a dozen sham license agreements that inflated KIT Digital’s publicly reported financial results. Read More

On November 14, 2016, the Securities and Exchange Commission (“SEC”) added Francisco Martin of Woodland Hills, California to a civil injunctive action currently pending in the U.S. District Court for the Southern District of New York, charging him with defrauding investors in sham Native American tribal bonds.

The SEC’s amended complaint alleges that Martin, along with seven other co-defendants, participated in a scheme to convince a Native American tribal corporation affiliated with the Wakpamni District of the Oglala Sioux Nation to issue limited recourse bonds that Jason Galanis and his father, John Galanis, had already structured. As Jason Galanis allegedly told two of his associates, the “primary objective” of the scheme was to provide Jason Galanis and his associates “a source of discretionary liquidity.” Read More

On November 14, 2016 the Securities and Exchange Commission (“SEC”) announced that it entered into a settlement agreement with Gordon Johnston, a former official at the U.S. Food and Drug Administration’s Office of Generic Drugs (OGD) who allegedly participated in an insider trading scheme while working as a trade association representative.

On June 15, 2016, the SEC filed a complaint in federal district court in Manhattan alleging that Johnston concealed his role as a hedge fund consultant to obtain confidential information from his former OGD colleagues and friends about anticipated FDA approvals for a drug called enoxaparin, which is a generic version of the brand name drug Lovenox. Johnston allegedly passed the material, nonpublic information to a portfolio manager at Visium Asset Management, L.P. (Visium), where Johnston earned approximately $108,000 as a paid consultant. The portfolio manager allegedly made millions of dollars illicitly trading on the nonpublic information that Johnston provided. Read More

The Securities and Exchange Commission (the “SEC”) is pursuing unregistered broker or broker dealer activity which runs rampant in the penny stock markets particulary in transactions involving reverse merger companies. Often these unregistered broker-dealers claim to be exempt from the broker dealer registration requirements.  SEC enforcement actions demonstrate there are serious consequences for those who engage in unregistered broker dealer activity.

This Securities Lawyer 101 Q &A addresses the most common questions we receive about unregistered broker-dealer activity. Read More

On October 24, 2016, James M. Merrill, of Ashland, Massachusetts, the former president of TelexFree, Inc. and TelexFree, LLC, pled guilty to criminal charges related to his operating a pyramid scheme through TelexFree. On May 9, 2014, Merrill and another defendant, Carlos N. Wanzeler, who is a fugitive located in Brazil, were charged in a federal criminal complaint, charging them with conspiracy to commit wire fraud. The criminal charges against Merrill arose out of the same fraudulent conduct alleged by the SEC in a civil securities fraud action filed in April 2014. Read More

The Securities and Exchange Commission (“SEC”) says it doesn’t like over-the-counter shell companies, and would like to see them gone from the marketplace.  To that end, its Enforcement Division cooked up an initiative it called  “Operation Shell-Expel”.  It began with a bang on May 14, 2012, when the agency coupled an announcement of Shell-Expel with the suspension of trading in the stock of 379 dormant penny companies.  It was, the SEC said, the largest such action in agency history.  What danger did these sorry companies present and if they are so dangerous why are there so many dormant shell companies still out there being fraudulently taken over?

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.

The shells were “rendered essentially worthless” because the suspension meant they’d be delisted to the Grey Market, the graveyard of bad pennies, in which market makers are forbidden to publish quotes.

Critics of rampant abuse in the OTC market cheered the SEC on, hoping Operation Shell-Expel signaled a new, and far less tolerant, attitude toward dormant shells that were often serially pumped and dumped.  The following June, the agency suspended trading in another 61 issuers, and in February 2014, it followed up by shutting down another 255 shells.  The hammer came down on 128 more in March 2015.  There’s been no similar action in 2016.  At the time of the 2015 suspensions, Enforcement director Andrew J. Ceresney remarked, “We are getting increasingly aggressive and adept at ridding the microcap marketplace of dormant shells within a year of the companies becoming inactive.”  Many market participants see the SEC’s failure to pursue corporate hijackers of dormant shells as one of the greatest enforcement failures of the penny stock markets in the last decade. We have identified hundreds of hijacked tickers and/or companies involving penny stocks with minimal effort yet these companies are illegally acquired and have been used in schemes robbing investors of millions of dollars and eliminating existing stockholders of their holdings.
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On October 27, 2016 the Securities and Exchange Commission (“SEC”) charged a Los-Angeles based investment advisory firm and its owner, Marc Broidy with fraudulently overbilling clients and stealing assets from their trusts to pay such personal expenses as his home mortgage, overseas trips, and leases on two Mercedes-Benz vehicles.

The SEC’s complaint alleges that Broidy and his firm Broidy Wealth Advisors obtained more than $1.4 million in ill-gotten gains since February 2011. Broidy allegedly billed clients approximately $643,000 in excess fees And covered it up by altering the amount of management fees recorded on forms issued by brokerage firms before sending the forms to his clients. The SEC further alleges that he fraudulently obtained additional funds to pay his personal expenses by misappropriating approximately $865,000 in assets from clients’ trusts for which he was trustee. Read More

Texas company Southlake Resources Group, LLC and its president Cody Winters have agreed to pay over $5.4 million to settle charges by the Securities and Exchange Commission (“SEC”) that they orchestrated an oil-and-gas fraud. The SEC also charged the president and a company vice president with acting as unregistered brokers in the transactions underlying the fraud.

According to the SEC’s complaint, filed on October 24, 2016, in the U.S. District Court for the Northern District of Texas, Southlake and its founder and president, Winters, raised approximately $5.2 million from more than 70 investors in 12 fraudulent oil-and-gas joint ventures. Winters and Southlake employed sales agents, including vice president Nicholas Hamilton, to offer and sell joint-venture interests to investors in 26 states from approximately June 2010 through September 2014. Read More

The Securities and Exchange Commission (“SEC”) announced a global settlement along with the U.S. Department of Justice and Brazilian authorities that requires aircraft manufacturer Embraer S.A. to pay more than $205 million to resolve alleged violations of the Foreign Corrupt Practices Act (FCPA).

The SEC’s complaint alleges that Embraer made more than $83 million in profits as a result of bribe payments from its U.S.-based subsidiary through third-party agents to foreign government officials in the Dominican Republic, Saudi Arabia, and Mozambique. Embraer allegedly created false books and records to conceal the illicit payments, and also engaged in an alleged accounting scheme in India. Read More

On October 21, 2016 the Securities and Exchange Commission (“SEC”) charged a James Cope, a Tennessee lawyer who served on the executive committee of the board of directors of Nashville-based Pinnacle Financial Partners with insider trading based on nonpublic information he learned about an impending merger.

The SEC alleges that Cope obtained more than $56,000 in ill-gotten gains by purchasing securities in Pinnacle’s acquisition target, Avenue Financial Holdings, prior to the banks’ joint public announcement later that month. According to the SEC’s complaint, Cope learned confidential details about the planned merger during a board executive committee meeting on January 5, 2016, and proceeded to place his first order to purchase Avenue Financial stock while that executive committee meeting was still in progress. Read More

A federal grand jury in the Northern District of Indiana has indicted Christopher Salis, Douglas Miller, and Edward Miller on charges relating to insider trading, money laundering, and structuring currency transactions. The 17-count indictment also charges Douglas Miller with false statements and Edward Miller with obstruction of justice and witness harassment. All three defendants were charged earlier this year in a parallel SEC matter.

According to the indictment, returned October 19, 2016, Salis was employed as a global vice president at SAP America in August 2014 when he obtained material, nonpublic information related to SAP’s intent to acquire Concur Technologies. The indictment alleges that Salis tipped his close friend, Douglas Miller, who in turn, tipped his brother, Edward Miller, and others. The Miller brothers and others allegedly purchased short-term, risky Concur call options, yielding illegal profits exceeding $500,000 after the acquisition was announced publicly on September 18, 2014. In an effort to avoid scrutiny and to evade currency transaction reporting requirements, the Miller brothers allegedly used cash, money orders, and checks to transfer some of these profits to Salis. Read More

On November 2, 2016, the Securities and Exchange Commission (“SEC”) Division of Corporation Finance released two new compliance and disclosure interpretations (“C&DIs”) addressing eligibility to use Form S-3 registration statements and submission of annual reports to the SEC.

Form S-3 Eligibility

New Question 116.25 of the Securities Act Forms C&DIs clarifies that securities registered for resale on Form S-3 registration statements in reliance on Form S-3 Instruction I.B.3 should be counted against the issuer’s available capacity under Instruction I.B.6 of the form.

Instruction I.B.6 allows an issuer with less than a $75 million public float to use a Form S-3 registration statement for a primary offering such as an Initial Public Offering (“IPO) so long as the issuer sells no more than one-third of its public float within a 12-month period. Read More

On October 17, 2016 the Securities and Exchange Commission (“SEC”) charged Lime Energy Co., an energy services provider and four of its executives for their roles in an accounting fraud in which the company recognized revenue earlier than allowed in order to meet internal targets.

Lime Energy areed to pay $1 million to settle the charges, and its four now-former executives also agreed to settlements.

The SEC’s complaint alleges that Lime Energy improperly recognized $20 million in revenue from at least 2010 to 2012. Two then-executives in the company’s utilities division — vice president of operations Joaquin Alberto Dos Santos Almeida and director of operations Karan Raina — developed procedures to enable the company to recognize revenue on newly signed contracts based on documentation received before year-end 2010. But when documentation did not arrive in time, they allegedly went ahead and booked the revenue anyway.

According to the SEC’s complaint, Almeida and Raina became even more aggressive in 2011 and 2012 as they further recognized revenue earlier than allowed by accounting principles as they faced increasing pressure to produce results. They eventually went so far as to direct internal accountants to book revenue on jobs that didn’t exist. The SEC further alleges that Lime Energy’s then-corporate controller Julianne Chandler accepted new accounting entries to book millions of dollars in additional 2011 revenue well after the year-end close. And in February 2012 when Lime Energy still needed $500,000 to meet its 2011 revenue target, the company’s then-executive vice president James Smith suddenly sent Chandler new entries that provided the company with even more additional revenue to improperly recognize. Read More

On October 26, 2016, the Securities & Exchange Commission (the “SEC”) adopted  amendments to Rule 147 of the Securities Act of 1933, as amended (“Securities Act”) to modernize the exemptions for intrastate securities offerings. According to the SEC, the amendments are intended to assist smaller companies with their capital raising efforts. Amended Rule 147 and new Rule 147A will become effective 150 days after publication in the Federal Register. The Rule 147 amendments expand the existing Rule 147 safe harbor under Section 3(a)(11) of the Securities Act and create Rule 147A under the Securities Act, a new intrastate offering exemption.

In October of last year, the SEC announced proposed amendments to Rule 147. As amended Rule 147 is substantially the same as the proposed rule amendments except that the existing Rule 147 safe harbor under Section 3(a)(11) is identical to the new exemption created by Rule 147A except that issuers relying on the Rule 147 safe harbor:

• May not offer securities to out-of-state residents, and
• Must be incorporated or organized in the state in which the offering is conducted.

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On September 29, the Honorable Sam R. Cummings of the United States District Court for the Northern District of Texas entered final judgments against Defendants Paul Downey, Jeffry Downey, and John Leonard. The judgments followed summary-judgment rulings in the SEC’s favor in July 2016, in which the court found that the Downeys raised $4.9 million from investors in a fraudulent oil-and-gas investment program and Leonard made $405,698 in commissions while serving as an unregistered broker.

Judge Cummings found the Downeys’ misconduct to be “extremely egregious,” describing it as “knowingly deceiving investors about virtually every aspect of the investment.” The court ordered them to disgorge $4.9 million plus $1.1 million in interest and to pay a civil penalty of $178,156 apiece. Read More

On September 29, 2016, the Securities and Exchange Commission (“SEC”) charged five individuals for engaging in a fraudulent scheme to illegally profit by manipulating the market and price for the stock of Ecoland International, Inc. (now known as Novus Robotics, Inc.), a penny stock company whose securities were quoted on the OTC Bulletin Board.

The SEC’s complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, alleges that Louis Buonocore, Jeremy Draper, Frank Morelli III, currently incarcerated in Philadelphia, Pennsylvania, Berardino “Dino” Paolucci, Jr., and Don Rose participated in a scheme to obtain an OTCBB company with a large block of unrestricted stock and conduct a fraudulent promotional campaign through which they could sell their shares of stock. During the summer of 2011, the defendants allegedly acquired over 90% of Ecoland’s stock and began the process of merging Paolucci’s father’s company, D&R Technology, Inc., into it, thereby obtaining total control over Ecoland’s 22 million shares of unrestricted stock and influence over the majority of its restricted stock. Read More

On September 30, 2016 the Securities and Exchange Commission (“SEC”) charged an attorney and three others in California with defrauding investors out of $13.6 million in a penny stock pump-and-dump scheme.

The SEC alleges that Marcus Luna and Norell Walker orchestrated the scam, which entailed setting up boiler rooms of telemarketers to tout a pair of companies that Luna and Walker secretly controlled. Walker’s business associates, Paul Gomez and Dustin Smith, ran boiler rooms in Beverly Hills and Costa Mesa, respectively. Telemarketers trained and supervised by Walker, Gomez, and Smith cold-called investors and urged them to purchase penny stocks they claimed would soar as high as $11 per share. As investors entered orders to purchase the stock out of their personal brokerage accounts, Walker would contact Luna so he could contact an offshore brokerage to fill the orders with Luna’s own shares. Luna, a California attorney, split the proceeds with Walker. Read More

On September 30, 2016, the Securities and Exchange Commission (“SEC”) filed fraud charges against cannabis company Infinex Ventures, Inc. and its CEO Ronald Salem.

According to the SEC’s complaint filed in the U.S. District Court for the District of Colorado, Salem incorporated a new entity, Marijuana Funding Inc. in March 2014, and then caused Infinex to release a series of three press releases in May and June 2014 announcing its negotiations with, and ultimate acquisition of, Marijuana Funding, Inc. In those press releases, Infinex and Salem described Marijuana Funding, Inc. as a private company that specialized in funding companies in the marijuana industry. Read More

On September 28, 2016, a federal court jury in New York, New York convicted Gary Hirst, the former CEO and President of Gerova Financial Group Ltd., of securities fraud, wire fraud and conspiracy charges. The criminal action was prosecuted by the U.S. Attorney’s Office for the Southern District of New York, and the trial was presided over by U.S. District Judge P. Kevin Castel.

The conviction follows guilty pleas on securities fraud and related charges by four other defendants in the matter: Jason Galanis, John Galanis, Derek Galanis and Gavin Hamels. Jared Galanis pled guilty to misprision of felony. A seventh defendant, Ymer Shahini, remains at large.

On September 24, 2015, the SEC filed a civil action in federal court in Manhattan, charging John Galanis, his sons Jason Galanis, Derek Galanis, and Jared Galanis, along with Hirst and investment adviser Hamels based on the same conduct alleged in the criminal case. According to the SEC’s complaint, in early 2010, Jason Galanis and Hirst orchestrated a scheme to secretly issue $72 million of unrestricted Gerova shares to a Galanis family friend in Kosovo. Jason Galanis, his father, and his brothers allegedly directed sales of the shares from the Kosovo friend’s brokerage accounts and had the proceeds wired to them and their associates who collectively realized approximately $20 million in illicit profits. Read More

On September 29, 2016, the Securities and Exchange Commission (“SEC”) charged Aegis Oil, LLC and its President and CEO Patrick Reagan Beason with defrauding investors in oil and gas projects managed by Aegis.

According to the SEC’s complaint filed in the U.S. District Court for the Southern District of Florida, from at least October 2010 through October 2015, Aegis and Beason raised approximately $35million from approximately 250 investors nationwide through a series of unregistered offerings in 15 oil and gas projects. The SEC alleges that Aegis and Beason made material misrepresentations and omissions orally and in written offering materials concerning the use of investor proceeds, the projected oil production and income from the investment, and Beason’s disciplinary history. The SEC also alleges that Aegis used an independent network of sales agents to solicit potential investors, and that Aegis paid commissions as high as 35% of investor funds to these sales agents. Read More