On Friday, July 15, 2016, the Securities and Exchange Commission (“SEC”) charged Thomas Conrad, Jr. and his son, Stuart Conrad, and their two unregistered advisory firms, Financial Management Corporation (“FMC”) and Financial Management Corporation, S.R.L. (“FMC Uruguay”), with defrauding investors in a $10.7 million hedge fund primarily managed by Thomas Conrad.

According to the SEC’s complaint, between 2010 and late 2014, Thomas Conrad directed preferential redemptions and other disbursements out of the hedge fund and its feeder funds to himself, his son Stuart Conrad, their extended family, and certain favored investors, while representing to other investors that redemptions were suspended.

The complaint also claims that Thomas Conrad arranged to increase his compensation from the hedge fund by appointing himself to be a sub-manager, for a fee, and that this additional fee and the related conflict of interest was not disclosed to investors. Read More

Vineet Kalucha was sentenced to fifteen months in prison in a parallel criminal case after pleading guilty to charges that he obstructed justice in an investigation conducted by the SEC. Vineet Kalucha, whose sentence was handed down on July 14, will also be placed on supervisory release for 24 months upon completing his prison term. On May 5, 2014, the SEC filed fraud charges in federal district court against Kalucha, Aphelion Fund Management LLC (“Aphelion”), an unregistered investment advisor Kalucha controlled, and Aphelion’s chief financial officer. The SEC’s complaint alleged that Kalucha fraudulently altered an outside audit firm’s report reviewing the performance of an investment account that Kalucha managed, essentially changing an investment loss into a major investment gain in the account. The complaint further alleged that investors were separately provided false information about Aphelion’s assets under management and Kalucha’s litigation history, and that Kalucha allegedly siphoned investor funds for his luxury car payments and settlements of legal actions against him personally that are unrelated to Aphelion.

Read More

On Friday, July 15, 2016, the Securities and Exchange Commission (“SEC”) charged two residents of Alpharetta, Georgia, Thomas Conrad, Jr. and his son, Stuart Conrad, and their two unregistered advisory firms, Financial Management Corporation (“FMC”) and Financial Management Corporation, S.R.L. (“FMC Uruguay”), with defrauding investors in a $10.7 million hedge fund primarily managed by Thomas Conrad. According to the SEC’s complaint, between 2010 and late 2014, Thomas Conrad directed preferential redemptions and other disbursements out of the hedge fund and its feeder funds to himself, Stuart Conrad, their extended family, and certain favored investors, while representing to other investors that redemptions were suspended. Read More

On July 18, 2016, the U.S. District Court for the District of Utah entered final judgments against Tyson D. Williams and Stanley D. Parrish, both of whom were charged by the SEC in 2014 with fraud in connection with the sale of securities by ST Ventures, LLC. Among other remedies, the final judgments ordered the two defendants to pay over $4 million in monetary sanctions. According to the SEC’s complaint, Williams and Parrish raised over $7 million from approximately 50 investors through the fraudulent and unregistered sale of securities in ST Ventures, LLC. The complaint alleged Williams and Parrish told investors that ST Ventures would purchase collateralized mortgage obligations (CMOs) and then leverage the CMOs to produce a large return for the investor within 30 to 90 days. Read More

On July 22, 2016, Jeffrey Wilson, the former CEO of Indiana-based Imperial Petroleum, Inc., and a defendant in a SEC civil enforcement action, was found guilty of 19 counts of securities fraud and other violations of federal law on July 20 by a jury in a federal criminal trial in Indianapolis, Indiana. The criminal charges stemmed from Wilson’s role in a fraudulent scheme in which Imperial Petroleum’s largest subsidiary, E-biofuels LLC, was falsely portrayed as a legitimate biodiesel production company in order to illegally take advantage of valuable government incentives.

Wilson was found guilty of two counts of securities fraud, seven counts of making false statements in required filings with the SEC, five counts of wrongful certification as a corporate officer of annual or quarterly reports filed with the SEC, three counts of making false statements or omitting to state material information to Imperial Petroleum’s auditors, and one count of making false statements to government officials. Read More

On May 5, 2016, Judge Alvin W. Thompson of the U.S. District Court for the District of Connecticut granted the SEC’s motion for an officer and director bar against Joseph F. Apuzzo, former Chief Financial Officer of Terex Corporation. The ruling follows an evidentiary hearing on the Commission’s motion and resolves the case against Joseph Apuzzo in its entirety.

Joseph Apuzzo had previously consented, without admitting or denying the allegations in the Commission’s complaint, to be permanently enjoined from violations of Sections 10(b) and 13(b)(5) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rule 13a-1 thereunder, and to pay a penalty of $100,000. Read More

On May 3, 2016, the SEC announced  securities fraud charges against 10 individuals involved in cash bribes and other kickbacks to registered representatives and unregistered brokers who solicited investors to buy stock in ForceField Energy Inc. The SEC alleges that investors were unaware those soliciting them were being paid by a ringleader – ForceField’s then-chairman of the board Richard St. Julien – to steer them to the stock, and that some of the perpetrators attempted to evade law enforcement by going so far as to communicate with prepaid disposable “burner” phones and encrypted, content-expiring text messages.

Read More

We last wrote about the complex litigation involving Calissio Resources Group (CRGP) in February. It arose out of a controversy surrounding the company’s payment of a special dividend of $0.011 a share in August 2015. At the time of declaration, Calissio estimated that the dividend would cost about $1.3 million. During the same period, it announced that it would launch a stock buyback program.

We last wrote about the complex litigation involving Calissio Resources Group (CRGP) in February.  It arose out of a controversy surrounding the company’s payment of a special dividend of $0.011 a share in August 2015.  At the time of declaration, Calissio estimated that the dividend would cost about $1.3 million.  During the same period, it announced that it would launch a stock buyback program.

The dividend was declared on 16 June.  The company set a record date of 30 June and a pay date of 17 August.  When FINRA processed the relative corporate action request, it named 19 June as the ex dividend date.  The ex date is the first day on which a stock will trade without a dividend attached.  The dividend will be paid on all stock of the class specified that is issued and outstanding as of the record date.  If a shareholder sells his stock between the record and ex dates—that is, during the interim period—he will be selling his right to the dividend with it.  A due bill will be attached, and the dividend will be paid to the person holding the stock as of the ex date.  To sum up:  the record date establishes what stock is eligible for the dividend; the ex date establishes what shareholders will receive it. Read More

Many penny stocks have bad histories, or are associated with questionable players.  Only last December, convicted felon Edward Durante was civilly and criminally charged in a securities fraud and manipulation scheme he’d embarked upon immediately after leaving prison in 2009.  He managed to escape detection for years by using a number of aliases and variations of his name.  One-time bad actors don’t always go that far, though they almost always attempt to conceal their unsavory pasts.

A case in point is William David Jones.  Jones currently works with Kaya Holdings, Inc (KAYS) as a “consultant.”  Between 2010 and April 2015, KAYS was Alternative Fuels America, Inc (AFAI), a biofuels company hoping to score in the then-hot alternative energy industry.  Despite the efforts of its CEO Craig Frank, that didn’t happen, so in 2014 Frank decided to take the company in a new direction.  The following year, KAYS changed its name and ticker, claiming to be the “first publicly traded seed-to-sale marijuana business.”  Frank chose to establish his operation in Oregon, which had recently legalized recreational as well as medical marijuana.  KAYS is by no means the first public pot company—there are at least 300 public entities that deal in marijuana or peripherals like grow equipment or vapes—but it’s one of approximately 50 that are Securities and Exchange Commission (“SEC”) registrants.  Currently, KAYS has two dispensaries in Oregon, one in Portland, the other in Salem.  They’re branded as “Kaya Shacks.” Read More

The Securities and Exchange Commission (“SEC”) announced that on April 8th the Honorable Paul A. Crotty of the United States District Court for the Southern District of New York entered final judgments on consent against defendants Stephen Shea, the former Chief Operating Officer of Sky Capital LLC a/k/a Granta Capital Group LLC (“Sky Capital”), and three registered representatives (“RRs”) at Sky Capital, Adam Harrington Ruckdeschel, Michael Passaro, and Robert Grabowski, permanently enjoining them from violating the antifraud provisions of the federal securities laws. These judgments fully resolve the enforcement action before Judge Crotty as to these defendants.

In its complaint filed on July 8, 2009, the SEC alleged that Shea, Harrington, Passaro, and Grabowski used fraudulent boiler room tactics to raise more than $61 million from investors in two related companies – Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (the “Sky Entities”). The complaint alleged that the defendants orchestrated and participated in the extremely profitable scheme designed to fraudulently induce numerous individuals to invest in the Sky Entities. Read More

The Securities and Exchange Commission (“SEC”) announced today that, on April 11, 2016, a federal court in Philadelphia, Pennsylvania sentenced Michael Donnelly of Lecanto, Florida, to 99 months imprisonment, to be followed by three years of supervised release, and the payment of restitution in the amount of $1.99 million. Donnelly is the former president of Wilmington, Delaware-based Coastal Investment Advisors Inc. and its affiliated broker-dealer. Donnelly pleaded guilty to securities fraud and wire fraud in December 2015.

The SEC charged Donnelly in a parallel action filed in October 2015. According to the SEC’s complaint, from 2007 through August 2014, Donnelly took funds from elderly and unsophisticated advisory clients and brokerage customers and, instead of investing the money as promised, used it to pay for his own expenses. Read More

The Securities and Exchange Commission (“SEC”) filed a civil injunctive action on April 12, 2016, in the United States District Court for the Southern District of New York against Khaled “Kal” Bassily, the former head of ConvergEx Execution Solutions LLC’s Global Transition Management (“GTM”) group, for his participation in a fraudulent scheme to hide from customers that they paid substantially higher amounts than disclosed for the execution of trading orders.

The SEC’s complaint alleges that over the course of approximately five years, Bassily took steps to conceal from transition management customers the routine practice of routing their brokerage orders to an offshore affiliate to take hidden charges that were embedded in the price customers paid to buy and sell securities. The customers included charities, religious organizations and retirement funds. The complaint alleges that the hidden charges, known as “trading profits” or “TP,” were in addition to and often substantially higher than the commissions paid by customers to have their orders executed. As alleged in the complaint, one customer paid $600,000 in commissions for certain trades placed through GTM, but also unknowingly paid $9.6 million in hidden TP on those same trades. Read More

On April 11, 2016 the Securities and Exchange Commission (“SEC”) announced fraud charges against a Texas-based technology company and its founder accused of boosting stock sales with false claims about a supposedly revolutionary computer server and big-name customers purportedly placing orders to buy it.

Also charged in the SEC’s complaint is Texas Attorney General Ken Paxton and a former member of the company’s board of directors for allegedly recruiting investors while hiding they were being compensated to promote the company’s stock.

The SEC alleges that Servergy Inc. and William Mapp III sold $26 million worth of company stock in private offerings while misleading investors to believe that the Cleantech CTS-1000 server (the company’s sole product) was especially energy-efficient. They said it could replace “power-hungry” servers found in top data centers and compete directly with top server makers like IBM, Dell, and Hewlett Packard. However, neither Mapp nor Servergy informed investors that those companies were manufacturing high-performance servers with 64-bit processors while the CTS-1000 had a less powerful 32-bit processor that was being phased out of the industry and could not in reality compete against those companies. Read More

The Securities and Exchange Commission (SEC) announced that, on April 5, 2016, a federal jury in Massachusetts convicted Rosalind Herman of Woburn, Massachusetts of criminal charges of investment adviser fraud, tax fraud, wire fraud and conspiracy for her role in connection with defrauding investors of over $1.3 million.

Herman was indicted in March 2012; additional charges were added by a superseding indictment in March 2013. Read More

On April 7th, 2016, the Securities and Exchange Commission (SEC) announced fraud charges against two men behind a scheme to manipulate the stock of Green Energy Renewable Solutions, Inc., a company that purported to be in the business of developing waste processing and recycling facilities.

The SEC’s complaint, filed in federal court in the District of Massachusetts, charges David Aubel, of Florida, and Robert Raffa, of New Hampshire, for their roles in the alleged scheme. In a parallel case, the U.S. Attorney’s Office for the District of Massachusetts today filed charges against the two men. Read More

On March 31, 2016, the Securities and Exchange Commission (SEC) announced fraud charges against a Cache County, Utah man who solicited investors in a bogus scheme involving investments in “top secret” Iraqi currency and oil contracts.

In a related criminal action, the U.S. Attorney’s Office for the District of Utah announced that John Scott Clark, of Cache County, Utah, pled guilty to felony securities fraud for his participation in the scheme. Clark will pay more than $1.7 million in criminal restitution and serve 36 months in prison.

The SEC charged Clark in 2011 for operating a $47 million Ponzi scheme and he pled guilty in 2009 to bank fraud, money laundering and illegal gambling. Read More

The Securities and Exchange Commission (SEC) announced fraud charges against Massachusetts resident Nathanial Ponn for engaging in a scheme to defraud numerous broker-dealers over more than seven years.

According to the SEC complaint filed in federal court in Boston, Ponn defrauded numerous brokerage firms through bogus bank transfers to newly opened brokerage accounts. These bogus transfers created the false appearance that the brokerage accounts would have cash available upon the settlement of Ponn’s purchases of stocks and mutual fund shares. Ponn used temporary credits from the bogus transfers to purchase stock and mutual fund shares, which he repeatedly attempted to cash out or transfer to other financial institutions before the brokerages discovered that Ponn did not have actual money to fund the bank transfers.

In a parallel action, the U.S. Attorney’s Office for District of Massachusetts today announced criminal charges against Ponn. Read More

The Securities and Exchange Commission (SEC) charged Navistar International Corp. with misleading investors about its development of an advanced technology truck engine that could be certified to meet U.S. emission standards.

Navistar, without admitting or denying the charges, has reached a settlement with the SEC and agreed to pay a $7.5 million penalty. Separately, in a complaint filed in federal court in the Northern District of Illinois, the SEC charged former Navistar CEO Daniel Ustian with misleading investors and with aiding and abetting violations by Lisle, Illinois-based Navistar.

The SEC alleges that Navistar and Ustian failed to fully disclose the company’s difficulties obtaining Environmental Protection Agency (EPA) certification of a truck engine able to meet stricter EPA Clean Air Act standards that took effect in 2010. Navistar and Ustian also are alleged to have repeatedly misled investors about Navistar’s development of the engine, which used exhaust-gas-recirculation (EGR) technology. Navistar later abandoned the effort and adopted the selective catalytic reduction (SCR) technology used by its competitors. Read More

 

On March 24, 2016, the Securities and Exchange Commission charged two brothers, and a company that they founded purportedly to develop and sell real estate, with engaging in a $2.7 million Ponzi scheme that targeted approximately 30, largely elderly and unsophisticated investors over a six-year period.

According to the SEC’s complaint, filed in federal court in New Jersey:

• From 2008 through at least 2014, Daniel Rivera, a New York resident who maintains an office in New Jersey, told investors that they would share in the profits of Robbins Lane, a Pennsylvania real estate venture that purportedly bought, redeveloped and sold properties.
• Daniel Rivera provided a brochure to investors that advertised Robbins Lane as “provid[ing] an opportunity for the senior investor to share in the profits from prudent investments in real estate” and “giv[ing] the senior investor a guaranteed monthly income.”
• In fact Robbins Lane had no real estate portfolio, no operations, no employees, and no ability to provide income to investors (much less “guaranteed” income).
• Daniel Rivera also created the content of a publicly available Robbins Lane website that aimed to attract investors and which his brother, Matthew Rivera, a Pennsylvania resident, reviewed. Robbins Lane’s website contained the same misstatements as did the brochure that was provided to investors.
• At times, Daniel Rivera recommended that investors liquidate other holdings, including retirement assets, to invest in Robbins Lane.
• Instead of investing in real estate, hundreds of thousands of dollars of investor funds were used to pay other investors.
• Other funds were used for personal expenses, such as, for example, to purchase tickets for sporting events, to pay for college tuition and sorority dues for Daniel Rivera’s daughter, to pay personal credit card bills, for transfers to relief defendants Rivera & Associates and Daniel Rivera Inc., for transfers to a janitorial business in which Matthew Rivera was a partner, and to purchase a condominium that, at one point, was occupied by a relative of Matthew Rivera.
• After the SEC’s investigation began, Matthew Rivera repaid to Robbins Lane a substantial portion of the funds that he withdrew, which were, in turn, repaid to investors.

Read More

When Shorts Hit Cannabis Stocks

When a public stock’s price declines, it has become common practice for penny stock issuers and their disciples to scream foul play, typically claiming on message boards like Investor’s Hub that their company has fallen victim to stock “bashers” and naked short sellers.  Short sellers and bashers are widely believed to be working with crooked market makers and nefarious clearing firms to send stock price tumbling downward. It is important that companies going public and public companies in the cannabis sector understand the risks presented by short sellers and the laws that regulate short sale activity. This is particularly important given the rise of activist short sellers who publicly disseminate negative information, in part to expose what they consider to be bad companies, but also to benefit financially from their short selling. Understanding the securities laws will assist cannabis companies in interpreting unusual market activity in their shares.

What Might Make a Publicly Traded Cannabis Company Vulnerable to Short Sellers?

Short selling naturally enjoys greater popularity when the public markets are generally perceived as vulnerable, when particular market sectors are doing poorly or, paradoxically, those sectors are thought to be doing better than their fundamentals suggest. Cannabis companies are a hot new sector. Well over 100 marijuana-related companies trade on the U.S. over-the-counter markets; the number fluctuates as some turn quickly to other lines of business and new entrants appear.  While some of these issuers are SEC registrants, most are not.  They offer varying levels of disclosure—sometimes, none at all—at the OTC Markets website, making accurate due diligence difficult. Read More

The Securities and Exchange Commission (SEC) charged a New York-based securities professional with defrauding two institutions he solicited to invest in a shell company he controlled whose name was deceptively similar to that of a legitimate private equity fund.

According to the SEC complaint, Andrew Caspersen solicited approximately $95 million from two institutional investors by offering promissory notes issued by Irving Place III SPV, LLC (“Irving Place III”). The complaint alleges that Irving Place III is a shell entity formed and controlled by Caspersen with no legitimate business operations, unlike the similarly named Irving Place Capital Partners III SPV, a legitimate private equity fund not associated in any way with Caspersen. Read More

The Securities and Exchange Commission (SEC) announced that a former market analyst and TV news commentator has agreed to settle charges that he and his company fraudulently promoted a penny stock to investors.

The SEC alleges that Tobin Smith and NBT Group Inc. were paid to prepare and disseminate e-mails, online blogs, articles, and other communications touting the stock of IceWEB Inc., a data storage company. Smith and NBT did not fully disclose their compensation to investors, who did not have the benefit of knowing that part of their pay was tied to a sustained increase in IceWEB’s share price. The promotional material also contained false and misleading statements intended to artificially increase the trading volume and share price of IceWEB’s stock.

Smith and NBT agreed to be barred from involvement in any future penny stock offerings and must pay disgorgement of $165,900 plus $16,893 in interest. Smith also must pay a $75,000 penalty. Read More

The Securities and Exchange Commission announced fraud charges against a Massachusetts-based biotech company and three former executives for misleading investors about the company’s efforts to obtain Food and Drug Administration (FDA) approval for its flagship developmental drug to treat kidney cancer.

The SEC alleges that AVEO Pharmaceuticals Inc. concealed the FDA’s level of concern about Tivozanib in public statements to investors by omitting the critical fact that FDA staff had recommended a second clinical trial to address their concerns about patient death rates during the first clinical trial. When the FDA made public months later that it had recommended an additional clinical trial, the company’s stock price declined 31%. AVEO never conducted an additional trial, and the FDA later refused to approve Tivozanib. Read More

On March 25, 2016, the Honorable Richard W. Story of the United States District Court for the Northern District of Georgia sentenced Stanley Kowalewski to 18 years’ imprisonment for defrauding the investors in his hedge funds and obstructing the SEC’s earlier related investigation. In February 2013, a federal grand jury in Atlanta indicted Kowalewski with wire fraud and obstruction of justice. According to the indictment, beginning in 2009, Kowalewski solicited investment money from pension funds, school endowments, hospitals, non-profit foundations, and other investors which he placed in various hedge funds that he controlled. Read More

On March 25, 2016 the Securities and Exchange Commission (SEC) announced fraud charges and asset freezes obtained in a case filed against a New Jersey-based fund manager and two firms he controls that marketed shares in promising pre-IPO tech companies in the Bay Area. The SEC alleges they stole $5.7 million from investors and diverted millions more to other improper and undisclosed uses.

Specifically, the SEC alleges that John Bivona used money raised through Saddle River Advisors and SRA Management Associates to pay off earlier investors, prop up other funds, and pay family-related expenses. He secretly steered the lion’s share of misappropriated funds to his nephew Frank Mazzola, who was barred from the securities industry in a prior SEC enforcement action and is charged along with Bivona and his firms in the complaint filed Monday in federal district court in California. Read More

The Securities and Exchange Commission (SEC) announced that the Honorable Patrick J. Schiltz of the United States District Court for the District of Minnesota has entered an order holding defendants James Louks and FiberPoP Solutions, Inc. in civil contempt.

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 defrauded nearly 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.” Read More

The Securities and Exchange Commission (SEC) announced that on March 23, 2016, Gilbert Lundstrom, the former chairman of the board and CEO of TierOne Bank, based in Nebraska, was sentenced to 11 years in federal prison and ordered to pay a $1.2 million criminal fine.

Lundstrom, along with TierOne’s former chief operating officer James Laphen and former chief credit officer Don Langford, was criminally charged for orchestrating a scheme to defraud TierOne’s shareholders and misleading regulators by concealing more than $100 million in losses on loans and declining real estate. Laphen and Langford both pled guilty and agreed to cooperate in the criminal case against Lundstrom. At Lundstrom’s trial, the government presented evidence that Lundstrom was the architect of an aggressive strategy to expand the bank’s portfolio beyond traditional lending in Nebraska to riskier areas like commercial real estate in Las Vegas. Read More

The Securities and Exchange Commission (SEC) announced on March 24, 2016 that it had entered into settlement agreements, subject to court approval, with defendants David Amaryan, Copperstone Alpha Fund, Copperstone Capital, Intertrade Pacific SA, Ocean Prime Inc., Guibor S.A., and Omega 26 Investments Ltd. in a case alleging a scheme to trade on hacked news releases. In August 2015, the SEC filed a civil action and an amended complaint in federal court in New Jersey, and the court entered an asset freeze and other emergency relief against these defendants, among others. Read More

The Securities and Exchange Commission (SEC) announced on March 24, 2016 that a federal court in Texas found promoters of fraudulent oil and gas investments liable all counts. The Honorable Ed Kinkeade of the United States District Judge for the Northern District of Texas granted summary judgment on March 22 for the SEC on all claims against promoters Leon Ali Parvizian and his two Dallas-based companies, Arcturus Corporation and Aschere Energy, LLC. The court also found for the SEC on its claims against Alfredo Gonzalez and AMG Energy, LLC, also of Dallas, and Florida-based Robert Balunas and R. Thomas & Co. LLC, who sold the investments.

The SEC’s charges filed in December 2013, alleged that the defendants raised nearly $22 million from at least 380 investors nationwide through illegal securities sales. In its 50-page summary judgment order, the court found that Parvizian and his companies committed securities fraud by offering and selling interests in a drilling project in which they had no rights to participate or share profits. The court also found that all defendants had illegally offered and sold unregistered securities and that Parvizian, Gonzalez, AMG Energy, Balunas, and R. Thomas & Co. acted as unregistered broker-dealers. Read More