SEC Target Held In Contempt and Arrested
On January 23, 2014, the Securities and Exchange Commission (“SEC”) announced that a Staten Island man who was a SEC enforcement target was held in contempt of court and arrested for failing to comply with subpoenas requiring him to produce documents and give testimony. Read More
Investment Advisor Impersonates Angel Investors to Get Clients
Kimberly Fontenot of Texas has been convicted of defrauding clients of her so-called investment advisory firm, Stellar Grants Inc. According to the FBI, Fontenot lured potential clients by falsely claiming to know numerous wealthy investors located throughout the United States. She offered access to these wealthy investors, whom she called her “angel investors,” to potential Stellar Grants clients in exchange for money. Read More
Art Scammers Busted by FBI
On January 16, 2014, a federal grand jury in San Jose returned a 12-count indictment charging two antique dealers with conspiracy to commit mail fraud and wire fraud, mail fraud, and wire fraud relating to a multi-million-dollar investment scheme, announced United States Attorney Melinda Haag, Federal Bureau of Investigation Special Agent in Charge David J. Johnson, and United States Postal Inspection Service Acting Inspector In Charge Rafael Nunez. Read More
SEC Charges Senior Management of Veolia with Falsifying Financial Records
On January 14, 2014, the Securities and Exchange Commission filed a civil injunctive action in federal district court Milwaukee, Wisconsin, charging Christopher Hohol (“Hohol”) and Brian Poshak (“Poshak”), formerly the senior vice president for operations and the controller, respectively, of Veolia Special Services (“Special Services”), a fourth-tier United States subsidiary of Veolia Environnement S.A. (“Veolia”), a multinational utilities and environmental services company, with falsifying books, financial records, and accounts and circumventing internal controls in order to overstate Special Services’ earnings before taxes (“EBT”) over a period of at least three years.
According to the SEC, beginning no later than January 2008 and continuing through February 2011, Hohol and Poshak, among other things, made and caused others to make false accounting entries in Special Services’ general ledger. Read More
Joseph Meuse & Belmont Partners Barred, Enjoined and Fined
On January 10, 2014, the Securities and Exchange Commission (“SEC”) announced a $300,000 settlement against Belmont Partners LLC, an alleged “shell packaging” company and Joseph Meuse, its Chief Executive Officer. Belmont and Meuse were charged with facilitating a penny stock scheme involving a reverse merger. According to the SEC, Virginia-based Belmont Partners LLC and its CEO Joseph Meuse are in the business of identifying and selling public shell companies for use in reverse mergers. Belmont’s marketing materials reflect it assisted more than 100 companies complete reverse mergers. Many of these reverse mergers involved China based penny stock issuers. Public shell companies for reverse merger transactions sell for as much as $450,000 each. Read More
FINRA Suspends and Fines Thomas Mikolasko
The Financial Industry Regulatory Authority (“FINRA”) recently suspended and fined Advisor Thomas Mikolasko, (“Mikolasko”) of HFP Capital Markets LLC (“HFP”). According to FINRA, Mikolasko made material misrepresentations and omissions of material fact in connection with $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (“MMM”) in a private placement offering. Read More
What Are the Benefits of Foreign Issuer Status in Going Public Transactions?
A private foreign company seeking to go public may be classified as a U.S. domestic issuer or a non-U.S., private foreign issuer under SEC rules. A company’s status as a private foreign issuer has many benefits for a foreign company seeking public company status. These benefits include less stringent narrative and financial statement disclosure in public offering documents making the SEC registration statement process less burdensome.Upon completion of a going public transaction, foreign companies become subject to less stringent SEC periodic reporting requirements. Additionally, upon obtaining public company status, foreign companies are not subject to the proxy rules which impose disclosure and procedural obligations for companies who solicit shareholder votes.
The term “private foreign issuer” is not determined by solely where an issuer is incorporated or domiciled. Instead it is defined under the securities laws. Foreign issuer status offers many benefits to issuers in going public transactions. Read More
What Are Regulation Crowdfunding Disclosures?
On October 23, 2013, the Securities and Exchange Commission (“SEC”) proposed Regulation Crowdfund, setting forth the rules governing the offer and sale of securities through crowdfunded offerings, pursuant to Title III of the Jumpstart Our Business Startups Act (“JOBS Act”).
Within days, FINRA published its proposed rules for the licensing and regulation of “funding portals.” The Read More
Regulation Crowdfund For Investors
On October 23, 2013, the Securities and Exchange Commission (“SEC”) proposed Regulation Crowdfund, setting forth the rules governing the offer and sale of securities through equity crowdfunded offerings, pursuant to Title III of the Jumpstart Our Business Startups Act (“JOBS Act”). Read More
How Does the JOBS Act Benefit Foreign Issuers? Going Public Lawyers
The JOBS Act offers incentives for foreign issuers seeking to go public and enter the U.S. capital markets without filing a Form S-1 or other registration statement under the Securities Act of 1933, as amended or registering a class of securities on Form 10 under the Exchange Act. Effective September 23, 2013, as required by the JOBS Act, the SEC lifted the ban on general solicitation and advertising in private placement offerings of securities made pursuant to Rule506(c) of Regulation D. Read More
Marijuana Stock Scams on the Rise
The holidays are over. As the new year begins, investors find themselves bombarded with media coverage related to the legalization of marijuana for medical and recreational purposes in a number of states. Along with the increase in media coverage have come active promotions of marijuana-related penny stocks. So far, all of the public companies associated with medical or recreational weed are OTC issuers.
Presumably the reason for this is that the sale of marijuana for any purpose is still illegal under federal law. In the absence of exchange-listed alternatives, investors interested in the sector have turned to these OTC microcaps.
Volume and price for some thinly traded marijuana-related companies increased dramatically despite their volatility.
This week FINRA published a risk warning about pot stocks, noting that with “medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention—including the attention of scammers”.
Last September, FINRA cautioned investors about the growing number of pump-and-dump schemes involving penny stocks that purport to be in the high-profile medical marijuana business. While these scammers urge investors to buy, and tout the potential of their fabricated or exaggerated medical marijuana business and/or opportunities, they dump their own shares into the public markets.
Scammers pushing medical marijuana scams use the same tactics as all stock touts. These include hard mailers, spam and other email messages, text messages, webinars, infomercials, tweets, message board and blog posts.
How the Touts Do It
Scammers use the same techniques used in any other penny stock scam to promote their medical marijuana plays. These include sponsored links, investment profiles and spam email, including one promotional piece claiming the stock “could double its price SOON” and another asserting the stock was “poised to light up the charts!” Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan. One penny stock scam company issued more than 30 press releases announcing its medical marijuana business in the first half of 2013, while touting its prospects and growth potential. According to FINRA, these releases touted “rosy financial prospects and the growth potential of the medical marijuana market”.
In its alert, FINRA published a list of “Smart Tips” to help investors to avoid medical marijuana scams. FINRA’s Smart Tips are set forth below.
Smart Tips – To avoid potential marijuana-related stock scams:
Ask: “Why me?” – Why would a total stranger tell you about a really great investment opportunity? The answer is there likely is no true opportunity. In many scams, those who promote the stock are corporate insiders, paid promoters or substantial shareholders who profit handsomely if the company’s stock price goes up.
Consider the source – It’s easy for companies or their promoters to make exaggerated claims about lucrative contracts, the company’s revenue, profits or future stock price. Be skeptical about companies that issue a barrage of press releases and promotions in a short period of time. The objective may be to pump up the stock price. Likewise, be wary of information that only focuses on a stock’s upside with no mention of risk.
Do your research – Search the names of key corporate officials and major stakeholders, as well as the company itself. Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags. For example, the CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history. The former CEO of a similar company was recently indicted for his role in a multi-million dollar mortgage-based Ponzi scheme. Check the Federal Bureau of Prisons Inmate Locator to determine if a solicitation is coming from someone who has served time in a federal prison. Many states also have similar prisoner locator systems.
Know where the stock trades – Most unsolicited spam recommendations involve stocks that do not trade on The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange (NYSE Euronext) or other registered national securities exchanges. Instead, these stocks may be quoted on an over-the-counter (OTC) quotation platform like the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc.
Generally, there are no minimum quantitative standards that a company must meet to have its securities quoted in the OTC market.
Many of the securities quoted in the OTC market don’t have a liquid market. They’re infrequently traded and can move up or down in price substantially from one trade to the next. This may make it difficult to sell your security at a later date.
Read a company’s SEC filings, if available – Most public companies file reports with the Securities and Exchange Commission (SEC). Check the SEC’s EDGAR database to find out whether the company files with the SEC. Read the reports and verify any information you have heard about the company.
Remember that just because a company has registered its securities or has filed reports with the SEC does not mean it will be a good investment—or the right fit for you. Also, be aware that not all financial information filed with the SEC, or published elsewhere, is independently audited. Unaudited financials are just that—not reviewed by an independent third party.
Many OTC companies are not SEC reporting issuers; most of the currently popular marijuana companies fall into that category. Rather than filing a registration statement with the SEC and then submitting periodic reports, they follow OTC Markets’ “alternative reporting standard,” posting often-inadequate reports on the OTC Markets website.
Be wary of frequent changes to a company’s name or business focus – Name changes and the potential for manipulation often go hand in hand. One low-priced stock now claiming to be in the medical marijuana business has had four name changes in the past 10 years. Another company switched from the coffee business to focus “on the rapidly emerging medical marijuana industries.” Name changes can turn up in company press releases, internet searches and, if the company files periodic reports, in the SEC’s EDGAR database.
Check out the person selling the stock or investment – A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with FINRA, the SEC and a state securities regulator—depending on the type of business the firm conducts. To check the background of a broker or investment adviser, use FINRA’s BrokerCheck. You can also call your state securities regulator. When using BrokerCheck, research the name of the person who contacted you, as well as the name of the firm they claim to work for. Verify the caller’s identity using the phone number on the firm’s website or in a publicly available telephone directory.
If a Problem Occurs – If you believe you’ve been defrauded or treated unfairly by a securities professional or firm, file a complaint. If you suspect that someone you know has been taken in by a scam, send a tip.
In the past week, following the first sales of recreational pot in Colorado, even CNBC dedicated some air time to a couple of the OTC marijuana-related companies. They and their peers skyrocketed, and then dropped dramatically. It’s a good time for investors and potential investors to be careful, and heed FINRA’s words of caution.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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www.SecuritiesLawyer101.com
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