Mary Jane’s Last Dance l FINRA Marijuana Scam Alert
Both the SEC and FINRA have published risk alerts for investors, “medical marijuana is 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”. FINRA cautioned investors of the growing number of pump-and-dump schemes involving penny stocks that purport to be in the high profile medical marijuana business. Read More
Why Do I Have To Hire a Transfer Agent When Going Public? – Going Public Lawyers
Transfer agents play a key role in the going public process. Transfer agents are the record keeper for a company’s securities. Share ownership is reflected on the issuer’s shareholder list. Transfer agents issue and cancel certificates to reflect changes in ownership of securities.Transfer agents also function act as an intermediary for the company. In going public transactions, transfer agents provide a shareholder list which the Financial Industry Regulatory Authority (“FINRA”) reviews prior to the issuance of a company’s ticker symbols in going public transactions. Read More
SEC Charges Indiana Man In Ponzi Scheme
Marcum, of Noblesville, Indiana, is the principal of Guaranty Reserves Trust, and was once a broker. He’s also been an investment adviser registered with the SEC. In 2010, he began presenting himself to potential marks as an “experienced money manager” worth $300 million. He told one investor that he’d done so well for himself that he wanted to “give back.” He persuaded these people to give him money in exchange for promissory notes that he characterized as “asset-backed” and “secured.” They were co-signed by the investors and Marcum, and deposited in the investors’ IRA accounts. Read More
SEC Charges Free Rider Ronald Feldstein With Fraud
On September 3, 2013, the Securities and Exchange Commission (“SEC”) filed a fraud complaint in Federal District Court for the Southern District of New York charging Ronald Feldstein and two entities controlled by him, Mara Capital Management and Vita Health of America, with a “free-riding” fraud scheme on the one hand, and with bilking investors out of more than $450,000 on the other.
The SEC’s fraud complaint alleges that between 2008 and 2011, Feldstein purported to manage two investment funds, which of course were Mara Capital and Vita Health. In reality, they were thinly-capitalized entities that he used for his own personal trading. He opened accounts with three brokerages in the names of these firms. The accounts were “delivery versus payment,” or “DVP” accounts, which was advantageous to him because no cash balance needed to be maintained in them. Read More
California Man Sentenced to 64 Months For Securities Fraud
On 22 August 2013, Douglas Hollingsworth of Santa Rosa, California was sentenced to 64 months in prison for defrauding investors of at least $4.9 million in a five-year Ponzi scheme. The U.S. Attorney’s Office for the Northern District of California had brought charges against him in 2011.
Earlier in the year, Hollingsworth pled guilty to one count of wire fraud and one count of money laundering. Between June 2007 and October 2012, he solicited money from investors, telling them that his two businesses, Read More
How Did the JOBS Act Change Form D? Going Public
Securities Lawyer 101 Blog
On July 10, 2013, the SEC adopted final rules as required by Title II of the JOBS Act, which directed the SEC to eliminate the ban on general solicitation and advertising for certain offerings conducted under Rule 506 of Regulation D, of the Securities Act of 1933, as amended (the “Securities Act”) provided the securities are sold only to accredited investors.
In connection with these amendments to Rule 506, the SEC approved amendments to Form D, adding a box check box requiring issuers to disclose if they are relying on Rule 506(c). As discussed below, the SEC also proposed significant amendments to Form D’s requirements that include penalties for non-compliance. Read More
SEC Rewards Dodd-Frank Whistleblowers
On August 30, 2013, the Securities and Exchange Commission (the “SEC”) announced that it had awarded three whistleblowers for tips and information they provided to help the SEC and Justice Department stop a sham hedge fund.
The SEC’s whistleblower program under the Dodd-Frank Act allows the SEC to reward bounties to individuals who offer high-quality, original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.
Under the SEC’s whistleblower program, whistleblowers will receive the maximum award of 30% of the monetary sanctions collected in the action. In cases where there are related criminal proceedings in which money is collected by another regulator, a provision in the whistleblower rules allows whistleblowers to then additionally apply for a bounty based off the other regulator’s collections in what qualifies as a related action. Read More
What is a Rule 506 Bad Actor Ban?
Securities Lawyer 101 Blog
Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Rule 506 of Regulation D is the most widely-used exemption from registration.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would prohibit the use of the Rule 506 exemption for any securities offering in which certain felons and other bad actors are involved. Read More
Broker Accidentally Cold Calls State Securities Regulator
On August 28, 2013, the Arkansas Securities Department published a Consent Order by the terms of which Junmo Hong, a former employee of John Thomas Financial, agreed to the revocation of his registration as a broker-dealer agent for a variety of offenses including securities fraud, recommending unsuitable investments, and placing cold calls to Arkansas residents on the National Do-Not-Call List. Read More
Anti-Fraud Provisions Apply To Reverse Merger and Public Float Schemes
When companies go public through reverse merger transactions, insiders often employ various mechanisms to obtain not only control of the public shell but also of its free trading shares. Public float schemes involving penny stocks have been around for years and have become routine features of reverse merger transactions, particularly where the services of third party escrow agents are used. A recent court decision may change the laws applied to schemes where the participants obtain control of an issuer’s public float.
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 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 without making public disclosures about the control of the public float or the persons involved. Read More
Going Public Law
A private company going public is subject to three federal securities laws, each with its own unique requirements. The three laws are the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002 (”Sarbanes-Oxley”). In addition to the federal securities laws, companies going public are subject to state securities regulation of their securities public and private offerings. The Securities Act sets forth the regulations that govern the offer and sale of securities by an issuer and certain shareholders. Read More
How Does a Company Bring SEC Filings Current?
The Securities Exchange Act of 1934 (the “Exchange Act”) imposes ongoing disclosure obligations that include an obligation to file periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). Sometimes reporting companies are unable to comply with their reporting obligations under the Exchange Act. In limited circumstances, when issuers are more than one year behind in their annual report filings, the SEC eases the burden on delinquent issuers by allowing them to file a single form containing the 10-K and 10-Q reports for the most recent year instead of filing all delinquent reports.
The SEC has indicated that it will relax its procedures in certain cases to accommodate issuers that, for reasons beyond their control, have failed to comply with their reporting obligations.
This policy provides numerous benefits to companies that are able to become current with the SEC by filing a single comprehensive 10-K. Read More
SEC Obtains Judgment Against Jonathan Gilchrist
On August 15, 2013, the SEC obtained a summary judgment against Jonathan Gilchrist for violation of the antifraud and registration provisions of the federal securities laws. On August 16, 2013, the court entered a final judgment imposing monetary and other relief.
In rendering summary judgment in favor of the SEC, the court determined that Gilchrist, while acting as an officer and director of Alternative Energy Technology Center, Inc., then known as Mortgage Xpress, caused the issuance of six million company unregistered shares to himself and entities under his control.
According to the SEC, Gilchrist improperly maintained that the offer and sale of the shares were exempt from registration under Rule 504 of Regulation D of the Securities Act of 1933. The shares were immediately publicly sold by Gilchrist. Read More
SEC Shuts Down John Marcum, Ponzi Scheme Targeting Retirees
On August 26, 2013, the Securities and Exchange Commission (the “SEC”) charged John K. Marcum with defrauding investors in a Ponzi scheme that targeted the retirement savings of investors.The SEC alleges that Marcum told investors he was a successful trader and asset manager in order to raise more than $6 million through promissory notes issued by his company Guaranty Reserves Trust. Marcum assisted investors in setting up up self-directed IRA accounts which enabled him to gain control over their retirement assets. Read More
DTCC Identifies Cyber-Attacks as Most Significant Risk to Financial Markets
On August 7, Depository Trust & Clearing Corporation (DTCC) released a report identifying threats to the stability of the financial markets. DTCC considers cyber-attacks that can bypass U.S. and E.U. industry security systems and laws to be the most significant danger to our markets today.
Mike Leibrock, DTCC Vice President, of Systemic Risk stated that the report is intended “to initiate robust dialogue and help market participants gain a deeper understanding of how new or evolving systemic risks might impact the safety and soundness of global financial markets, and the steps the industry needs to take”.
DTCC’s report emphasizes that the systemic risks facing the Read More
Ask Securities Lawyer 101 l Rule 504 Q & A
Q. How Much Money Can I Raise In A Rule 504 Offering?
A. The aggregate amount raised for an offering of securities under Rule 504 cannot exceed $1,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this Rule 504, in reliance on any exemption under section 3(b), or in violation of section 5(a) of the Securities Act. The issuer can, however, issue as much stock as he likes for that $1 million: 10 shares or 10 billion; it makes no difference.
Q. Can My Company’s Shareholders Rely Upon Rule 504 To Resell Their Securities? Read More
OTC Markets OTC Pink Listings l OTC Pink Lawyers
A private company seeking to go public can obtain a stock ticker or trading symbol assignment from the Financial Industry Regulatory Authority (“FINRA”) if it meets certain requirements. This enables the company to be quoted on OTCMarkets OTC Pink Sheets. Many private companies that decide to go public are opting for the Pink Sheet option because of the increased costs and more stringent regulations associated with SEC reporting. Rule 15c2-11 (Rule 15c2-11”) of the Securities Exchange Act of 1934 (the “Exchange Act”) can be used by an issuer seeking to go public without a registration statement. Read More
SEC Issues Stop Order For Registered Offering
Securities Lawyer 101 Blog
The Securities and Exchange Commission (the “SEC”) issued an order to stop an initial public offering (IPO) by Counseling International and prevent the sale of its shares to the investing public. In issuing the stop order, the SEC determined that the company’s registration statement contained false and misleading information. According to the SEC’s Edgar database, the registration has been amended 5 times since its original filing in August of 2012. Read More
SEC Prevents Corporate Hijackings By Suspending Zombie Tickers
On June 24, 2013, the Securities and Exchange Commission (“SEC”) instituted administrative proceedings to prevent corporate hijackings. The SEC revoked the registration of Green Solutions China, Inc., Yarraman Winery, Inc. (n/k/a Global Beverages, Inc.; (GBVI)), and Yinlips Technology, Inc. pursuant to the Securities Exchange Act of 1934. All of the companies are delinquent with the periodic financial reports required by the Commission and prime targets for corporate hijackers who use bogus state court proceedings to take over shell companies. The SEC has been proactive in preventing corporate hijackings of dormant shell companies for reverse merger transactions. When the SEC seeks to revoke registration, usually it first suspends the companies it has targeted. That was not necessary in this case, because none of the three companies had ever traded. Only GBVI had been assigned a ticker symbol, but there was no initial interest from buyers, and its sponsoring market maker must have jumped ship quickly. It currently resides on the Grey Market, the graveyard of over-the-counter securities. Read More
Three Indicted In Precious Metals Scam
Manhattan District Attorney’s office has indicted Sean Robert Stropp , a/k/a “John Goldman,” a/k/a “Sean Roberts,” Karl Spicer and Ricardo Garcia, for operating a precious metals scam through a company known as PMCO Services Inc. that claimed to sell precious metals.
The scheme resulted in millions of dollars of investor losses across the U.S. and Canada. The indictments include charges of Grand Larceny, Scheme to Defraud, violations of the Martin Act, and a violation of the General Business Law for failure to register with the New York State Attorney General as commodities brokers. Read More
Penny Stock Fugitive Gregory Curry Arrested in Prachin Buri
On August 19, 2013, the Federal Bureau of Investigation circulated a new Wanted by the FBI poster to announce that Sandy Winick, indicted the week before on multiple counts of stock manipulation, wire fraud, and mail fraud, had been captured. The next day, Gregory Curry was arrested. According to the FBI, Winick and Gregory Curry operated domestically and internationally under various identities through the use of alias names. According to the FBI, Curry and Winick were participants in a $140 million penny stock fraud scheme that bilked investors in 35 countries. Read More
Penny Stock Fugitive Sandy Winick Arrested in Bangkok
On August 19, 2013, the Federal Bureau of Investigation circulated a new Wanted by the FBI poster to announce that Sandy Winick, indicted the week before on multiple counts of stock manipulation, wire fraud, and mail fraud, had been captured.
According to the FBI, Winick operated domestically and internationally under various identities through the use of alias names including John Peter Smith, Robin Cheer, Roben Cheer, Jerry Sarrano, Glen Forman, Kyle Bendford, and Stephen Thompson. Read More
Additional Charges and Convictions in Kickback Schemes
On August 13, 2013, John Jordan, former chief executive of Vida Life International Ltd., a public company that trades on the OTCMarkets OTCQB as VILF, was sentenced to 30 months in federal prison for conspiracy to commit securities fraud, wire fraud and mail fraud. The Securities and Exchange Commission (“SEC”), which conducted a parallel investigation alongside the FBI undercover operation, assisted in bringing these charges and similar ones against 10 other defendants who participated in the scheme, which involved offering kickbacks to individuals who turned out to be undercover FBI agents. Read More
Nine Individuals Indicted In Penny Stock Sting
On August 14, 2013, the U.S. Attorney’s Office for the Southern District of Florida announced that six individuals had been charged as a consequence of penny stock sting operations conducted over the course of several years, and that another four, previously charged in similar circumstances, had recently pled guilty. Simultaneously, the Securities and Exchange Commission (SEC) filed civil lawsuits against all but one of the individuals and four of the penny companies involved. Read More
Colt Curry Indicted in Securities Scheme
On August 13, 2013, the U.S. Attorney’s Office for the Eastern District of New York announced the indictment of Sandy Winick, a Canadian promoter now living in Thailand; Gregory Curry, a Canadian living in Thailand; Kolt Curry, a Canadian living in Thailand and Canada; Gregory Ellis, a Canadian; Gary Kershner, a U.S. citizen living in Arizona and Kansas; Joseph Manfredonia, a U.S. citizen living in New Jersey; Curt Poyner of Florida; Songkram Roy Sahachaisere, a U.S citizen living in Los Angeles; and William Seals of California for their roles in a massive penny stock fraud.
Winick, Kolt Curry, and Manfredonia used aliases as well as their real names.
The defendants stand accused of manipulating the price of penny stocks, using an advance fee scheme to bilk investors who’d already purchased restricted stock in those companies. According to charges, the defendants were so brazen that they impersonated Internal Revenue Service employees and expolited U.S. investors. One Canadian defendant, Kolt Curry, stated (on a recorded conversation) that, “hitting the Americans would be like taking money from a baby.” The defendants are alleged to have reaped at least $140 million from the fraud between 2008 and 2013. Read More
FINRA Alerts Investors to Cold Calls From Brokerage Firm Impostors
FINRA’s Warning
On August 6, 2013, the Financial Industry Regulatory Authority (“FINRA”) issued an alert warning investors that fraudsters pretending to work for at least one well-known brokerage were making cold calls in which they told potential victims they had important information about certificates of deposit (“CDs”) with yields considerably higher than the best rates in the market. Read More
SEC Short Sale Alert l Trading to Conceal Failures to Deliver
On August 9, 2013, the SEC‘s Office of Compliance Inspections and Examinations issued a Risk Alert concerning certain trading activity being used to circumvent Regulation SHO’s close-out requirements for short sales. The SEC observed that some short sellers create the false impression of compliance with Regulation SHO’s “close-out requirement” when “failures to deliver” occur.
In a short sale, the seller sells a security it does not have at the time of the sale. The seller profits when the price of the security declines by purchasing it at a lower price than they sold it for in a short sale.
The short seller profits even more if it engages in trading activity that creates the false appearance that their short position was closed out to avoid the cost of purchasing a security to cover. These bogus close-outs violate Regulation SHO which requires that trades settle within the time frame allowed by the rule.
Locate and Close-out Requirements
Regulation SHO requires short sellers who fail to deliver securities after the required settlement date to close out their position immediately, unless they are a market maker. The “locate” requirement of Regulation SHO requires broker-dealers to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order. Regulation SHO’s close-out provisions apply to all equity securities including OTC Pink Sheet issuers.
FINRA Rule 4320 expands Regulation SHO’s close-out provisions to OTC Pink Sheet issuers and other non-reporting issuers. The close-out requirements of Regulation SHO require broker-dealers to close-out all failures to deliver that exist in threshold securities for thirteen consecutive settlement days by purchasing securities of like kind and quantity.
Reset Transactions
The activity that prompted the SEC’s Risk Alert generally involves hard to borrow securities in which the Put/Call Parity is imbalanced. If a market maker does not deliver shares when he needs to, but instead engages in a second transaction to give the appearance of satisfying the close-out requirements while maintaining the original short position, he will be deemed not to have closed out the position at all. This is called a “reset transaction.” Reset transactions are usually accomplished through the use of a buy-write trade, but may also employ a married put, and may incorporate the use of short-term FLEX options.
The SEC’s Renewed Interest in Short Sale Transactions
The SEC’s interest in these types of Reg SHO violations is illustrated by two recent enforcement actions. The first, from April, 2013 was brought against optionsXpress, owned by Charles Schwab. According to the SEC, the firm had “engaged in… sham reset transactions in a number of securities, resulting in continuous failures to deliver.”
Robert Khuzami, the SEC’s head of Enforcement, said, “Feldman and optionsXpress used sham reset transactions to avoid, sometimes for months, compliance with Reg SHO’s stock delivery requirements. In effect, they ‘kited’ shares of stock, thus depriving buyers of the benefit of their bargain – prompt delivery of their shares.”
In early June, the agency brought an administrative proceeding against the Chicago Board Options Exchange and its subsidiary C2 Options Exchange for regulatory oversight violations involving reset transactions, saying the exchanges failed to enforce the close-out rule because staff did not understand it, and its investigators had never received formal training in the rule.
In a statement, the SEC noted further that “CBOE failed to provide information to SEC staff when requested, and went so far as to assist the member firm [presumably OptionsXpress, though it was not named] by providing information for its Wells submission to the SEC. The CBOE actually edited the firm’s draft submission, and some of the information and edits provided by CBOE were inaccurate and misleading.”
The CBOE agreed to pay a $6 million fine and implement new measures designed to prevent a recurrence of the violations.
Short Sale Red Flags Identified by the SEC
The SEC’s Risk Alert identified certain red flags of illegal short sale activity. These include:
● Trading exclusively or excessively in hard-to-borrow securities or threshold list securities, or in near-term listed options on such securities
● Large short positions in hard-to-borrow securities or threshold list securities
● Large failure to deliver positions in an account, often in multiple securities
● Continuous failure to deliver positions
● Using buy-writes, married puts, or both, particularly deep in-the-money buy-writes or married puts, to satisfy the close-out requirement
● Using buy-writes with little to no open interest aside from that trader’s activity, resulting in all or nearly all of the call options being assigned
● Trading in customizable FLEX options in hard-to-borrow securities or threshold list securities, particularly very short-term FLEX options
● Purported market makers trading in hard-to-borrow or threshold list securities claiming the exception from the locate requirement of Regulation SHO; often these traders do not make markets in these securities, but instead make trades only to take advantage of the option mispricing
● Multiple large trades with the same trader acting as a contra party in several hard-to-borrow or threshold list securities; often traders assist each other to avoid having to deliver shares
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
Corporate Hijackings In Going Public Transactions
Corporate hijackings, also known as corporate identity theft, of public shell companies have been a problem for more than a decade. Hijackings are increasingly used by fraudsters to acquire control of publicly traded shell companies and then to sell them to unsuspecting private companies seeking to go public. Many observers ask why anyone would purchase these hijacked vehicles. First, most purchasers are not aware that the vehicles are hijacked. More importantly the transactions are always blessed by a complicit lawyer who provides assurances to the buyer as well as investor relations firm’s involved that the transactions are in compliance with the securities laws. The lawyers act as the gatekeeper to the transactions providing guidance to the parties, rendering legal opinions and holding escrow for the illegal sale of the hijacked shell company.
SEC Halts Market Action Advisers Hedge Fund l Securities Lawyer 101
On August 6, 2013, the Securities and Exchange Commission (the “SEC”) obtained an emergency court order to halt a hedge fund investment scheme targeting mostly unsophisticated investors including friends, family members, and military personnel to invest in his hedge fund. According to the SEC, the fund was controlled by a former Marine living in the Chicago area who purported to be a successful trader to defraud fellow veterans, current military, and other investors. Read More
OTC Pink Sheets l OTC Pink Market Lawyers
Getting Listed on the OTC Pink Sheets
Many companies going public for the first time are opting for the OTCMarkets OTC Pink Read More
