AN INVESTMENT FRAUD NOT A PONZI SCHEME

Post-Madoff, the SEC seems to have brought an almost endless stream of Ponzi scheme cases. The once virtually impossible-to-detect frauds appear to be surfacing everywhere. When that happens, the SEC and at times DOJ and the CFTC, have been there to file actions. Whether this is the result of the market crisis, the Madoff debacle or some other reason is unclear. Unfortunately what is clear is the almost continuous stream of cases in which unwitting investors have been fleeced with the same too-good-to-be-true claims. Perhaps in the future more potential investors will save their hard earned money after reading Erin Arvedlund’s new book, Too Good to Be True, about the world’s largest Ponzi scheme.

In this rash of Ponzi scheme cases, almost lost is the fact that there is a vast array of other types of investment fraud taking place in which investors get fleeced. One is the old fashion unregistered stock scheme pushed on the public with press releases, a call room and false claims. Such is the case of Big Apple Consulting. SEC v. Big Apple Consulting USA, Case No 6:09-cv-1963 (M.D. Fla. Filed Nov 18, 2009). See also SEC v. Grocock, Civil Action No. 09-cv-1833 (M.D. Fla. Filed Oct. 29, 2009) (outside general counsel was accused of insider trading) discussed here.

The key players in this too good to be true (to borrow Ms. Arvedlund’s title) scheme are: CyberKey Solutions, Inc., a company which once sold flash memory drives, and its former CEO, James Plant; Big Apple Consulting USA, Inc., a public relations firm and its president and co-founder, Marc Jablon; its subsidiary MJMM Investments, LLC; and CyberKey’s former outside counsel Bennett Grocock.

The public was sold millions of dollars of unregistered CyberKey shares from November 2005 through 2007 based on a lie, according to court papers. During the approximately two year period, investors were solicited to purchase shares based on a claim that CyberKey had obtained a $25 million purchase order from the U.S. Department of Homeland Security. It had not.

In June 2005 however, CyberKey and Big Apple entered into an agreement under which the PR firm would promote the company based on its false claim about the HHS contract. As part of the agreement, MJMM could acquire an unlimited number of shares at 50% of the market price, which were later distributed to the public.

Under the agreement Big Apple provided CyberKey an all-inclusive campaign. This included issuing press releases, web site design and investor relations. To promote CyberKey unregistered shares to investors, Big Apple used a telephone calling room employing between 14 and 50 callers to interested registered brokers. Press releases were also issued touting the company. When potential investors called in response to the press releases, they were sent to the brokers to purchase unregistered shares. During this process, Big Apple and MJMM acted as brokers by participating securities transactions during the distribution as well as dealers by participating in an underwriting, although the shares were never registered, according to the SEC. The sales were made based on claims that CyberKey had obtained non-existent Homeland security contract.

By mid-2006, Big Apple knew, or were reckless in not knowing, that CyberKey’s supposed main asset, the claimed DHS contract, did not exist. Despite learning this fact, Big Apple continued to promote the shares of CyberKey. Millions of shares were sold to the unsuspecting public.

During the course of the scheme Mr. Grocock, the outside counsel to CyberKey, also sold unregistered shares to the public. Those sales, made while the company was under investigation by the SEC, then-NASD and the Utah Division of Securities, continued until the president of the company was arrested. The investigations had not been disclosed. Mr. Grocock was charge by the SEC with insider trading in a case which he settled.

In the current action Big Apple, Mr. Jablon, Matthew Maguire, its vice president, Mark Kaley, the corporate secretary and Keith Jablon, vice president of a Big Apple subsidiary and MJMM and its president Mark Kaley were named as defendants. The complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See also Litig. Rel. 21305 (Nov. 18, 2009).

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