Another Manipulation Tied to COVID-19

Pump-and-dump schemes taking advantage of unsuspecting investors have long been a Commission staple. Over the years the agency has brought an almost continuous stream of these cases, all with a familiar pattern: The manipulator secretly gets control of the shares, moves the stock price up either with manipulative trading and/or false information in the form of press releases, emails or statements, and then dumps the secretly held shares once the price reaches a sufficient level. The manipulator has huge profits; the retail investors who thought they were buying a sure thing have nothing.

The Commission’s latest case in this area is a variation on a theme using a complex structure but based on the same nuts and bolts elements. The scheme is run by Canadian citizens using off-shore entities who conceal the fact that the shares are held by insiders. Thus it could only be sold if registered or dribbled out in limited quantities under Rule 144. It was then tied to the current pandemic. The end result – manipulators makes money while retail investors lose. SEC v. Gomes, Civil Action No. 1:20-cv-11092 (D. Mass. Filed June 9, 2020).

The Commission’s complaint, announced June 11, 2020, names five individuals and six offshore entities as defendants. The scheme generated over $25 million in profits from the illegal sales of shares in a number of microcap entities. Although the Commission suspended trading in the shares of four of the entities, the orders were not in time to save the retail investors.

Named as defendants were five Canadian citizens: Nelson Gomes, Michael Luckhoo, Shane Schmidt, Douglas Rose and Kelly Warawa. A series of entities based in Hong Kong with one exception were also named as Defendants. The manipulation involving Sandy Steele shares, a firm formed in Minnesota decades ago, is typical of each. Defendant Schmidt had the firm make filings in early 2019 regarding a claimed change in control to a person named John Scott — actually Defendant Schmidt.

The next step was to issue millions of shares of stock. Defendant Schmidt, in conjunction with other individual defendants, had the firm issue millions of what purported to be unrestricted shares of stock. The stock was supposedly from a promissory note Sandy Steele had entered into with Arectex Capital, Inc. about three years earlier. The note was then sold in four equal segments to the original four Sandy Steele shareholders. The firm’s transfer agent issued 3 million shares to each of the four shareholders under the terms of the notes based on a lawyer’s letter. The shares were not restricted. The shares eventually were moved to Mr. Schmidt who also arranged to have a block of restricted preferred shares issued to Mr. Scott – actually Mr. Schmidt.

By mid-September a stock which had been trading for a few cents per share was about have a share and volume increase. Mr. Schmidt created a corporate website for the firm, IP address Vancouver, Canada. The website falsely claimed the company was manufacturing and selling garments, as reflected in the attached pictures. The stock price began to move up.

By March 2020 the group employed an email marketing service to further boost the stock price. An email was sent at the behest of the group from “” noting that investors who wanted to capitalize on COVID-19 should acquire shares since they were set to increase in value by 200%. Volume in the stock spiked up in late March to over 3 million shares per day. Defendants began dumping their shares. Although the Commission eventually halted trading many of the shares had been sold.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(d), 15(b) and 20(e). The case is pending.

Tagged with: , ,