Commission Partially Settles Microcap Fraud Manipulation Action
The Commission and the staff may have returned to the office in time to pack-up. By all reports there is no deal on funding the government past the end of the week, February 15, 2015. If that continues the stalemate could begin anew at the close of business on Friday.
Since the government returned the Commission has continued to move forward in court, partially settling a large microcap fraud action – the type of case that is central to its retail investor focus. The settlements were in SEC v. Honig, Civil Action 18-cv-08175 (S.D.N.Y. Filed Sept. 7, 2018) with Defendants Mark Groussman, his firm Melechdavid and Alpha Capital Anstalt, a Lichtenstein hedge fund managed by an unnamed New York based unregistered investment adviser.
Mr. Groussman settled with the agency, consenting to the entry of permanent injunctions based on Securities Act sections 5 and 17(a) and Exchange Act section 10(b). In addition, he agreed to pay disgorgement of $1,051,360, prejudgment interest of $170,554.78 and a penalty of $160,000. His firm also consented to the entry of a permanent injunction based on the same sections. A five year penny stock bar was imposed on the firm.
Alpha Capital settled, agreeing to the entry of a permanent injunction based on section 5 of the Securities Act. The firm agreed to pay disgorgement of $708,470.07 along with prejudgment interest in the amount of $149,788.44.
The underlying action also names as defendants Barry Hong, Philip Frost, John Stetson, Michael Brauser, John O’Rourke, Robert Ladd, Elliot Maza, Brian Keller, John Ford and a series of controlled entities. It centers on the manipulation of four microcap firms’ shares during the period 2013 to 2018 yielding millions of dollars in profits.
The schemes followed a basic pattern. Mr. Hong essentially directed the transactions, according to the Commission. Initially, Defendants, or a subgroup of them, acquired control of the issuer and held the shares with Mr. Honig orchestrating a series of transactions. Actions designed to generate market activity, and which would also benefit the management of the issuers, were then initiated. Indeed, management of two of the firms participated.
The schemes concluded with a pump-and-dump manipulation of the shares and their price. Defendants would sell their shares, Over the course of the scheme millions of dollars in illicit profits were made. For example, one scheme involving one issuer resulted in over $9.25 million while another yielded over $8.3 million. The complaint alleges violations of Securities Act sections 5(a), 5(c), each subsection of 17(a) and 17(b) and Exchange Act sections 9(a)(1) and (2), 10(b), 13(d) and 15(d).
The Commission is preparing an amended complaint that will be filed in early March 2019. During the government shutdown other defendants settled with the Commission.