by T. GormanPosted on Posted in SECActions

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 “PennyStockTomorrow.com” 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.

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by T. GormanPosted on Posted in SECActions

The Commission resolved one of its largest cybersecurity cases last week, the newswire action. The case combined hacking and insider trading – an international group did the hacking, transmitted the inside information to the traders who then acted quickly prior to the release by other wire services of the deal announcements, making millions of dollars in trading profits.

The agency also continued to focus on COVID-19, filing another action tied to the virus. This time a trader tried to manipulate the share price of a firm he falsely claimed had FDA approval on a drug. that was tied to an insider trading ring reputed to have made millions in trading profits. The agency also filed a stock an insider trading case in which the trader self-reported.

Be safe this week

SEC

FinHub: The Commission’s Strategic Hub for Innovation and Financial Technology or FinHub will host a series of meetings in which those involved will have an opportunity to meet virtually with members of the staff to discuss key topics. The first of these P2P meetings will be held the week of July 6, 2020.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 1 administrative proceeding last week, excluding 12j and tag-along-proceedings.

Cyber – insider trading: SEC v. Dubovoy, Civil Action No. 2:15-cv-06076 (D.N.J.) is a previously filed action which centered on an international hacking scheme on two news services tied to an insider trading ring which is reputed to have netted about $100 million in profits. The Commission settled with Defendants Arkadly Dubovoy, Igor Dubovoy, Southeastern Holding and Investment Company LLC, APD Developers, Inc., Leonid Momotok, Aleksandr Garkusha, Vladislav Khulupsky, and Memeland Investments Ltd. The court approved the settlements. The hacker defendants penetrated the computer systems of at least two newswire services. This was done using a variety of advanced techniques which included masking their identities by posing as newswire employees and customers. As a result, the hackers were able to acquire advance copies of corporate press releases before distribution to the public. The information obtained by the hacker defendants was transmitted to the traders. The traders had been recruited with a video which showcased the ability of the hackers to obtain inside information. The information had to be transmitted in a narrow window of time before the release by the newswires of the press releases. The members of the trader group placed trades through a variety of accounts using the information prior to the public release of the information. The hacker defendants were paid either a flat fee or a percentage of the trading profits. At times the traders in the groups communicated with each other and the hackers had access to various trading accounts. The Commission’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 20(a) and 20(e). Previously, in parallel criminal actions filed in the Eastern District of New York and the District of New Jersey, defendants Momotok, Garkusha and Khalupsky were convicted. They were each sentenced and ordered to pay restitution and forfeit assets. Defendants Arkadiy Dubovoy and Igor Dubovoy pleaded guilty and are awaiting sentencing. The final judgments entered in the Commission’s action each enjoined Defendants from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The final judgments as to Arkadiy Dubovoy, Igor Dubovoy, Southeastern Holding, ADP Developers, Momotok, Garkussha and Khalupsky direct them to pay disgorgement and prejudgment interest, deemed satisfied by the restitution and forfeiture orders entered against the individuals. Memelland, not charged in the criminal cases, has agreed to pay disgorgement and a civil penalty. Collectively the monetary liabilities imposed exceed $14 million. Previously, the Commission settled with 13 defendants who consented to injunctions. The agency has recovered over $50 million. See Lit. Rel. No. 24833 (June 10, 2020).

Manipulation: SEC v. Nielsen, Civil Action No. 5:20-cv-03788 (N.D. CA. Filed June 9, 2020) is an action against investor Nielsen who owned about 10% of the common stock of Arrayit Corporation, a biotech firm. Beginning in March 2020 Mr. Nielsen made a series of false statements on an internet forum regarding the company including representations that the firm had developed a COVID-19 test, that it had been approved by the FDA and that other investors were purchasing blocks of stock. The statements, along with Defendant’s omission of his stock holdings in the firm and spoofing activities related to the stock, were designed to drive up the share prices. The complaint alleges violations of Exchange Act Sections 9(a)(2) and 10(b) and Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 24832 (June 9, 2020).

Recidivist: SEC v. Copeland, Civil Action No. 1:20-c—00589 (N.D. Ohio) is a previously filed action against the investment advisor and his firm, E.B. & Copeland Capital, Inc. The action alleged that almost immediately after executing a consent decree with the agency Mr. Copeland began soliciting investors using false statements. The final judgment entered in the case enjoins future violations of Advisers Act Section 206(4) and directs Mr. Copeland to pay a penalty of $192,768. The final judgment as to the firm restrains future violations of Advisers Act Section 206(4). See Lit. Rel. No. 24830 (June 8, 2020).

Offering fraud: SEC v. Putnam, Civil Action No. 2:20-cv-00301 (D. Ut.) is a previously filed action in which the Commission obtained a freeze order at the time the complaint was unsealed. The action names as defendants Daniel Putnam, Jean Rico, Angel Rodriguez, MMT Distribution, LLC and R& D Global, LLC. The complaint alleges that Defendants participated in a fraudulent offering of digital asset-related securities over about a two-year period, beginning in July 2017. About $12 million was raised from investors in the U.S. and other countries. Mr. Putnam, who operated a multi-level marketing business called Modern Money Team, and the others sold interests in what was supposed to be a cryptocurrency mining operation. Interests were also sold in what were claimed to be a cryptocurrency trading packages which were falsely represented to pay high returns. Those returns, however, came from recycling funds from other investors, Ponzi style. Portions of the investor proceeds were also misappropriated. The complaint alleges violations of Securities Act Sections 5(a) and (c) and 17(a) and Exchange Act Section 10(b). The Court entered a freeze order. The case is pending. See Lit. Rel. No. 24829 (June 5, 2020).

Breach of duty: SEC v. Steele, Civil Action No. 18-cv-2838 (S.D. Ind.) is a previously filed action. The complaint alleged that beginning in December 2012 Tamara Steele and Steele Financial, Inc., her advisory, sold shares to the advisory clients in Behavioral Recognition Systems, Inc, a private company the Commission had previously charged with fraud. The clients purchased about $13 million worth of securities. Those purchasers were not told Defendants were paid a commission. A final judgment as to each Defendant was obtained by the Commission enjoining each from future violations of Advisers Act Sections 206(1), 206(2) and 206(3), Securities Act Section 17(a) and Exchange Act Section 10(b). Ms. Steele was also ordered to pay disgorgement of $845,750 which was deemed satisfied by her return of 1,358,160 shares of Behavioral Recognition stock to that firm’s bankruptcy trustee. In addition, she will pay a penalty of $75,000 and cease the operations of the advisory within 90 days. In a related administrative proceeding Ms. Steele was barred from the securities business. In the Matter of Tamara Steele, Adm. Proc. File No. 3-19823 (June 5, 2020). See Lit. Rel. No. 24827 (June 5, 2020).

Insider trading: Jana Faith Kiena, CPA, Adm. Proc. File No 3-19824 (June 5, 2020). Ms. Kiena, a CPA with an inactive license, was employed at Illumina, Inc. in the revenue department in 2019 as a contract employee. She processed revenue related to monthly service contracts for the firm. She also participated in what the firm called “group huddles” – phone meetings where the staff chatted about the revenue flow. In late June 2019 Ms. Kiena participated in one “huddle” with seven other employees and an accounting manager. The group in the huddle learned that revenue for the quarter would be disappointing. On July 2, 2019 Ms. Kiena used her credit card to obtain a cash advance. She then paid $13,638.33 to purchase July 12, 2019 put option contracts on ILMN, her firm The strike price was $365 per share. Six days later she took $3,096 from her savings account and purchased more put options. On July 11, 2019 Illumina announced that its preliminary revenue for the second quarter would be lower than expected, updating full year guidance. The stock price dropped from $363.66 to $305.05 or 16%. The next day Ms. Kiena sold the put options, securing a gain of $249,227.92. Within a month Ms. Kiena self-reported to the Commission staff. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Ms. Kiena consented to the entry of a cease and desist order based on the section cited in the Order. She also agreed to the entry of an order denying her the privilege of practicing before the Commission as an accountant with the right to request consideration for a reinstatement after two years. In addition, she will pay disgorgement in the amount of her trading profits and a penalty equal to half that amount.

ESMA

Short selling: The European Securities and Markets Authority has renewed, as of June 11, 2020, its decision to require holders of net short positions in shares traded on a European Union regulated market to notify the relevant national competent authority if the position exceeds 0.1% of the issued share capital. The decision is tied to the COVID-19 pandemic.

Singapore

Remarks: “The COVID-19 Crisis: Risks and Policy Responses” – The Central Banker Podcast by Ravi Menon, Managing Director, Monetary Authority of Singapore, with Tim Adams, President, Institute of International Finance, May 28, 2020 was published on June 11, 2020 (here).

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