by T. GormanPosted on Posted in SECActions

Microcap fraud continues to be the key theme this week in securities enforcement litigation. In the most recent case the U.S. Attorney’s Office for the District of Massachusetts secured the indictment of a Swiss resident alleged to be at the center of international pump-and-dump actions that have yielded over $160 million in the past three years. U.S. v. Knox, No. 1:8-cr-10385 (D. Mass.).

Roger Knox is a U.K. national residing in Switzerland. He was indicted on one count of securities fraud and one count of conspiracy to commit securities. The indictment followed his arrest earlier this month.

Mr. Knox ran a firm initially known as Silverton but later renamed as Wintercap. It claimed to be an asset manager. In fact the firm served as a vehicle for selling massive amounts of penny stock on behalf of so-called “control groups” — those who secretly own large blocks of penny stocks through a variety of entities and accounts. The transactions were made in conjunction with campaigns by those who actually controlled the shares that are designed to artificially inflate the share price and trading volume. Stated differently, Mr. Knox facilitated international pump-and-dump manipulation schemes, according to the charges.

In the end Mr. Knox channeled the funds back to persons in the “control groups” located in the United States and other jurisdictions. The trading profits were thus returned to those who controlled the shares. The case is pending. See also SEC v. Knox, Civil Action No. 1:16-cv-12858 (D. Mass.).

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by T. GormanPosted on Posted in SECActions

The Commission continues to crackdown on microcap fraud, particularly those in the crypto currency space which try to lure investors by claiming that the agency have given its seal of approval to the transactions. One new matter focused on a long time firm based in Las Vegas which claimed to have a partnership with a crypto related firm that had the SEC seal of approval. The second centered on the manipulation of a microcap stock headed in part by an attorney. Both cases center on efforts to push the price of microcap stocks higher, typically at the expense of retail investors, a clear Enforcement priority.

First, the Commission suspended trading in the shares of Nevada based American Retail Group, Inc. The firm, which traces its history back to the 1930’s, announced in two August 2018 press releases that it had partnered with an “SEC qualified custodian for use with cryptocurrency transactions that would be ‘under SEC Regulations,’ and that the company was conducting a token offering that was ‘officially registered in accordance [with] SEC requirements.’” The Commission suspended trading in the firm’s shares and cautioned market makers and others about their Rule 15c-2-11 obligations before entering quotes in the market following the expiration of the suspension. Securities Exchange Act of 1934, Release No. 84460 (Oct. 19, 2018)

This is not the first time the Commission has cautioned investors that it does not endorse or qualify custodians for cryptocurrency. Earlier the Commission issued an Investor Alert, cautioning against such claims.

The second centered on a pump-and-dump manipulation scheme. SEC v. Fisher, Civil Action No. 9:18-cv-81428 (S.D. Fl. Filed Oct. 22, 2018) is an action which names as defendants Mark Fisher, an attorney whose license is inactive, and Joseph Capuozzo, the President of microcap issuer Valentine Beauty Inc.

The case centers on a scheme involving the company and two named defendants as well as Eddy Marin and Mark Spierdowis. The scheme began in November 2013. Mr. Marin, who controlled Valentine Beauty, caused the firm to issue shares to affiliated individuals and entities including the named defendants. More than 50 million free trading shares – about 90% of the float – was issued. Mr. Fisher received a block that included 2 million shares issued based on his false opinion letter.

Subsequently, Messrs. Fisher and Capuozzo began a coordinated marketing campaign using firm press releases coupled with internet and email touts which focused on the liquidity of the stock. Defendants coordinated their stock transactions, reaping profits of $100,132 for Mr. Fischer and $52,516 for Mr. Capuozzo. The complaint alleges violations of Securities Act sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act section 10(b).

Each Defendant agreed to settle the case. Each consented to the entry of a permanent injunction based on the sections cited in the complaint. Each also agreed to the entry of a permanent penny stock bar. Mr. Capuozzo, in addition, agreed to the entry of an officer and director bar. Monetary relief will be considered by the court at a later date. The U.S. Attorney’s Office for the Southern District of Florida filed parallel criminal charges. See Lit. Rel. No. 24322 (Oct. 22, 2018).

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