by T. GormanPosted on Posted in SECActions

Microcap fraud has been a priority for SEC Enforcement at least since the creation of the Microcap Fraud Task Force two years ago. The cases typically focus on market manipulation claims of shell companies and pump-and–dump type schemes.

The SEC’s newest case in this area, SEC v. Gallison, Civil Action No. 1:15-cv-05456 (S.D.N.Y. Filed July 14, 2015) is perhaps a more complex version of the standard microcap fraud action. The complaint names thirty–four defendants, including fifteen individuals and nineteen entities. Key individual defendants include: Harold Gallision, a founder of defendant Moneyline Brokers, and a securities law recidivist; Carl Kruse Sr., Carl Kruse Jr., Frank Zangara, Charles Moeller and Mark Dresner. Key entity defendants are Moneyline, a purported broker dealer based in Costa Rica and controlled by Mr. Gallison; Bastille Advisers, Inc., Club Consultants, Inc., Jurojin, Inc., Sandias Azucaradas CR S.A., and Vanilla Sky, S.A., all affiliated with Moneyline and referred to as Moneyline entities.

Beginning in 2009, and continuing through most of the next year, Moneyline and the Moneyline entities operated as a broker-dealer under the control of Mr. Gallison. The firm sought U.S. based customers who wanted to manipulate the share price of microcap firms they controlled or owned. The schemes alleged here involved two manipulations. One involving Warrior Girl Corporation; the other Everock, Inc.

Under the Moneyline business model U.S. customers were instructed to transfer microcap shares to U.S. brokerage accounts in the name of Moneyline entities. The shares were unregistered. The shares were then comingled with other held assets to conceal the actual ownership from the brokers. The Moneyline entities represented to the U.S. brokers that they were the beneficial owners of the shares.

A group of Moneyline affiliated persons assisted customers with market manipulation schemes by directing matched trades. Those trades were designed to create the illusion of genuine investor demand, inducing others to purchase. By trading through numerous nominee accounts, the Moneyline entities and affiliated persons created the impression that unrelated persons were in fact purchasing and selling shares. The Moneyline entities and affiliated persons also assisted customers with promotional campaigns. Steps were taken to conceal the identity of the Moneyline entities and affiliates.

The Moneyline entities charged a commission of $25 per trade plus 5% of the trade value. Customers also paid the brokers fees and charges. Following settlement the Moneyline entities wired the proceeds to various bank accounts.

One of the manipulations here involved Warrior Girl. That firm, formed in 2002, was a shell company until at least June 2010. Its business changed over time from hydroelectric owner to mining and extracting oil from tar sand to online education and social media. Since at least 2009 Messrs. Kruse Sr. and Jr. controlled the firm. They orchestrated several promotional campaigns to liquidate their secret Warrior Girl holdings. Coordinated trading was conducted along with Mr. Gallison and others. False press releases promoting the company were posted on the OTC Markets website which in part concealed the holdings of Messrs. Kruse Sr. and Jr.

A second manipulation involved the shares of Everock Inc. That firm was formed in Ontario in 1999. Initially it claimed to own interests in mining properties and had nominal assets. In 2005 the firm re-domiciled from Ontario to Nevada, focused on the gold mining sector and merged with Everock Inc.

Defendants Frank Zangara, Charles Moeller and Mark Dresner coordinated with the Moneyline entities and affiliated individuals in the unlawful distribution and manipulation of Everock shares Several promotional campaigns were conducted, aided by false filings on the OTC Markets site and with the SEC.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a). In addition, it alleges violations of Exchange Act Sections 9(a), 10(b), 15(a), 17(a) and control person liability under Section 20(a). The case is in litigation. See Lit. Rel. No. 23303 (July 14, 2005).

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by T. GormanPosted on Posted in SECActions

DOJ and SEC officials repeatedly encourage cooperation. There are benefits for both sides. Cooperation can facilitate the Government’s investigation, providing a road to the scheme. Testimony can aid in obtaining a favorable result. For the cooperator there is the promise of cooperation credit – a shorter sentence in a criminal case for an individual or a lesser fine. Frequently, the value in a criminal case can be seen in the sentencing guideline calculation. While in an SEC enforcement action there is also the prospect of cooperation credit, its value may be more difficult to determine since Commission remedies are not churned out by a formula.

The Commission’s recent settlement with cooperator Frank Tamayo is an illustration of cooperation credit given by the agency, according to an agency press release. SEC v. Tamayo, Civil Action No. 3:14-cv-09844 (D. N.J.). Mr. Tamayo was the man in the middle of an insider trading ring composed of three friends. He had been friends with Steven Metro since law school. Mr. Metro later became a managing clerk at Simpson Thatcher. He has also been friends with Vladimir Eydelman, a registered representative with Oppenheimer & Co., for years.

The scheme traced to February 2009 at a New York City bar. Messrs. Tamayo and Metro met with friends for drinks but separated and discussed stocks. One was Mr. Tamayo’s holdings in Sirius XM Radio. Mr. Tamayo expressed concern that the firm would go bankrupt. Mr. Metro told his friend that it would not because Liberty Media Corporation planned to invest over $500 million in the company. He knew this from reviewing Simpson Thatcher documents he assured his friend.

Subsequently, the two men called broker Eydelman and ordered additional Sirius shares for Mr. Tamayo’s account. When the Liberty-Sirius deal was announced on February 17, 2009 Mr. Tamayo had potential profits of about $157,892. His friend had profits of about $54,922. When Mr. Tamayo offered $7,000 to his friend as a “thank you” he was told to keep it in his account.

From this beginning a scheme unfolded in which the men traded on inside information stolen from Simpson Thatcher thirteen times. The mechanics of the scheme were designed to shield the three from capture. Mr. Metro accessed the law firm’s non-public information through the computer system to identify possible corporate transactions. Messrs. Metro and Tamayo then met, typically met a New York City coffee shop. Mr. Metro would signal his friend the name of the stock and/or its ticker symbol. Messrs. Eydelman and Tamayo would meet later near the information booth in Grand Central Station. Another signal transmitted the name of the company whose shares were to be acquired. Mr. Eydelman then returned to his office and researched the company. Reports with a recommendation would be transmitted to Mr. Tamayo. The stock would be purchased. Profits made.

The plan seemed fool proof. It yielded about $5.6 million in trading profits. But it failed. The SEC and the U.S. Attorney’s Office for New Jersey brought charges. Mr. Tamayo decided to cooperate with the authorities.

Based on what the SEC termed “extensive cooperation” he resolved the civil enforcement action. Under the terms of the agreement Mr. Tamayo consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). He was also ordered to pay disgorgement of over $1 million. That amount will be deemed satisfied by the entry of orders of forfeiture or restitution in the parallel criminal case where he has pleaded guilty. No monetary penalty was imposed. He is also obligated to continue cooperating with the authorities. The settlement is subject to court approval. See Lit. Rel. No. 23202 (July 13, 2015).

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