SEC Charges Recidivist with Manipulation
Last week the U.S. Attorney’s Office for Manhattan obtained a guilty plea in a securities fraud action from a defendant who engaged in the fraudulent activity while out on bail on another criminal securities case. See, SEC v. McFarland, Civil Action No. 1:18-cv-06634 (S.D.N.Y.) and related criminal cases discussed here. Now the Commission has initiated a securities manipulation action against an individual who was on supervised release following a prison term for securities fraud. SEC v. Appel, Case No. 2:18-cv-03200 (E.D. Pa. Filed July 27, 2018).
This action centers on the manipulation of the stock for three microcap issuers by Defendant Howard Appel and his associates, primarily during the period 2012 through 2013, although the preparation for the fraudulent acts began as early as 2010. Previously, Mr. Appel pleaded guilty to one count of conspiracy to commit securities fraud and one count of conspiracy to commit money laundering in connection with his role in a multi-million dollar pump-and-dump scheme involving the stock of several microcap issuers. He was incarcerated from June 2008 through June 2010 and released from prison on supervised release for three years until June 2013.
The schemes involved here centered on three issuers: Rio Bravo Oil, Inc., a firm that claimed to engage in the acquisition, development and exploration of oil and natural gas properties; Red Mountain Resources, Inc., a company which claimed to engage in the exploration of oil and natural gas properties; and Virtual Piggy, Inc., a company that supposedly provided a platform for children to make online purchases under parental supervision. The shares of each firm were quoted on the OTC BB.
Preparation for each manipulation traces back to the time Mr. Appel was on supervised release following his prison term. For example, as early as 2010 he became involved with each of the three entities supposedly as a consultant working through other controlled firms. Each of the schemes was directed by Mr. Appel who coordinated the activities of a group of associates, some of whom were located off-shore. By November 2011 Mr. Appel owned or controlled through his associates a significant portion of Red Mountain’s float. By late 2011 Mr. Appel, who supposedly was a consultant to Rio Bravo, was able to exercise sufficient control over the company to select the firm’s auditor. By 2012 Mr. Appel had recruited a group of associates who each took positions in the firm’s shares, actions the associates also took with respect to the stock of the other companies involved. Prior to, or in conjunction with, those actions Mr. Appel typically acquired large blocks of the issuer’s stock, usually through private placements.
The manipulation of each firm’s shares was similar once the initial steps were completed. First, Mr. Appel controlled the manipulation and, along with the associates, the stock of each firm. He would monitor transactions in the stock through his position at the company or through the control he had over the brokerage accounts of some associates. Associates were not authorized to sell shares of company stock absent instructions.
Second, trading was designed and initiated to create the appearance of activity in the market while pushing the price – the typical pump-and-dump emails and press releases do not appear to have been employed here. Rather, matched trades were used in conjunction with coordinated trading. Those transactions created the appearance of market activity and liquidity. Those actions were then tied to others that pushed up the price.
Frequently Mr. Appel coordinated the activities of the associates through email. For example:
- With regard to Red Mountain Mr. Appel sent an email to the associates dated January 23, 2013 stating: “Bot 14500 red mtn yesterday and had accumulated 9k over the last few weeks. Avg. 865. Have ur guy bid for 12500 at .87 and another 7500 at .85 in case we got hit by selling today. (My guy above the bid .87).”
- With regard to Virtual Piggy Mr. Appel sent an email dated in January 2013 to an associate stating in part: “[Y]ou cant sell vpig in the market.”
- Later in November 2013 Mr. Appel sent an email to another associate decrying his failure to follow instructions: “You sold the vpig and rdmp while your partners were buying and then conveniently forgot to tell us until after the fact, or not at all. You’ve caused incredible turmoil in both of these deals because you’ve been backdooring us and then lying about it.”
In other instances Mr. Appel traded through accounts of an associate. For example, in March 2012 he used the account of an associate to engage in a series of pre-arranged matched trades. The account was used to sell and repurchase a large block of stock from a market maker for Rio Bravo stock.
Overall Mr. Appel dominated the market in each stock through his holdings and those of the associates. The trading created an artificial price. The scheme yielded over $3 million in profits. The complaint alleges violations of Securities Act sections 17(a)(1) and (3) and Exchange Act sections 9(a)(1), 9(a)(2) and 10(b). The case is pending. See also U.S. v. Appel, No. 2:18-cr-00321 (E.D.Pa. Filed July 27, 2018).