SEC Charges Three For Six Microcap Fraud Manipulations
Microcap fraud has been a priority of SEC Enforcement since at least the formation of the Microcap Task Force about two years ago. The Commission has brought a series of cases focused largely on pump-and-dump schemes.
Now the Commission has brought an action against three individuals who are alleged to have conducted six pump-and-dump schemes in 2011 and 2012. The three defendants, all residents of Israel, are: Joshua Aaron, Gery Shalon and Zvi Orenstein. The issuers are Southern Home Medical Equipment, Inc.; Greenfield Farms Grassfed Beef, Inc.; Next Generation Energy Corporation; Mustang Alliances, Inc.; IDO Security, Inc.; and Premier Brands, Inc. SEC v. Aaron (S.D.N.Y. Filed July 21, 2015).
The defendants control numerous promotional websites and have large email lists which are used to tout the stocks. Typically the defendants used these resources to send multiple emails touting the same issuer. The emails, however, were made to appear as if they came from different sources. The defendants and/or their associates obtained control over the issuer prior to the initiation of the promotions.
Many of the promotional materials had a disclaimer stating essentially that company officials and their families may hold a position in the securities. The disclaimers also stated at times that the firm officials may sell their stock. Potential investors were not told that the promotors planned to sell their stock as the promotions began. By the end of the promotions the stock price crashed back down after a dramatic increase, leaving investors with little and the defendants with profits.
Typically, each defendant contributed to the scheme. For example, Mr. Aaron generally wrote, created and helped design the email and website promotions. Mr. Shalon contributed to those emails, sent them out and approved the use of funds by Mr. Orenstein to acquire domain names. Mr. Orenstein handled the back office duties.
Each scheme generated a significant price increase and profits for the defendants:
- Southern Home: The share price increased over 1,800% yielding the defendants $300,000 in profits;
- Greenfield Farms: The share price increased 286% yielding profits of $123,000;
- Next Generation: The share price increased 93% yielding profits of $36,000;
- Mustang Alliances: The price increased 65% yielding over $2.2 million;
- IDO Security: The share price increased 112% yielding profits of $580,000; and
- Premier Brands: The share price increased 41% yielding profits of $216,000.
Overall the defendants netted over $3.4 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and each subsection of Rule 10b-5. The case is pending. The U.S. Attorney’s Office filed parallel criminal charges.