SEC Claims Individual, Firm Engaged In Unregistered Dealer Business

The Commission’s recently released report on the Enforcement Division identified retail investors and cyber as key areas of emphasis for Enforcement under Chairman Clayton. Examples of the retail focus are actions involving microcap stocks and frauds as well as those where market professionals overcharge investors. In such cases retail investors are victims.

A new case charging that an individual and his firm acted as an unregistered dealer business when selling penny stock shares into the market appears to be part of this approach. SEC v. Almagarby, Civil Action No. 17-cv-62255 (S.D. Fla. Filed Nov. 17, 2017). The action names as defendants Ibrahim Almagargy and Microcap Equity Group LLC. Mr. Almagargy controls Microcap Equity.

The complaint alleges that over a two and one half year period, beginning in January 2013, the Defendants purchased over 1.1 million of convertible debt involving 39 different microcap issuers. Later they sold over 7.4 billion shares of the microcap issuers’ stock into the market. The Defendants undertook these transactions through a series of steps:

  • Convertible debt securities were purchased through agreements;
  • In conjunction with the purchases Defendants negotiated the right to convert the issuers’ debt into shares of common stock;
  • The debt securities were converted into common stock;
  • The stock was deposited into the brokerage account of Defendants; and
  • The shares were sold into the market at a profit.

Over the two and one half year period Defendants entered into 58 transactions of this type. Through the conversion of the debt securities Defendants acquired 8.9 billion shares of which about 7.4 billion were sold into the market. The transactions resulted in profits of over $1.4 million.

The complaint alleges that Defendants entered into these transactions as part of a regular business. Any person engaged in the business of buying and selling securities for their own account must register with the Commission, according to the complaint.

At least “some” of the 7.4 billion microcap shares sold by Defendants were penny stocks. Defendants therefore participated in the offering of penny stock by acting as dealers engaged in the buying and selling of penny stocks. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 23992 (Nov. 20, 2017).

Program: The Fourth Annual Dorsey Federal Enforcement Forum will be held on December 6, 2017. There will be panel discussions and presentation on EPA enforcement, SEC enforcement, investment advisers, international sanctions, FinTec, and FBI international corruption investigations, followed by a holiday party. Attend in person, listen on the web or watch a live stream; CLE available. For a detailed program and free registration click here.

Tagged with: , ,