SEC Complaint: How To Create A Manipulation Vehicle
Microcap fraud has long been a focus of SEC enforcement. Many of the cases start with a public shell followed by a reverse merger in which the promoters end up with large portions of the stock. The transaction culminated with a pump-and-dump market manipulation. An Israeli resident with dual citizenship in that country and the U.K. took a different path, however, beginning with the formation of the company. SEC v. Zwebner, Civil Action No. 16 CV 1013 (S.D. Cal. Filed April 26, 2016).
The action against Asher Zwebner, along with a companion case, details a series of steps to a manipulation, beginning with the formation of a shell company through a pump-and-dump market manipulation. At each stage Mr. Zwebner, who has implemented similar schemes in the past, secretly controlled the company — up to the point of the manipulation. The key steps were:
Formation: In June 2010 Crown Dynamics Corporation was incorporated in Delaware, supposedly by Amir Rehavi, in fact a Zwebner nominee.
S-1 Registration: In September of the same year Crown filed a Form S- 1 Registration Statement with the SEC. Although Mr. Zwebner controlled the entire process – even having the comments sent to him under another identity – his name never appeared. That is contrary to Items 401(a) and 404(c) of Regulation S-K which require the disclosure of officers, directors, promoters and control persons and related transactions conducted by them. In September 2011 the registration statement became effect – Crown could conduct an IPO.
The IPO: The final amendment to the S-1 described the procedures for the IPO. Investors, according to the amendment, would be required to submit a subscription agreement and deliver funds to Crown for purchase. In reality the offering was an “elaborate charade,” charges the complaint. Defendant Zwebner and his sons arranged for local friends to serve as supposed purchasers – shills. A shareholder list of 40 IPO subscribers was created. The transfer agent issued the shares. Most of those on the IPO list never new about the issuance of the shares. Control and the shares remained with the Defendant.
Trading: To initiate trading on the OTCBB, Form 211 had to be submitted to FINRA by a market maker who demonstrated compliance with Exchange Act Rule 15c2-11. The rule requires the market maker to have a reasonable basis to believe the information about the firm is accurate and from a reliable source. Mr. Zwebner arranged for a broker-dealer to file a Form 211 in September 2011 regarding Crown’s securities so that quotations could be published on OTCBB. Amir Rehavi was the firm CEO; Crown would license a toothbrush for its manufacturer, according to the papers. The statements were false. Following amendments which also included false information, FINRA cleared the Form 211. The broker-dealer was permitted to enter quotes on the OTCBB. Mr. Zwebner had 2.5 million free-trading shares.
Sale: Mr. Zwebner sold the Crown shell to stock promoter Christopher Larson. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23526 (April 26, 2016).
The scheme concluded with the manipulation of Crown’s shares. SEC v. Zouvas, Civil Action No. 3:16-cv-998 (S.D. Cal. Filed April 25, 2016). Named as defendants are Luke Zouvas, and attorney; Cameron Robb, a business associate of defendant Larson; Christopher Larson, a CPA; James Schiprett, a nominee for defendant Larson; and Robert Jorgenson, also a nominee for defendant Larson.
Although Mr. Larson acquired control of Crown, his name never appeared in any filings made with the SEC. Crown’s shares were transferred to nominees for Mr. Larson, including defendants Schiprett and Jorgenson. A call center was paid $400,000 by Mr. Larson to promote the shares and create the appearance of market interest. As the share price became inflated defendant Larson’s nominees dumped their shares. Most of the proceeds which totaled at least $850,000 were wired to nominee accounts controlled by defendant Larson. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending.