SEC Continues To Focus On Microcap Fraud

The Commission continues to focus on microcap fraud actions with two new manipulation cases involving penny stocks. In one a former registered representative acted as an unregistered broker and then engaged in a series of wash sales. In the Matter of Paul J. Pollack, Adm. Proc File No. 3-16316 (December 16, 2014). In the other an oil and gas company and five executives manipulated the share price of the company. SEC v. Blackburn, Civil Action No. 4:14-cv-00812 (E.D. Tex. Filed December 15, 2014).

Mr. Pollack and his controlled entity, Montgomery Street Research LLC, are Respondents in an action centered on alleged violations of Exchange Act Sections 10(b) and 15(a). While Mr. Pollack was a registered representative, he has never been registered with the Commission as a broker. Montgomery claims to provide equity research and consulting services.

In March 2010 Montgomery entered into a three year Letter Agreement with Company A to provide general advice on growth strategies and “position within the public capital markets.” The focus of the undertaking was to raise money in the capital markets and introduce potential investors to the company. From November through April 2011 Respondents helped effect transactions for the company in its common stock. As a result of efforts by Respondents, nine investors purchased $445,000 of the company’s common stock. This represented about 74% of the total offering.

Later in 2011 Respondents again solicited prospective investors for the firm, this time to acquire shares of preferred stock. About $5.2 million was raised in the offering. Approximately 40% came from the efforts of Respondents. At the conclusion of this offering it was agreed that Respondents would be paid 5% of the value of the preferred stock.

Mr. Pollack also controlled about 665,000 shares of the firm’s common stock through the Letter Agreement. From December 2010 through October 2012 he had exclusive trading authority over ten online brokerage accounts at five brokers. During the period he used the accounts to purchase about 5.3 million shares of the company while selling about 5.6 million. These transactions yielded over $800,000 in net proceeds. Over a period of 300 trading days Mr. Pollack conducted 4,341 transactions. On some days accounts under his control accounted for over 90% of the reported trading volume.

During the period July 2011 through June 2012 eight of the accounts controlled by Mr. Pollack engaged in wash trading. The creation of this false activity created upward pressure on the share price. None of the 100 wash trades by various controlled entities resulted in a change of beneficial ownership. The transactions resulted in net trading proceeds of about $369,686.23. The proceeding will be set for hearing.

Blackburn centers around a scheme created by convicted felon Ronald Blackburn, Treaty Energy Corporation and its executives – Andrew Reid, CEO, Bruce Gwyn, co-CEO, Michael Mulshine, corporate secretary and Lee Schlesinger, CIO, each named as a defendant. Samuel Whitley, outside securities counsel is also named as a defendant.

The company was formed in December 2008 through a reverse-merger of a private oil and gas company and a dormant public shell by Mr. Blackburn. Its shares, 86% of which were controlled by Mr. Blackburn, were quoted on the OTC Bulletin Board. While the other defendants were appointed to various positions at the company, Mr. Blackburn controlled the firm behind the scenes – a fact not disclosed in its Commission filings.

In April 2010, through a joint venture agreement, Treaty obtained the drilling rights in Belize . Press releases were issued touting the merits of the program in July 2011. Later that year the company hired a stock promoter to post misleading information on message boards. The hype regarding the drilling program culminated in January 2012 with a press release announcing that Treat stuck Oil. The press release claimed the well had an estimated 5 to 6 million barrels of recoverable oil. The stock price shot up by 79.3% in one day. The announcement was false, according to the complaint. The same day the release was issued, a government agency in Belize published a release refuting the claim of the company. Nevertheless, Mr. Blackburn and the company officers continued to tout the claimed oil strike. A second release by the company again touting the strike halted the share price decline. The price did not return to pre-announcement levels for a months.

Between 2009 and 2013 Mr. Blackburn and others sold shares of the company in an unregistered public offering and using a Form S-8 to distribute shares to ineligible persons. About $3.6 million was raised from 90 investors.

By June 2013 Treaty depleted all of its authorized shares. Subsequently, the firm began offering investors oil and gas working interests in a well located in West Texas. Investors were told that the well had an initial production rate of 62 barrels per day with a life span of 20 years and that the investment was low risk. In reality the well produced far less. Nevertheless, 19 investors paid about $565,000 for interests. While the investors were told the funds would be invested in current oil and gas filed development much of the money was misappropriated.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a) and 16(a). The case is in litigation. See Lit. Rel. No. 23158 (December 15 2014).

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