SEC Files Microcap Fraud Action Charging Thirty-Four Defendants
Microcap fraud has been a priority for SEC Enforcement at least since the creation of the Microcap Fraud Task Force two years ago. The cases typically focus on market manipulation claims of shell companies and pump-and–dump type schemes.
The SEC’s newest case in this area, SEC v. Gallison, Civil Action No. 1:15-cv-05456 (S.D.N.Y. Filed July 14, 2015) is perhaps a more complex version of the standard microcap fraud action. The complaint names thirty–four defendants, including fifteen individuals and nineteen entities. Key individual defendants include: Harold Gallision, a founder of defendant Moneyline Brokers, and a securities law recidivist; Carl Kruse Sr., Carl Kruse Jr., Frank Zangara, Charles Moeller and Mark Dresner. Key entity defendants are Moneyline, a purported broker dealer based in Costa Rica and controlled by Mr. Gallison; Bastille Advisers, Inc., Club Consultants, Inc., Jurojin, Inc., Sandias Azucaradas CR S.A., and Vanilla Sky, S.A., all affiliated with Moneyline and referred to as Moneyline entities.
Beginning in 2009, and continuing through most of the next year, Moneyline and the Moneyline entities operated as a broker-dealer under the control of Mr. Gallison. The firm sought U.S. based customers who wanted to manipulate the share price of microcap firms they controlled or owned. The schemes alleged here involved two manipulations. One involving Warrior Girl Corporation; the other Everock, Inc.
Under the Moneyline business model U.S. customers were instructed to transfer microcap shares to U.S. brokerage accounts in the name of Moneyline entities. The shares were unregistered. The shares were then comingled with other held assets to conceal the actual ownership from the brokers. The Moneyline entities represented to the U.S. brokers that they were the beneficial owners of the shares.
A group of Moneyline affiliated persons assisted customers with market manipulation schemes by directing matched trades. Those trades were designed to create the illusion of genuine investor demand, inducing others to purchase. By trading through numerous nominee accounts, the Moneyline entities and affiliated persons created the impression that unrelated persons were in fact purchasing and selling shares. The Moneyline entities and affiliated persons also assisted customers with promotional campaigns. Steps were taken to conceal the identity of the Moneyline entities and affiliates.
The Moneyline entities charged a commission of $25 per trade plus 5% of the trade value. Customers also paid the brokers fees and charges. Following settlement the Moneyline entities wired the proceeds to various bank accounts.
One of the manipulations here involved Warrior Girl. That firm, formed in 2002, was a shell company until at least June 2010. Its business changed over time from hydroelectric owner to mining and extracting oil from tar sand to online education and social media. Since at least 2009 Messrs. Kruse Sr. and Jr. controlled the firm. They orchestrated several promotional campaigns to liquidate their secret Warrior Girl holdings. Coordinated trading was conducted along with Mr. Gallison and others. False press releases promoting the company were posted on the OTC Markets website which in part concealed the holdings of Messrs. Kruse Sr. and Jr.
A second manipulation involved the shares of Everock Inc. That firm was formed in Ontario in 1999. Initially it claimed to own interests in mining properties and had nominal assets. In 2005 the firm re-domiciled from Ontario to Nevada, focused on the gold mining sector and merged with Everock Inc.
Defendants Frank Zangara, Charles Moeller and Mark Dresner coordinated with the Moneyline entities and affiliated individuals in the unlawful distribution and manipulation of Everock shares Several promotional campaigns were conducted, aided by false filings on the OTC Markets site and with the SEC.
The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a). In addition, it alleges violations of Exchange Act Sections 9(a), 10(b), 15(a), 17(a) and control person liability under Section 20(a). The case is in litigation. See Lit. Rel. No. 23303 (July 14, 2005).