SEC, Main Street Investors and Microcap Fraud By Recidivists
The main street investor focus of Enforcement has spawned in part repeated cases centered on microcap fraud and manipulation. Over the years these cases have always been key for the Division. The difficulty is frequently whether the Division can uncover them before the investors have lost most or all of their money. The most recent case of this genera fits the mold. It features a years long scheme crafted and implemented by a rogues gallery of securities law recidivists using six microcap issuers and two PR firms to fleece the public out of over $11 million by selling worthless stock at manipulated prices. SEC v. Farmer, Civil Action No. 4:19-cv-01774 (S.D. Tx. Filed May 15, 2019).
The Defendants in this action are:
Andrew Farmer — alleged to have coordinated the scheme and pleaded guilty to one count of conspiracy to commit wire and securities fraud in U.S. v Farmer, No. 4:16-cr-408 (S.D. Tx. Filed Sept. 15, 2016);
Eddie Austin, Jr. — a lawyer married to Defendant Carolyn Austin who ran the “war room” for the manipulation and who has been disbarred by the State of Louisiana, denied the right to practice before the Commission, enjoined in SEC v. Sunrise Solar Corporation, Civil Action No. 5:12-cv-918 (W.D. Tx. Filed Sept. 28, 2012) and pleaded guilty in U.S. v. Farmer to one count of conspiracy to commit wire fraud;
Scott Sieck — former stock broker who was enjoined in SEC v. Sieck, Civil Action No. 99-6165 (S.D. Fla.) and pleaded guilty to one count of conspiracy to commit wire fraud in U.S. v. Farmer;
Carolyn Austin — wife of Eddie Austin; she has been been enjoined twice, once in SEC v. Sunrise Solar Corporation, Civil Action No 5:12-cv-918 (W.D. Tx.) and once in SEC v. Farmer, Civil Action No. 4:19-cv-01774W.D. Tx. Filed Aug. 14 2014)(separate action from this case); she pleaded guilty to one count of misprison of a felony in U.S. v. Farmer; and
John Brotherton — helped craft the “story” for the manipulation and is currently in federal detention after pleaded guilty to one count of conspiracy to commit wire fraud in U.S. v. Farmer.
The issuers involved in the action all had shares traded on OTC Link and in the 2013 –2015 time period engaged in massive distributions of their stock. They are: Puget Technologies, Inc., purportedly in the business of innovative cannabinoid products and therapies; Gankit Corporation, purportedly an online auction website; Nhale, Inc., purportedly in the business of distributing non-flame smoking devices and the pursuit of marijuana legalization whose shares; Horizon Energy Corp., purportedly a producer of solar energy products and solutions; and Valmie Resources, Inc., a firm supposedly now in the business of providing drone aircraft and whose shares were suspended from trading in 2017 by the Commission.
The manipulation took place over a six year period beginning in May 2011 apparently while U.S. v. Farmer and SEC v. Farmer were being litigated. During the period the scheme was unraveled and implanted it virtually text book fashion.
First: It was coordinated through frequent meetings in a windowless “war room” with the use of encrypted communications. The effort began by securing secret control of much of the float for each issuer and installing controlled management. The stock was then deposited with a number of entities that served as alter egos for the group.
Second: The markets were conditioned for the coming manipulation through a series of matched and controlled trades. The illusion of an active, trading market for the shares of each firm was thus created.
Third: Defendants arranged for massive, false publicity about each company and its shares centered on a story created for each. The campaigns typically used email blasts and “click adds.” As the public purchased shares in the wake of the false PR, the share price rose.
Fourth: Defendants sold their shares into the manipulated market at artificial prices. By the end Defendants had reaped over $11 million from unsuspecting investors who were defrauded. The complaint, filed two years after the end of the scheme, alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24470 (May 17, 2019).
The rogues gallery of defendants involved in this action suggests that perhaps a bit of research by individual investors would have saved them from their fate. Perhaps not. Many of the defendants were charged in U.S. v Farmer. That action was filed by the DOJ in 2016. The Commission filed an action two years earlier against Mr. Farmer and another defendant involved here.
While the criminal and civil enforcement actions were pending Mr. Farmer and his band were busy not just with court dates in those cases but in unrolling this massive manipulation. By the time this case was brought the earlier two actions were over as was the scheme on which this case is predicated — not even a temporary freeze order would have saved the investors’ $11 million which was without a doubt long gone. Cf. SEC v. Arthur Young, 590 F. 2d 785 (9th Cir. 1979)(noting that SEC is often too late on the scene to aid investors).
FCPA Institute: On June 21 and 22, 2019, Professor Mike Koehler will conduct the FCPA Institute at the Offices of Dorsey & Whitney LLP in Minneapolis, Minnesota. The Institute provides a unique learning experience for those seeking to elevate their knowledge of the Foreign Corrupt Practices Act. Professor Koehler is one of the foremost scholars in on the FCPA and conducts an interesting and most informative program. You can obtain more information about the program and register here.