SEC Staples: Trading Suspensions, Market Manipulation and Ponzi Schemes

Trading suspensions, market manipulation and Ponzi scheme actions – staples of SEC enforcement. The Commission suspended trading for 128 dormant shell companies this week while bringing a market manipulation action involving two recidivists and a case against an adviser involving Ponzi like schemes.

Trading suspensions: The suspensions which halted trading in the shares of 128 issuers described as being dormant by the Commission are part of Operation Shell-Expel. Since that operation began in 2012 trading suspensions have been issued for over 800 microcap stocks. That represents about 8% of the OTC traded stocks. While trading could begin again if certain requirements are met, it is “extremely rare” for that to occur, according to the Commission.

Manipulation: The Commission filed a pump-and-dump and insider trading action centered on the manipulation of the shares of a company which is a defendant in another SEC enforcement action by a securities law recidivist. SEC v. Williky, Civil Action No. 15-cv-357 (S.D. Ind. Filed March 2, 2015). This action focused on the manipulation of the shares of Imperial Petroleum, Inc. by Gary Williky. The firm, a defendant in another SEC enforcement action, supposedly made and sold biofuel, reaping significant tax credits in the process. Mr. Williky, a defendant in two prior SEC enforcement actions, was retained to conduct investor relations.

Following his retention, Mr. Williky engaged in a series of wash sales and matched orders to inflate the price of the shares. He also used e-mails in which he touted the shares without disclosing that he was actually selling the stock. Although at one point he acquired over 5% of the company shares, the required disclosure schedules were not filed.

During his work with the company Mr. Williky discovered that its business was a fraud. The company did not manufacture bio-fuel. It purchased the substance and resold it. Accordingly, it was not entitled to the tax credits it obtained. Rather than report the fraud to the authorities, Mr. Williky demanded and obtained a block of stock from the firm in return for his silence. He then sold the shares into the market. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1), 10(b) and 13(d). The case is pending. See Lit. Rel. No. 23211 (March 2, 2015).

Ponzi payments: The Commission also brought an action against fund manager Gregory Gray and his controlled entities, Archipel Capital LLC and BIM Management LP, centered on a Ponzi like scheme. SEC v. Gray, (S.D.N.Y. Filed February 27, 2015). Since at least 2011 Mr. Gray has raised about $20 million from at least 140 investors for various funds he controls. Although each fund was supposed to be separate, the investor money was comingled and transferred among the group.

The Social Media Fund LP, one of the group of funds, was supposed to acquire pre-IPO shares of Twitter at prices ranging from about $19 to $25 per share. Mr. Gray raised about $5.2 million for this fund. While about 80,000 pre-IPO shares of Twitter were acquired, under the terms of the offering documents about 230,000 should have been acquired. When investors sought the transfer of the promised shares Mr. Gray at first delayed. He then misappropriated about $5.3 million from the Late Stage Fund LP, another member of the group. That Fund was supposed to acquire pre-IPO shares of Uber Technologies, Inc. Rather than use the investor money put in the Late Stage Fund primarily by one investor to purchase Uber shares, Mr. Gray diverted to repay investors in the Social Media Fund. When the investor in the Late Stage Fund demanded the shares, Mr. Gray fabricated certificates for the investor. In testimony before the staff he authenticated the shares.

To replace the funds in the Late Stage Fund Mr. Gray continued soliciting investors. In February 2015 he secured $470,000 from another investor for that Fund. He also claimed to be about to close a deal with a China based investor for an additional $30 million. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The SEC obtained an emergency freeze order. The case is pending.