Penny Stock Scams (South Florida Business Journal)

SEC targets 379 shell companies in fraud-fighting initiative


South Florida Business Journal
Date: Monday, May 14, 2012, 2:44pm EDT


The Securities and Exchange Commission on Monday suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes, the agency said in a press release.

The trading suspension marks the most companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.

South Florida has traditionally been one of the nation's hotbeds when it comes to microcap shell companies, which are often touted via investment newsletters and telephone sales operations. The SEC has a link to a list of the companies whose trading has been suspended, but the list did not have a breakdown of where the companies are located.

Earlier this month, the SEC suspended the trading of two companies based in Fort Lauderdale and Miami, saying there was an attempt to manipulated the market. In April, FBI Director Robert Mueller in a Miami speech said corporate and securities fraud were a big problem for South Florida's business community.

In a pump-and-dump, perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company, the SEC said. After purchasing shares for a low price and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

While the price gains are often less than a dollar per share, the schemes can generate millions in revenue through dramatic percentage increases in share prices.

"Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade," said Robert Khuzami, director of the SEC's Division of Enforcement. "This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors."

Stock manipulators will pay as much as $750,000 to assume control of a shell company in order to pump and dump the stock for illegal proceeds to the detriment of investors, the SEC said. But with this trading suspension's obligation to provide updated financial information, these shell companies have been rendered essentially worthless for scam artists.

An initiative tabbed Operation Shell-Expel by the SEC's Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division's Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud, the SEC said.

The SEC's previously largest trading suspension was an order in September 2005 that involved 39 companies. The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.

Beware those low-priced stocks (South Florida Business Journal)

Task force continues penny stock crackdown

Florida Business Journal - by Kevin Gale
Date: Thursday, June 30, 2011, 4:33pm EDT


Eric Bustillo, the SEC's regional director in Miami, said agencies are combining their limited resources to fight fraud.
Government agencies in South Florida are continuing a crackdown against penny stock promoters with undercover work that resulted in a flurry of conspiracy charges and an SEC action on Thursday.

Those charged live in Coconut Creek, California, Texas and Nevada – an indication of the broad geographic reach of the multi-agency effort.

The investigation is targeting what Eric Bustillo, director of the SEC’s Miami regional office, calls the "securities fraud underworld. Unfortunately, it has many of the players located down here."

In a telephone interview, Bustillo said investigators follow the trail of evidence as it unfolds.

It's not unusual for promoters and consultants to reach out to others for help raising money or fraudulently manipulating the price of stock, he said.

Historically, penny stock cases often involve promoters and telephone sales boiler rooms that make inflated claims. Cases are getting new twists these days through the use of websites and social media.

Most of the schemes listed Thursday involved kickbacks to a purportedly corrupt pension fund trustee in exchange for having the fund buy stock in microcap companies, the SEC said in a news release.

Another scheme involved a bribe that was to be paid to a purportedly corrupt broker who agreed to buy microcap shares on behalf of investors with discretionary accounts, the SEC said.

A final scheme involved a stock promoter who created a website to tout a penny stock company through a volley of e-mail blasts, and who posted phony testimonials from fake investors, the SEC said.

What the insiders and promoters did not know was that the people who were counterparties to the illegal transactions were actually undercover FBI agents or confidential sources participating in an undercover operation, the SEC said.

The latest charges follow a series of cases, filed in October and December 2010, in which the SEC sued more than a dozen companies and penny stock promoters with similar stock manipulation schemes.

On Thursday, Brian Gibson, 63, of Coconut Creek, was charged with one count of conspiracy to commit securities fraud in connection with a scheme to defraud the investing public by engaging in deceptive and manipulative trading practices in connection with Xtreme Motorsports International stock, according to a news release from Wifredo A. Ferrer, U.S. attorney for the Southern District of Florida, and John V. Gillies, special agent in charge for the FBI in Miami.

Gibson was a marketing consultant for Xtreme Motorsports International who conspired with others to create a promotional website that encouraged investor interest in the company, the U.S. attorney’s press release said.

The website contained false and fraudulent statements, including false testimonials, the U.S. attorney said. Gibson faces up to five years in prison, three years of supervised release and substantial monetary fines, as do the others charged, according to the U.S. attorney:

Donald W. Klein, 40, of Frisco, Texas, who faces a count of conspiracy to commit securities fraud by engaging in deceptive and manipulative trading practices in connection with KCM Holdings, of which he was president and CEO. Klein is charged with engaging in a “pay-to-play” scheme to cause a stockbroker to purchase company stock in return for a kickback payment.
Douglas Newton, 66, of Rancho Mirage, Calif., who was charged with one count of conspiracy to commit securities fraud in connection with a scheme to defraud the investing public by engaging in deceptive and manipulative trading practices in connection with Real American Brands, of which he was president. Newton is charged with engaging in a “pay-to-play” scheme to cause a pension fund fiduciary to purchase shares in return for a kickback.
Charles Fuentes, 66, of Dana Point, Calif., and Thomas Schroepfer, 54, of Las Vegas, who were charged with one count of conspiracy to commit securities fraud in connection with a scheme to defraud the investing public by engaging in deceptive and manipulative trading practices in connection with Smoke Free Innotec Inc. stock. Fuentes was a consultant and Schroepfer was the president. Fuentes and Schroepfer are charged with engaging in a “pay-to-play” scheme to cause a pension fund fiduciary to purchase shares in return for a kickback.
Ferrer said the case show the risks associated with thinly traded microcap stocks.

"The defendants charged today abused their knowledge of the capital markets hoping to misappropriate money held in pension fund and brokerage accounts to enrich themselves and their co-conspirators,” he said in a news release.

“Investors deserve better than secret investment strategies based on kickbacks and bribes,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a news release. “As our charges make clear, these CEOs got more than they bargained for, but exactly what they deserved, for making illicit payments to manipulate microcap stocks.”

Bustillo said the federal agencies are combining their limited resources to bring the microcap cases, and more are likely down the road.

kgale@bizjournals.com | (954) 949-7520 On Twitter: @kevingale