Articles Posted in Microcap Market Fraud

Stock Promoters Accused in Pump-and-Dump Scam
The US Securities and Exchange Commission has filed fraud charges against James M. Farinella, his Integrated Capital Partners Inc., Anthony Amado, and his Equity Awareness Group with fraud over the alleged inflation and manipulation of a microcap company’s share price. As a result of the alleged pump-and-dump scam, the fraud made over $1M.

According to the regulator, Farinella and his consulting firm controlled almost the whole public float of stock in Pazoo Inc. Farinella paid Amado’s company to promote the microcap issuer and take part in matched trading to make it appear as if there was market activity for the stock. Amado and one of his employees, Carlo Palomino, are accused of enacting the scam, which allowed Farinella to make over $1M when dumping the Pazoo shares.

New Jersey prosecutors have filed criminal charges against Farinella over the microcap fraud allegations.

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The U.S. Securities and Exchange Commission is barring a number of market participants from the penny stock industry for their involvement in a number of purportedly fake initial public offerings of microcap stocks. The regulator says that investors were bilked because of these schemes.

Among those barred is Newport Beach, CA securities attorney Michael J. Muellerleile. He is accused of authorizing misleading and bogus registration statements that were employed in fake IPOs for several microcap issuers. The statements were generated to purportedly move unrestricted penny stock shares to offshore market participants. Muellerleile’s firm, M2 Law Professional Corp, attorney Lan Phuong Nguyen, and American Energy Development Corp. CFO Joel Felix are also charged in this microcap fraud case.

Nguyen allegedly signed misleading and false legal opinion letters. Felix is accused of making misleading and false statements. Earlier this month, the regulator suspended trading in American Energy Development.

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The Financial Industry Regulatory Authority (FINRA) is ordering Cantor Fitzgerald to pay $7.3 million for selling billions of unregistered microcap shares in 2011 and 2012. The firm is also facing sanctions for not having the proper supervisory /anti-money laundering programs in place to identify suspect activity or red flags related to microcap activity.

According to the self-regulatory organization, the Cantor Fitzgerald’s supervisory system was not designed in a reasonable enough manner to fulfill its obligation to assess whether the microcap securities it was liquidating for clients were SEC-registered or, if not, then were subject to a registration exemption. FINRA said that after Cantor Fitzgerald decided to broaden its microcap liquidity business in 2011, it did not make sure its supervisory system had a meaningful and reasonable way to determine whether the sales of these securities occurred in compliance with the law. Also, said the regulator, the firm did not provide proper guidance and training about how or when to look into whether a sale was exempt from SEC registration, and supervisors were not given the tools that they needed to identify when red flags were an indicator of unregistered, illegal distributions.
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The U.S. Securities and Exchange Commission has filed charges against California Attorney Richard Weed, Coleman Flaherty, and Thomas Brazil. The regulator contends that Weed facilitated a pump and dump scam involving CitySide Tickets Inc. stock that allowed Flaherty and Brazil to get millions of supposedly unrestricted shares.

Investors were barraged with a misleading and false promotional campaign presenting CitySide Tickets as a company in the verge of expansion and success. As the stock price went up, Flaherty and Brazil sold their shares to investors, causing the two of them to make about $3 million in illicit proceeds. Weed purportedly was well compensated for the role that he played.

The Commission charges the three men with violating federal securities laws’ antifraud provisions and related rules. The agency wants disgorgement of ill-gotten gains, interest, penalties, permanent injunctions against further violations, and penny stock bars. Meantime, the U.S. Attorney’s Office for the District of Massachusetts has filed a parallel criminal case against Flaherty, Brazil, and Weed.

Earlier this month, the U.S. Securities and Exchange Commission put out a Risk Alert reminding brokerage firms about their duties when they take part in unregistered transactions for customers. The guidance came, along with the announcement that the agency had filed an enforcement action against former and current E*TRADE Financial Corporation (ETFC) brokerage subsidiaries that did not successfully act as gatekeepers and improperly engaged in the unregistered sales of microcap stock for customers.

According to the SEC, E*TRADE Capital Markets and E*TRADE Securities sold billions of penny stock shares for customers between 2007 and 2011. During this time, there were numerous occasions when they disregarded red flags indicating that the offerings were taking place without an applicable exemption from federal securities laws’ registration provisions.

The two brokerage firms consented to repay over $1.5 million in disgorgement plus prejudgment interest from commissions they made on the improper sales. They also have to pay a $1 million combined penalty.

The Securities and Exchange Commission has filed charges against microcap company Natural Blue Resources Inc. and four persons for purportedly hiding from investors that two of them had previously broken the law. The regulator has suspended trading in Natural Blue stock.

Natural Blue’s mission was to acquire, establish, or invest in companies that are environmentally friendly. However, investors weren’t told that Joseph Corazzi and James E. Cohen were running the operations.

Cohen had previously served time for financial fraud and Corazzi was charged with federal securities law violations. He is permanently barred from acting as a director or officer of a public company.

The Securities and Exchange Commission said that as part of Operation Shell-Expel, its initiative to fight microcap fraud, it is suspending trading in 255 dormant shell companies that it says are “ripe for abuse in the over-the-counter market.” The regulator’s Office of Market Intelligence in its Enforcement Division has been looking through penny stocks and finding inactive companies.

Already, several hundred dormant shell companies have been suspended to protect them from fraudsters and from pump-and-dump scams, which is common with microcap companies. Schemers will use misleading and false statements to talk up a company’s thinly traded microcap stock. They will then buy the stock at a low figure to inflate the price to make it appear as if there is market activity. The next step involves getting rid of the stock by selling at that higher price and making huge profits.

These latest suspensions involve companies in two foreign countries and 26 US states. If a stock gets suspended from trading, relisting is not possible unless the company gives current financial data to show that it is still in business. Because many dormant shell companies are unlikely to do this, the shells become worthless to fraudsters.

In an effort to crack down on fraud via pump-and-dump scams and reverse mergers, the Securities and Exchange Commission is suspending trading in the securities of 379 Microcap companies that are dormant. This is the most number of companies to have trading in them suspended in one day.

As part of its heightened efforts to combat microcap shell company-related fraud, The SEC’s Microcap Fraud Working Group employed Operation Shell-Expel, which employed different agency resources to pinpoint shell companies in 6 other countries and 32 US states that were dormant and vulnerable to scams. SEC Division Director Robert Khuzami said that “empty shell companies” are to certain financial scammers “what guns are to bank robbers.”

According to the SEC, stock manipulators are willing to pay up to $750,000 to get control of a company so they can pump and dump the stock to make illegal gains while investors suffer. Now, however, because the trading suspension mandates that current financial formation must be provided, these shell companies can no longer be used by fraudsters to perpetuate their scams.

Securities laws let the SEC suspend trading in any stock for 10 days maximum. Barring exemptions and exceptions, a company whose trading privileges have been suspended can’t be quoted again unless it issues update information, including financial statements that are accurate.

The SEC chooses to suspend trading in a stock when it feels that to do so will protect investors. In an Investor Alert, the Commission listed some of the reasons for suspending trading, including:

• Insufficient or not the most up-to-date or accurate information about a company, including no current periodic report filings.

• Existing questions about whether information made available to the public is accurate, including the most current details about a company’s operational status, business transactions, or financial state.

• Potential issues over the trading in the stock, such as possible market manipulation and insider trading.

Because the SEC knows that suspending trading in a stock can cause the security’s price to dramatically go down, it is very discriminating about issuing suspensions.

Microcap companies usually have low-priced stock, which trades in low volumes, and limited assets. A pump-and-dump scam is one of the most common types of securities fraud involving these firms. Scammers will issue misleading and false statements to promote a microcap stock that is lightly traded. After buying low and then inflating the stock price by making it appear as if there is a lot of market activity, fraudsters will dump the stock by selling it into the market at the higher rate and make huge profits in the process.

Investor Bulletins: Trading Suspension, SEC (PDF)

SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant Shell Companies to Protect Investors From Potential Scams, SEC, May 14, 2012

More Blog Posts:
Daniel “Rudy” Ruettiger Faces SEC Charges Over Pump-and-Dump Scam Involving Sports Drink Company, Stockbroker Fraud Blog, December 19, 2011
Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case, Stockbroker Fraud Blog, November 17, 2010
Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie, Institutional Investor Securities Blog, April 13, 2011 Continue reading

Federal officials say that Jean “Richard” Charbit has pleaded guilty to one count of conspiracy to commit securities fraud in connection with a South Florida stock scam involving the microcap market that was under investigation by an undercover FBI sting. Charbit is facing a maximum 5 years in prison.

He and defendant Tzemach David Netzer Korem are accused of trying to pay kickbacks to a stockbroker so they could use client accounts to buy shares from the defendants’ company. This made it look as if there was a demand for the instruments, which allowed the defendants to dump their holdings at inflated prices.

Charbit and Korem controlled or owned about 5.6 million shares of ZNext Mining Corp. (ZNXT). Charbit offered the “broker,” who was actually an FBI agent, $100,000 to misappropriate $300,000 from discretionary accounts to purchase common stock in ZNXT. Per the criminal complaint, the goal was to raise the individual common share price from 4 cents to 50 cents.

Eight other microcap stock promoters and market insiders have been charged with securities fraud related to this scheme. Some also are facing criminal charges. One of the persons charged in the microcap market fraud case is Larry Wilcox, the former star of the TV show “CHiPs.” As part of his plea agreement, he admitted to conspiring to defraud a pension plan of $40,000.

Related Web Resources:
SEC v. Jean R. Charbit and Tzemach David Netzer Korem, Civil Action No. 1:10-cv-23604-CMA (U.S. District Court for the Southern District of Florida),
Stock scammer pleads guilty, South Florida Business Journal, November 1, 2010
Institutional Investor Securities Blog
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