On Tuesday, April 18, 2022, the U.S. Securities and Exchange Commission (“SEC”), in three separate lawsuits brought in the U. S. District Court for the Southern District of New York, charged 16 defendants (one company and 15 individuals) located in the Bahamas, the British Virgin Islands, Bulgaria, Canada, the Cayman Islands, Monaco, Spain, Turkey, and the United Kingdom, for running multi-year fraudulent penny stock schemes that produced over $194 million of illegal receipts. The SEC’s April 18 Press Release notes that the investigation involved securities regulators and law enforcement personnel in “more than 20 countries and are associated, in part, with parallel criminal actions announced by the United States Attorney’s Office for the Southern District of New York.”

The release quotes the SEC’s Director of Enforcement as saying the SEC alleges “that the defendants in these actions orchestrated some of the most complex microcap fraud schemes ever charged by the SEC.” Further, he noted that “[b]y locating their operations overseas, using encrypted messaging and operating through a convoluted network of offshore accounts, the defendants hoped to avoid detection of the massive frauds we allege they perpetrated on U.S. markets and investors.” In something of an international “pump-and-dump” operation, the defendants are alleged to have used “secretly funded promotional campaigns” to hype the stock for U.S. investors. The three April 18 complaints allege that “when those campaigns triggered increases in the demand for and price of the stocks,” defendants sold the stocks via trading platforms in Asia, Europe, and the Caribbean for significant profits.

The SEC’s description of the investigation sounds quite a bit like an international spy story, where the paragraph acknowledging all of those participating in the effort is over six inches long. The investigation was led by two of the SEC’s regional offices, Boston and New York, and the SEC headquarters staff, along with personnel from the SEC’s Office of International Affairs. The SEC organized the Office of International Affairs around the year 2000, as securities markets became ever more globally interconnected (as was painfully evident in the Great Recession of 2007-9). These lawsuits are the first SEC enforcement action I have ever seen where the filings include a color-coded world map identifying defendants by location.

The SEC actions seek permanent injunctions, disgorgement of “ill-gotten gains plus interest,” and civil penalties against all defendants. In addition, penny stock bars are sought against 11 of the 15 individual defendants, and officer and director bars against eight of them. The SEC notes that on emergency applications, the Court issued orders on April 12 and April 15, freezing the assets of six of the defendants and directing repatriation of their holdings. It is not known how amenable (i.e., either voluntarily or by extradition) the defendants may be to U.S. civil and criminal jurisdiction, so it may be that the primary good obtained is simply the stopping of fraudulent activities.

On Monday, June 27, 2022, the SEC once again charged foreign nationals with unlawfully invading U.S capital markets, this time from March 2014 to September 2018, to fleece insufficiently wary American investors by fraudulently selling microcap stocks using a “pump-and-dump” operation that allegedly stole over $1.5 million. Defendants: a small Canadian public company located in Vancouver, British Columbia, whose shares were traded in the U.S. on the Over-the-Counter Market (“OTC); and Formcap Corporation, a Nevada entity whose shares were also publicly registered and traded on the OTC. Both companies were controlled by their CEO Bradley Moynes, a Canadian entrepreneur and a defendant. 

Moynes proceeded with the assistance of an interesting collection of serial securities law violators including a Mexican attorney at one time licensed to practice in California and New Jersey and still licensed in New York. This lawyer was sued in 2013 by the SEC for “facilitating a pump and dump scheme involving penny stocks.” They sued him again in August 2021 “for his conduct associated with numerous microcap schemes.” Moynes also enlisted the services of Frederick L. Sharp and his employees “to facilitate each step of his fraud.” Sharp and some of his employees were sued by the Commission in 2021.  Sharp and one employee were also criminally charged by the U.S. Department of Justice at that time. According to June 27, 2022, Complaint, the SEC brought in the U.S. District Court for the District of Massachusetts, “[f]rom at least 2010 to 2019, the Sharp Group was in the business of facilitating illegal stock sales in the public securities markets.” They helped Moyne conceal his identity as the seller of “large blocks of each company’s stock to unsuspecting investors.” The Complaint lays out in detail the steps Moynes and his associates used to “massage” the public’s interest in the stock of the two companies, and then conceal the structured operation of selling them to the public at higher prices.

The Complaint seeks a permanent injunction, disgorgement of ill-gotten gains with interest, civil penalties, and a penny stock bar, as well as an officer and director bar against Moynes. Further, the SEC charges Vancap Ventures, Inc., another Canadian entity wholly owned by Moynes, as a relief defendant because Moynes had transferred approximately $1 million at the relevant times to Vancap’s bank account. Once again, the SEC’s Office of International Affairs assisted in the investigation, led by the Commission’s Boston Office, as did securities regulators and law enforcement personnel in the U.S. (Financial Industry Regulatory authority), British Columbia, Panama, Curacao, Cayman Islands, Cyprus, Latvia, Liechtenstein, Malta, Mauritius, Singapore, Switzerland, United Arab Emirates, Dubai, and the United Kingdom.

It is noteworthy that the securities involved in both microcap frauds were traded on some level of the OTC. As explained in my Oct. 29, 2020, Blog “Keeping Securities Disclosure in the Pink: Amendments to SEC Rule 15c2-11,” there are four levels of OTC markets, with the placement of securities dependent on factors including company size, number of actively traded shares, the financial condition of the company, etc. One of the freest market capital SEC Commissioners, Hester Peirce, issued a statement in connection with the proposed Rule 15c2-11 Amendments that some levels of the OTC that allow for the purchase and sale of so-called “outliers,” “can provide investors with unique and attractive investment opportunities in a part of the market often overlooked by large investment firms.” Indeed, the Commission, in late 2020 (i.e., before the change in Administrations), invited proposals for a so-called “Expert Market” to accommodate sophisticated risk-takers. See my Dec. 31, 2020, Blog “Letting Qualified Experts Expand the Pink to avoid the Grey: Proposed Conditional Waiver to SEC Rule 15c2-11.” That proposal was never acted upon by the SEC. In light of the complex global pump-and-dump schemes using OTC securities discussed above, it is difficult not to be very hesitant about granting any waivers to the SEC’s OTC Rule.

In any event, one teaching encompassed by the old Scottish wisdom “Mony a Mickle Maks a Muckle” (lots of little things make a big thing), as applied to the cases set out above, is that a sufficient number of penny stocks shares sold yields millions of dollars.