Enforcement News: SEC Charges International Participants with Perpetrating a Long-Running Global Pump-and-Dump Scheme

• Posted on: Aug 11 2021

“Pumping a few squirts of vanilla hazelnut syrup into your latte—nothing wrong with that. Pumping up a coffee stock with hype and false statements? That’s illegal, and the Securities and Exchange Commission (SEC) recently announced fraud charges against alleged perpetrators of just such a scheme:” a long-running international securities fraud scheme in which the promoters and their associates allegedly sold millions of shares in multiple microcap—or “penny”—stock companies using pump-and-dump schemes, generating at least tens of millions of dollars in illicit proceeds.

[Ed. Note: the quote that begins this article comes from an Investor Insights article, titled “Wake Up and Smell the Pump-and-Dump”, that FINRA posted on its website (here). In the article, FINRA provides important information on how investors can avoid being the victim of a pump-and-dump scheme.]

In prior posts, we have examined “pump-and-dump” schemes (e.g., here and here).  In a “pump-and-dump” scheme, promoters “pump” up, or increase, the stock price of a company by spreading positive, but often false, rumors.  These rumors cause many investors to purchase the stock.  Thereafter, the promoters or others working with them quickly “dump” their own shares before the hype ends.  Typically, after the promoters profit from their sales, the stock price drops, and the remaining investors lose most of their money (here). Notably, microcap companies are particularly vulnerable to pump-and-dump schemes because there is often limited publicly available information about the companies. 

On August 9, 2021, the SEC announced (here) that it filed an emergency action charging nine individuals, including a public company chairman, for their participation in long-running fraudulent schemes that collectively generated hundreds of millions of dollars from unlawful stock sales and caused significant harm to retail investors in the United States and around the world. The SEC obtained emergency relief in court, including an order to freeze the defendants’ assets.

According to the SEC’s complaint (here), Frederick L. Sharp, a Canadian resident, developed and implemented a complex scheme from 2011 to 2019 in which he and his associates, also Canadian residents, enabled control persons of microcap companies whose stock was publicly traded in the U.S. securities markets to conceal their control and ownership of huge amounts of penny stock. The SEC alleged that they surreptitiously dumped the stock into the U.S. markets in violation of federal securities laws. The services Sharp and his associates allegedly provided included furnishing networks of offshore shell companies to conceal stock ownership, arranging stock transfers and money transmittals, and providing encrypted accounting and communications systems.  According to the SEC, Sharp and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies. 

The SEC alleged that one group of control persons, comprised of Canadian residents, frequently collaborated with Sharp to dump huge stock positions while hiding their control positions and stock promotional activities from the investing public.  The complaint further alleged that a California resident, who chaired the boards of directors of four of the public companies whose stocks were fraudulently sold during the schemes, reaped millions of dollars in illicit proceeds from those illegal sales. According to the complaint, a Maryland resident worked as a promoter and allegedly touted stocks that some of the defendants simultaneously planned to sell, while concealing their roles.

In a related action, the SEC charged a Mexican resident with engaging in deceptive penny stock schemes that generated more than $75 million from the fraudulent sales of multiple microcap companies’ stock. 

“The SEC is committed to rooting out fraudulent attacks on our financial markets by bad actors in the United States and around the world,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Those who scheme to defraud retail investors, as we allege these defendants did, should know that they cannot hide behind sophisticated structures or international borders.”  

“We charge that the defendants created a network that enabled them to engage in multiple fraudulent schemes, making millions of dollars in unlawful profits at the expense of retail investors,” said Paul Levenson, Regional Director of the SEC’s Boston Regional Office.  “Among other things, the emergency relief we have obtained will preserve assets to potentially be returned to harmed investors.”

The SEC’s complaint, which was filed in federal district court in Boston, charged the defendants with violating the antifraud and registration provisions of the federal securities laws. In addition to the asset freeze and other temporary relief obtained, the SEC is seeking permanent injunctions, conduct based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, penny stock bars, and an officer and director bar against one of the defendants.

In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced (here) the filing of criminal charges against four of the promoters.

“My office uses securities laws and regulations to preserve market integrity, in other words: to protect investors from getting ripped off by crooks,” said Acting United States Attorney Nathaniel R. Mendell. “Investigating and prosecuting people who illegally manipulate our markets protects all investors, particularly when the illegal activity is sophisticated and done on a large scale.”

Defendants “are accused of executing a sophisticated, global con that allegedly bilked unsuspecting investors out of tens of millions of dollars. Investor confidence is essential to keeping our financial markets afloat and actions like the ones these individuals are charged with today chip away at the faith investors place in the process,” said Joseph R. Bonavolonta, Special Agent in Charge of the Federal Bureau of Investigation, Boston Division. “The FBI and our partners take securities fraud very seriously and we will do everything we can to hold accountable those who steal from American investors. We urge the public to use caution when researching investment opportunities and to contact us immediately if they become a victim of financial fraud.”