Enforcement News: SEC Charges Seven Individuals and A Technology Company for Perpetrating A Scheme to Gain Control of a “Penny Stock” Company and Defraud InvestorsPrint Article
- Posted on: Mar 3 2021
Concealment of material information and market manipulation. Both forms of improper conduct were on display in Securities and Exchange Commission v. Airborne Wireless Network, 21-cv-01772 (S.D.N.Y.) (here), a case we examine below.
The Importance of The Disclosure of Information
Disclosure of information has long been a mission of the Securities and Exchange Commission (“SEC” or the “Commission”). As noted on the SEC’s website: “[t]he laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” (Here.)
The SEC’s disclosure regime is predicated on providing investors with access to material information, so that they can make informed investment decisions. As former SEC Commissioner Daniel M. Gallagher observed: “This is not to say that the disclosure regime was meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company. Instead, the point has always been to ensure that they have access to material investment information.” (Here.)
Market manipulation refers to conduct that is intended to deceive investors by controlling or artificially influencing the market for a security. Such conduct can include, among others, spreading false information to the market about a company, “spoofing” (i.e., an activity used by traders to outpace investors and other market participants and to manipulate markets), “pump and dump” schemes, engaging in a series of transactions to make a security appear more actively traded (i.e., to affect the volume of trading), and rigging quotes, prices, or trades to affect the demand for a security. When the market is manipulated, the manipulator tries to inflate or deflate the price of a security so that it differs from the true price reflected by market fundamentals.
As a general matter, market manipulation occurs with smaller companies, such as microcap and penny stock companies because market analysts and other market professionals pay little attention to these companies as they do with medium and large-cap companies.
Market manipulation is fraudulent and can have significant consequences for the markets.
[Ed. Note: NASDAQ provided the following explanation of spoofing or layering: “Spoofing, also known as layering, the tape is when sophisticated short-term investors place orders in the market with no intention of having them filled. Other investors see the large orders waiting to be executed, believing that a market whale is trying to buy or sell at a certain price. Therefore, the investor places their order at the same level to buy or sell.
Seconds before the market trades at the price of the large order, the order is pulled from the market, and the retail investor’s order is filled. After the spoofer pulls the order, the market drops, resulting in losses for anyone unfortunate enough to be tricked into buying.”
Readers can find the explanation for “pump and dump” schemes and other useful information about protecting oneself from market manipulation here.]
SEC v. Airborne Wireless Network
On March 2, 2021, the SEC announced (here) that it filed a complaint in the Southern District of New York against seven individuals and a technology company, alleging that they engaged in a scheme to gain control of Airborne Wireless Network (“Airborne”), promote its stock, and defraud investors.
[Ed. Note: Airborne is a Nevada corporation headquartered in Simi Valley, California. It was originally incorporated in January 2011 as Ample-Tee, Inc. (“Ample-Tee”), a company that focused “on selling hard-to find ergonomic products for the physically disabled, such as chairs, workstations, back/arm/leg/wrist supports, through [its] proposed online website.” In May 2016, the company announced that it was changing its name to Airborne. It later changed its line of business to “developing, marketing and licensing a high-speed meshed broadband airborne wireless network by linking commercial aircraft in flight.”
Airborne does not have a class of securities registered with the Commission under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”). However, Airborne did make periodic filings with the Commission between 2013 and 2019.
At all times relevant to the SEC’s complaint, Airborne’s stock was a “penny stock” as defined by the Exchange Act. Airborne’s stock traded at less than $5.00 per share and met none of the exceptions to penny stock classification under Section 3(a)(51) and Rule 3a51-1 of the Exchange Act.]
According to the SEC, Kalistratos “Kelly” Kabilafkas (“Kelly Kabilafkas”) orchestrated the alleged fraud. The SEC claimed (here) that Kelly Kabilafkas secretly purchased essentially all the outstanding shares of Ample-Tee, and then distributed millions of shares among himself and his associates, including defendants Timoleon “Tim” Kabilafkas (“Tim Kabilafkas”), Panagiotis Bolovis, Eric Scheffey, Chrysilios Chrysiliou, and Moshe Rabin (Rabin”).
Kelly Kabilafkas and his associates allegedly deceived Airborne’s transfer agent and broker dealers in order to have the shares transferred into their names, deposited into brokerage accounts, and cleared for sale to the public. The SEC claimed that Kelly Kabilafkas, through defendant Jack Edward Daniels (“Daniels”), Airborne, and other third parties, spent millions of dollars on advertisements that concealed that Airborne was a vehicle for Kabilafkas’s fraudulent scheme. Kelly Kabilafkas allegedly hid his ownership of, and control over, the company by, among other things, placing the company’s restricted shares in Daniels’ name and giving about 13.6 million of the S-1 shares to Tim Kabilafkas, his father, and other alleged associates.
The SEC further alleged that, while the promotional campaign was underway (i.e., while defendants were “pumping” the stock), Kelly Kabilafkas and his associates sold (i.e., “dumped”) approximately 11.8 million Airborne shares for proceeds of more than $22 million, much of which was kicked back to benefit the Kabilafkas family (to buy real estate and pay for luxury vehicles and home improvements).
[Ed. Note: In the complaint, the SEC described the “pump and dump” scheme as follows: “To drive up demand for Airborne’s shares—and, thus, Airborne’s share price—Kabilafkas and Airborne organized an elaborate online, print, and television promotional campaign. Kabilafkas, through Airborne, Daniels, and other third parties, spent millions of dollars to attract potential investors with advertisements that concealed the fact that Airborne was a vehicle for Kabilafkas’s fraudulent scheme. Throughout these promotions, when Airborne’s share price was inflated, Kabilafkas and his Associates dumped about 11.8 million S1 Shares on unsuspecting investors for proceeds in excess of $22 million.”]
Finally, the SEC alleged that Airborne raised another approximately $22.8 million dollars from unsuspecting investors through public and private offerings while materially false and misleading statements about the company were publicly available. In total, the SEC alleged that defendants raised nearly $45 million from their wrongful conduct.
The SEC charged defendants with violations of the antifraud provisions of the federal securities laws and related rules. The SEC seeks civil penalties, disgorgement of ill-gotten gains, plus interest and injunctive relief.
Rabin agreed to settle the charges. In that regard, without admitting or denying the allegations in the complaint, Rabin consented to the entry of a final judgment ordering injunctive relief, a $125,000 civil penalty, and a penny stock bar. The proposed settlement with Rabin is subject to court approval.
“As alleged in the complaint, Kelly Kabilafkas orchestrated a wide-ranging scheme to deceive gatekeepers, conceal from investors the true ownership of a public company, and then manipulate the company’s stock,” said Jennifer S. Leete, Associate Director of the SEC’s Enforcement Division. “The SEC is committed to unraveling frauds to protect investors.”
Readers can find the case, Securities and Exchange Commission v. Airborne Wireless Network, 21-cv-01772 (S.D.N.Y.) here.