Microcap Fraud Dug by FBI
The Securities and Exchange Commission has charged several company CEOs and penny stock promoters with securities fraud for orchestrating kickback schemes, bribery, and blast e-mails to manipulate trading in microcap stocks.
Through the cooperation of the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation (FBI), the securities fraud was uncovered without having to harm the investors in the process.
Similarly, the U.S. Attorney’s Office announced parallel criminal charges against the same individuals and entities named in the SEC’s civil lawsuits.
In a complaint filed before the U.S. District Court for the Southern District of Florida, the SEC claimed that “most of the schemes involved kickbacks to a purportedly corrupt pension fund trustee in exchange for having the fund buy stock in microcap companies.”
“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 added.
“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.”
Douglas Newton, of Rancho Mirage, Calif., the CEO of Real American Brands, Inc. n/k/a Real American Capital Corp., allegedly paid kickbacks to a sham employee pension fund trustee to buy more than 6.2 million shares of restricted Real American Brands stock.
The complaint alleged that he attempted to hide the kickbacks by entering into a consulting agreement with a sham company fabricated by the trustee to receive the kickbacks.
However, the corrupt trustee was a fictitious person, the trustee’s business associate who helped arrange the deal was an undercover FBI agent, and the phony consulting company was actually created by the FBI.
Another defendant is Donald Klein of Frisco, Texas, president and CEO of KCM Holdings Corp. that is engaged in two restricted stock transactions and one market transaction involving KCM Holdings’ stock.
“Klein and the company paid kickbacks to an undercover FBI agent who portrayed himself as a business associate of a corrupt trustee of an employee pension fund, in exchange for the fund’s purchase of 2.5 million shares of restricted KCM Holdings stock,” the SEC claimed.
Klein attempted to conceal the kickbacks through a consulting agreement with a phony company that would receive the kickbacks. In another scheme, Klein bribed a purported corrupt stockbroker (actually an undercover FBI agent) to purchase KCM Holdings stock in the open market for brokerage clients with discretionary accounts.
Additionally, Thomas Schroepfer of Las Vegas, Nev., and president and CEO of SmokeFree Innotec, Inc., and Charles Fuentes, of Dana Point, Calif., a promoter of SmokeFree’s stock, allegedly paid kickbacks to an undercover FBI agent, posing as the business associate of a corrupt employee pension fund trustee, in exchange for the fund’s purchase of 400,000 shares of restricted SmokeFree stock.
“Schroepfer attempted to conceal the kickbacks through a consulting agreement with a phony company created to receive the kickbacks. In addition, SmokeFree issued shares of its stock to a cooperating witness for acting as a middleman in the scheme,” the complaint stated.
Finally, Brian Gibson, of Coconut Creek, Fla., created a now-defunct website, Roaringpennystocks.com, to promote shares of Xtreme Motorsports International, Inc., as part of a planned pump-and-dump scheme.
“Gibson touted Xtreme Motorsports by blasting a series of e-mails to potential investors and posted false testimonials on the site from purported investors raving about their success in following the website’s stock picks.
The charges came after a series of cases filed in October and December 2010 by the SEC against more than a dozen companies and penny stock promoters with similar stock manipulation schemes.
Robert Khuzami, Director of the SEC’s Division of Enforcement, said: “Investors deserve better than secret investment strategies based on kickbacks and bribes.
“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.”
The SEC is seeking permanent injunctions and fines against all the defendants for violating Section 17(a) of the Securities Act of 1933, and/or Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
The SEC further seeks disgorgement plus interest against the defendants, and penny stock bars against all the individual defendants.