Yearly Archives: 2013

On July 3, 2013, the SEC announced charges against eight Argentine citizens who unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also obtained an emergency order to freeze assets in the U.S. brokerage accounts of the eight defendants and two other Argentine citizens who had Biozoom shares but had not yet sold them. The action follows last week’s suspension of trading in Biozoom due to concerns that some shareholders may be unlawfully distributing its securities.

Biozoom, formerly Entertainment Art, Inc., announced in April that it was changing its name and moving from producing leather bags to developing biomedical technology. The SEC’s complaint alleged that from March to June 2013, the ten defendants received more than 20 million shares of Entertainment Art, which was one-third of the company’s total outstanding shares. In a one-month period beginning in mid-May, eight of them sold more than 14 million shares. The sales yielded almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze.

The SEC’s complaint, filed in U.S. District Court in Manhattan, charged the eight defendants — Magdalena Tavella, Andres Horacio Ficicchia, Gonzalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman and Mariano Pablo Ferrari — along with two others, Mariano Graciarena and Fernando Loureyro, who received shares but have yet to sell them.

According to the SEC’s complaint, when the defendants deposited the Biozoom stock into their U.S. brokerage accounts, they claimed to have acquired the bulk of the shares in March 2013 from Entertainment Art shareholders who purchased them in private placements that began in 2007. Each of the defendants provided stock purchase agreements between them and the former shareholders purportedly signed by the defendants and those shareholders. The SEC alleged that the documents were false because the Entertainment Art investors had sold all of their stock in the company in 2009, almost four years earlier. The defendants’ shares of Biozoom were deposited into their accounts as shares that purportedly could be freely traded and the defendants sold them even though no registration statement was filed with the SEC for any of the sales transactions, in violation of U.S. law.

In addition to the temporary restraining order and asset freeze granted by the court, the SEC is seeking preliminary and permanent injunctions, return of the selling defendants’ allegedly ill-gotten sale proceeds, and civil penalties. The SEC is also seeking preliminary and permanent injunctions against the non-selling defendants, Graciarena and Loureyro, because of the likelihood that both defendants will offer or sell their Biozoom shares to the public in violation of the registration requirements of U.S. securities law.

On July 2, 2013, the SEC announced three  initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas of the market and bring cutting-edge technology and analytical capacity to bear in its investigations. The initiatives are:

Financial Reporting and Audit Task

The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the Division’s efforts to identify securities-law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. The principal goal of the Task Force will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. The Task Force will focus on identifying and exploring areas susceptible to fraudulent financial reporting, including on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and use of technology-based tools such as the Accounting Quality Model. It will include Enforcement attorneys and accountants from across the country, working in close consultation with the Division’s Office of the Chief Accountant, the SEC’s Office of the Chief Accountant, the Division of Corporation Finance, and the Division of Economic and Risk Analysis.

Microcap Fraud Task Force

The Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. These abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The principal goal of the Task Force will be to develop and implement long-term strategies for detecting and combating fraud in the microcap market, especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.

The Microcap Fraud Task Force will build on the extensive and successful work of the Microcap Fraud Working Group – created in 2010 to bring together enforcement and examination staff with common interests in detecting and preventing microcap fraud – in amassing data, developing new approaches to investigations in this sector of the market, and forging relationships with criminal law enforcement authorities. The Task Force will not replace the Working Group but will differ from it in that it will consist of staff dedicated exclusively to investigation of participants in the microcap securities market.

Center for Risk and Quantitative Analytics

The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. It will work in close association with other Commission offices and divisions, especially the Division of Economic and Risk Analysis, and provide guidance to the Enforcement Division’s leadership on how to allocate resources strategically in light of identified risks. As a central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.

On June 20, 2013, the SEC charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.

The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S. The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleged that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy. After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000. Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year. The actual cash balance was just $10 million.

The SEC’s complaint stated that after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share. At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund. Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets. For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

The SEC’s complaint charged Zheng and China MediaExpress with violations of the antifraud provisions of the federal securities laws. The complaint charged China MediaExpress with violations of the reporting, books and records, and internal control provisions, and charged Zheng with violating the SEC’s rules prohibiting lying to auditors and making false certifications required under the Sarbanes-Oxley Act. The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

On June 18, 2013, the SEC charged a penny stock promoter for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleged that David F. Bahr of Rancho Santa Fe, California, artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn’t know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California filed criminal charges against Bahr.

According to the SEC’s complaint filed in federal court in San Diego, Bahr set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. Bahr arranged for the dissemination of promotional material that overstated the likelihood of iTrackr’s success and future profits.

The SEC’s complaint alleged that Bahr connected with the undercover agent in November 2012 and was told that that he represented a group of registered representatives who had trading discretion over certain client accounts. In exchange for a 30 percent kickback, the brokers could arrange to purchase iTrackr stock through their customers’ accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr’s stock price. Bahr agreed to pay the kickback and sought the purchase of 10 million iTrackr shares at an average of 25 cents per share for a total of $2.5 million. Bahr agreed not to disclose the kickback to any iTrackr investors.

According to the complaint, Bahr agreed to a test run involving the purchase of modest amounts of iTrackr stock on the open market, and Bahr would then pay a small commission. During the first week of December 2012, a total of 135,000 iTrackr shares were purchased, which represented approximately 32 percent of iTrackr’s trading volume during that time.  Bahr was then informed that the test purchases totaled approximately $14,000, and he owed a $4,000 commission. Bahr paid $3,000 through a wire transfer, and he asked another person to pay the remaining $1,000.

The SEC’s complaint alleged that Bahr violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint is seeking financial penalties, a penny stock bar, and a permanent injunction against Bahr.

On June 17, 2013, the SEC charged two executives at a Dallas-based medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The SEC alleged that Duncan MacDonald and Gloria Solomon solicited investments for Global Corporate Alliance (GCA) by promoting it as a proven business with a strong track record of generating revenue from the sale of limited-benefit medical insurance. In reality, GCA was merely a start-up company with no operating history and virtually no revenue. As they raised investor funds, MacDonald and Solomon used proceeds from new investors to pay returns to existing investors. Once they couldn’t find any new investors, MacDonald and Solomon used a stall campaign of purported excuses to delay making any further payments to investors.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Texas filed criminal charges against MacDonald and Solomon.

According to the SEC’s complaint filed in federal court in Dallas, MacDonald set out in 2008 to start an insurance company that would market medical insurance to large groups. He tried for months to find a single investor to fund the company’s initial capital needs, but was unsuccessful. Meanwhile, MacDonald and Solomon began spending money on the business before raising any capital. They hired employees, heavily marketed the program, and secured a sponsorship agreement with a large national membership group. MacDonald was GCA’s president and chairman, and Solomon was chief administrative officer.

The SEC alleged that when unable to land a major investor, MacDonald fractionalized his efforts and sought individual investors who could contribute smaller amounts. When pitching GCA to investors as well as brokers assisting him in identifying investors, MacDonald significantly misrepresented the history and state of his business. Besides misleading investors to believe there were more than 100,000 premium-paying members, MacDonald misrepresented that GCA had previously sold a portion of its revenue stream from paying members to a Chinese hedge fund. GCA had no relationships with a Chinese hedge fund or any other institutional investors.

According to the SEC’s complaint, MacDonald and Solomon began fabricating enrollment numbers to make it appear that GCA was enrolling new members each month. They created a so-called “Monthly Overage Disbursement Statement” that purported to show the monthly member enrollments and cancellations. The statements were meant to look as if they were generated from a database, but they were actually made in Excel and populated by Solomon. These monthly statements were provided to the brokers by MacDonald and Solomon so they could be used to induce investments from potential investors and serve as the basis for payments to existing investors. At MacDonald’s direction, Solomon was primarily responsible for making the monthly payments to investors based on the false enrollment numbers. In reality, these were Ponzi payments rather than revenues from policyholders.

The SEC alleged that by the time the scheme collapsed, GCA had raised nearly $10 million from investors and returned about $2 million to investors in the form of Ponzi payments. MacDonald and Solomon each took around $1 million of investor funds, and spent the remaining investor funds on various business-related expenses until GCA’s accounts were left with a negative balance. After investor money was gone and GCA could no longer make monthly payments to investors, MacDonald and Solomon spent the next year concocting various reasons to investors about why they could not make payments. Meanwhile, MacDonald was pursuing alternative means of financing the company and redeeming the investors, but no more money ever came.

The SEC’s complaint charged MacDonald and Solomon with securities fraud and conducting an unregistered securities offering while acting as unregistered broker-dealers. The SEC seeks various relief for investors including disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6 Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.