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Sunday, September 7, 2014

ALLEGED SECURITIES KICKBACK SCHEMERS GET CAUGHT BY FBI UNDERCOVER OPERATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Judgments Entered Against Company and Former CEO in Securities Kickback Scheme

The Securities and Exchange Commission announced that on September 4, 2014, the federal court in Boston, Massachusetts, entered judgments against Massachusetts corporation ZipGlobal Holdings, Inc. and its former Chief Executive Officer and President, Michael Lee of Hingham, Massachusetts, in a fraud action that was filed in December 2011. The fraud involved a kickback scheme that was exposed by an undercover operation of the Federal Bureau of Investigation's Boston office. Among other things, ZipGlobal and Lee were permanently enjoined from violating an antifraud statute, Lee was held liable for disgorgement of $105,603 of ill-gotten gains, and Lee was permanently barred from serving as an officer or director of public companies or participating in offerings of penny stock.

ZipGlobal and Lee are two of several parties charged on December 1, 2011 by both the Commission and the U.S. Attorney for the District of Massachusetts, alleging that they used kickbacks and other schemes to trigger investments in various thinly-traded stocks. According to the Commission's complaint, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the participants in the scheme did not know was that the purported investment fund representative was actually an undercover agent of the FBI.

The Commission's complaint alleged that in October 2010, Lee met with an individual who purported to be a Boston, Massachusetts-based representative of a major hedge fund. In fact, the hedge fund representative was an undercover FBI agent. The complaint alleged that Lee and the hedge fund representative agreed to a scheme whereby the hedge fund would purchase $5 million of ZipGlobal stock in return for the payment of kickbacks to the hedge fund representative. Lee and the hedge fund representative agreed to structure the transaction in such a way that it would avoid detection by the hedge fund's compliance personnel and securities regulators. Among other things, they agreed to structure the transaction into smaller "tranches" of securities purchases, and to make the kickback payments to the hedge fund representative through a shell corporation pursuant to a consulting agreement to make it appear that the kickback payments were compensation for consulting services. The complaint alleged that, from November 2010 to January 2011, ZipGlobal and Lee followed through by entering agreements whereby the hedge fund purchased a total of $113,775 worth of ZipGlobal stock and kickbacks totaling $39,821 were funneled back to the hedge fund representative.

In the related criminal action, Lee was sentenced on March 6, 2014 to three years of probation (the first nine months to be served in home confinement with electronic monitoring) and was ordered to forfeit $105,603 after pleading guilty on January 11, 2012 to one count of mail fraud and one count of conspiracy.

The judgments in the Commission's action permanently enjoin ZipGlobal and Lee from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The judgment as to Lee holds him liable for $105,603 in disgorgement, but deems his disgorgement satisfied by the forfeiture order for the same amount of money in the related criminal action. The judgment also prohibits Lee from acting as an officer or director of any issuer that has a class of securities registered under Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act, and prohibits Lee from participating in any offering of penny stock, pursuant to Section 21(d)(6) of the Exchange Act.

The Commission suspended trading in the stock of ZipGlobal on December 1, 2011.

The Commission's cases remain pending against James Wheeler, MicroHoldings US, Inc., Edward Henderson, and Paul Desjourdy, who were also charged on December 1, 2011 as a result of the FBI undercover operation.