10 CHARGED IN PENNY STOCK FRAUD SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23243 / April 16, 2015
Securities and Exchange Commission v. Daniel P. McKelvey, et al., Civil Action No. 9:15-cv-80496 (S.D. Fla., filed April 16, 2015)

The Securities and Exchange Commission announced fraud charges against 10 individuals involved in a scheme to offer and sell penny stock in undisclosed "blank check" companies bound for reverse mergers while misrepresenting to the public that they were promising startups with business plans.

Blank check companies generally have no operations and no value other than their status as a registered entity, which makes them attractive targets for unscrupulous individuals seeking reverse mergers with clean shells ripe for pump-and-dump schemes. The federal securities laws impose various requirements on blank check companies to prevent such illicit use. The SEC alleges that Daniel P. McKelvey of Foster City, Calif., Alvin S. Mirman of Sarasota, Fla., and Steven Sanders of Lake Worth, Fla., routinely evaded these requirements by creating undisclosed blank check companies and installing figurehead company officers while falsely depicting in registration statements and other SEC filings that the companies were pursuing real business ventures under these officers. Allegedly concealed from the public was the fact that the companies were controlled at all times by McKelvey, Mirman, or Sanders for the sole purpose of entering into reverse mergers with unidentified companies so they could profit from the sales.

According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, McKelvey, Mirman, and Sanders collectively developed nearly two dozen undisclosed blank check companies and sold most of them for a total of approximately $6 million in ill-gotten gains. They were thwarted from further sales when the SEC instituted stop order proceedings last year that led to the suspension of the registration statements of four issuers before they could be further packaged for sale. The scheme allegedly involved forging or falsifying hundreds of certifications filed with the companies' SEC filings as well as communications from impersonating e-mail accounts, management representation letters to accountants, notarizations on applications to the Financial Industry Regulatory Authority, and securities purchase agreements used in the sales of the undisclosed blank check companies.

The SEC's complaint alleges that Steven Sanders's brother Edward G. Sanders of Coral Springs, Fla., Scott F. Hughes of Duluth, Ga., and Jeffrey L. Lamson of El Dorado Hills, Calif. assisted the scheme by acting as corporate nominees with knowledge of the false business plans, drafting or providing false business plans, or recruiting other nominee officers.

The SEC's complaint charges McKelvey, Mirman, Steven Sanders, Hughes, Lamson, and Edward Sanders with violating or aiding and abetting violations of the antifraud, reporting, recordkeeping, and internal control provisions of the federal securities laws. The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions as well as officer-and-director bars and penny stock bars.

The SEC's complaint also names four relief defendants for the purpose of recovering illicit proceeds of the scheme in their possession: Mirman's wife Ilene P. Mirman, a company managed by McKelvey called Forte Capital Partners LLC, and two companies managed by Steven Sanders named AU Consulting LLC and MBN Consulting LLC.

The SEC additionally charged four other figurehead officers and directors who agreed to settle their cases in separate administrative proceedings: Edward T. Farmer of Sarasota, Fla., William J. Gaffney of Cumming, Ga., Kevin D. Miller of Alpharetta, Ga., and Ronald A. Warren of Peachtree Corners, Ga. They consented to SEC orders without admitting or denying the findings that they violated the antifraud, reporting, recordkeeping, and internal control provisions of the federal securities laws. They are barred from serving as an officer or director of a public company and from participating in penny stock offerings, and they must disgorge ill-gotten gains plus prejudgment interest.

The SEC's investigation, which is continuing, is being conducted by Jeffrey T. Cook in the Miami Regional Office as part of the Microcap Fraud Task Force. The case is being supervised by Eric R. Busto, and the SEC's litigation will be led by Patrick R. Costello.

10 CHARGED BY SEC IN ALLEGED BLANK CHECK COMANIES SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges 10 Individuals in Scheme to Sell Stock in Blank Check Companies Secretly Bound for Reverse Mergers
04/16/2015 04:30 PM EDT

The Securities and Exchange Commission today announced fraud charges against 10 individuals involved in a scheme to offer and sell penny stock in undisclosed “blank check” companies bound for reverse mergers while misrepresenting to the public that they were promising startups with business plans.

Blank check companies generally have no operations and no value other than their status as a registered entity, which makes them attractive targets for unscrupulous individuals seeking reverse mergers with clean shells ripe for pump-and-dump schemes.  The federal securities laws impose various requirements on blank check companies to prevent such illicit use.  The SEC alleges that Daniel P. McKelvey of Foster City, Calif., Alvin S. Mirman of Sarasota, Fla., and Steven Sanders of Lake Worth, Fla., routinely evaded these requirements by creating undisclosed blank check companies and installing figurehead company officers while falsely depicting in registration statements and other SEC filings that the companies were pursuing real business ventures under these officers.  Allegedly concealed from the public was the fact that the companies were controlled at all times by McKelvey, Mirman, or Sanders for the sole purpose of entering into reverse mergers with unidentified companies so they could profit from the sales.

“The federal securities laws prohibit the registration and sale of stock in undisclosed blank check companies given their frequent use in perpetrating pump-and-dump schemes,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “We allege that McKelvey, Mirman, and Sanders went to extreme lengths to run an illicit supply chain of undisclosed blank check companies, including the complete fabrication of business plans and installation of illusory executives.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, McKelvey, Mirman, and Sanders collectively developed nearly two dozen undisclosed blank check companies and sold most of them for a total of approximately $6 million in ill-gotten gains.  They were thwarted from further sales when the SEC instituted stop order proceedings last year that led to the suspension of the registration statements of four issuers before they could be further packaged for sale.  The scheme allegedly involved forging or falsifying hundreds of certifications filed with the companies’ SEC filings as well as communications from impersonating e-mail accounts, management representation letters to accountants, notarizations on applications to the Financial Industry Regulatory Authority, and securities purchase agreements used in the sales of the undisclosed blank check companies.

The SEC’s complaint alleges that Steven Sanders’s brother Edward G. Sanders of Coral Springs, Fla., Scott F. Hughes of Duluth, Ga., and Jeffrey L. Lamson of El Dorado Hills, Calif. assisted the scheme by acting as corporate nominees with knowledge of the false business plans, drafting or providing false business plans, or recruiting other nominee officers.  

The SEC’s complaint charges McKelvey, Mirman, Steven Sanders, Hughes, Lamson, and Edward Sanders with violating or aiding and abetting violations of the antifraud, reporting, recordkeeping, and internal control provisions of the federal securities laws.  The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions as well as officer-and-director bars and penny stock bars.

The SEC’s complaint also names four relief defendants for the purpose of recovering illicit proceeds of the scheme in their possession: Mirman’s wife Ilene P. Mirman, a company managed by McKelvey called Forte Capital Partners LLC, and two companies managed by Steven Sanders named AU Consulting LLC and MBN Consulting LLC.

The SEC additionally charged four other figurehead officers and directors who agreed to settle their cases in separate administrative proceedings: Edward T. Farmer of Sarasota, Fla., William J. Gaffney of Cumming, Ga., Kevin D. Miller of Alpharetta, Ga., and Ronald A. Warren of Peachtree Corners, Ga.  They consented to SEC orders without admitting or denying the findings that they violated the antifraud, reporting, recordkeeping, and internal control provisions of the federal securities laws.  They are barred from serving as an officer or director of a public company and from participating in penny stock offerings, and they must disgorge ill-gotten gains plus prejudgment interest.

The SEC’s investigation, which is continuing, is being conducted by Jeffrey T. Cook in the Miami Regional Office as part of the Microcap Fraud Task Force. The case is being supervised by Eric R. Busto, and the SEC’s litigation will be led by Patrick R. Costello

SEC CHARGES U.S. BASED CONSULTANTS TO NUMEROUS CHINESE REVERSE MERGER COMPANIES WITH SECURITIES FRAUD

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today filed fraud charges, among others, against Huakang "David" Zhou (Zhou) and his consulting firm Warner Technology and Investment Corporation (Warner Investment) in connection with its investigation into China Yingxia International, Inc. (China Yingxia), a now defunct Chinese reverse merger company.

The SEC alleges that Zhou and Warner Investment, key players assisting numerous Chinese companies access and navigate the U.S. capital markets in recent years, engaged in varied misconduct from at least 2007 through 2010. Zhou and Warner Investment, through Zhou, have acted as advisers to over twenty Chinese issuers, locating private companies in China to bring public in the U.S., conducting reverse mergers and, for some, thereafter maintaining prominent, if not controlling, roles with the companies’ management and financial operations.

Zhou engaged in unregistered sales of securities for several clients, including by conducting an unregistered public offering of over $5 million in securities to roughly 85 Chinese-Americans in several states. Zhou and his firm also improperly assisted with securities offerings for two clients while acting as unregistered securities brokers, and further aided and abetted others’ unregistered broker-dealer violations.

In connection with raising $2 million for one client, Zhou engaged in deceptive conduct and made material misrepresentations and omissions to investors. Among other things, Zhou misused a significant portion of the investment proceeds to pay $271,500 towards his mortgage on a million-dollar condo in New York City. As well, Zhou concealed from investors that their money would be put at risk due to the circuitous manner in which Zhou sent proceeds to China. Unknown to the investors, Zhou sent hundreds of thousands of dollars by wire transfer to multiple individuals in China who apparently had no affiliation with the company. The individuals supposedly then wired the money to the company’s chief executive officer, who in turn purportedly transferred the money to the company’s Chinese bank account.

Further, Zhou committed securities fraud by orchestrating an elaborate scheme in an apparent effort to list another client, a Chinese real estate company, on a national securities exchange. Zhou engaged in manipulative trading, including matched orders, to meet the minimum bid required for listing. As well, via gifts of stock and a purportedly private sale to a broker dealer, Zhou in effect artificially created a sufficient number of shareholders to meet a listing requirement that applicants have in excess of 400 round lot shareholders (holders of 100 shares or more). Zhou’s scheme succeeded, and the company was approved for listing in the fall of 2010.

The SEC’s complaint against Zhou and Warner Investment alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 13(d), 15(a), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, 13d-2, and 16a-3 thereunder, and control person liability and aiding and abetting violations of Section 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b) thereunder.

SEC SUSPENDS TRADING IN 379 DORMANT COMPANIES

Photo Credit:  Wikipedia
FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 14, 2012 — The Securities and Exchange Commission suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The trading suspension marks the most companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.

Microcap companies typically have limited assets and low-priced stock that trades in low volumes. An initiative tabbed Operation Shell-Expel by the SEC's Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division's Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud.

"Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors."

Thomas Sporkin, Director of the SEC's Office of Market Intelligence, added, "It's critical to assess risks to investors in the capital markets and, through strategic planning, develop ways to neutralize them. We were able to conduct a detailed review of the microcap issuers quoted in the over-the-counter market and cull out these high-risk shell companies."

The SEC's previously largest trading suspension was an order in September 2005 that involved 39 companies. The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.

Pump-and-dump schemes are among the most common types of fraud involving microcap companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

The existence of empty shell companies can be a financial boon to stock manipulators who will pay as much as $750,000 to assume control of the company in order to pump and dump the stock for illegal proceeds to the detriment of investors. But with this trading suspension's obligation to provide updated financial information, these shell companies have been rendered essentially worthless and useless to scam artists.

"This mass trading suspension is an effective and novel way for the SEC to neutralize potential threats to investors," said Chris Ehrman, Co-National Coordinator of the SEC's Microcap Fraud Working Group. "With the ability to leverage staff expertise throughout the agency's offices and divisions, the Working Group is uniquely positioned to take on risk-based matters like these and focus resources where they are needed most." This SEC enforcement effort has been led by Mr. Ehrman, Robert Bernstein, Jessica P. Regan, Leigh Barrett, and Megan Alcorn in the Office of Market Intelligence along with Microcap Fraud Working Group staff from each of the SEC's regional offices: Tanya Beard, David Berman, Sharon Binger, Melissa Buckhalter-Honore, Lisa Cuifolo, Tracy Davis, Elisha Frank, Kurt Gottschall, Lucy Graetz, Jennifer Hieb, C.J. Kerstetter, Victoria Levin, Aaron Lipson, Michael Paley, Farolito Parco, Jonathan Scott, and Lauchlan Wash. The SEC appreciates the assistance and cooperation of the Federal Bureau of Investigation's Economic Crimes Unit.