The FBI Manipulated Some Penny Stocks

15 Aug 2013 at 5:31 PM

The FBI Manipulated Some Penny Stocks

By Matt Levine

The SEC announced securities fraud charges against a fairly random assortment of South Florida crooks today and the message I took away from the assorted complaints is that it’d be a lot of fun to work in the South Florida office of the FBI. Basically the job seems to consist of setting up fake hedge funds and then using them to con people into giving you money, which is pretty much my dream job, and also the dream job of a lot of South Florida crooks I guess. Only in the FBI version the people you’re conning are themselves con men, and the money is illegal bribes, and then you arrest them, so it’s okay.Here, for instance, is the complaint against one Mark Balbirer:

On November 4, 2011, through an introduction by the cooperating witness, Balbirer met with the purported hedge fund manager (i.e., the undercover FBI agent) and the cooperating witness in Broward County, Florida, to discuss a possible stock transaction involving a company Balbirer planned to create purportedly to finance the production of films, So. Florida Film Fund. …

The hedge fund manager told Balbirer he would be willing to have clients of the hedge fund purchase shares in the company so long as the manager was paid a kickback in return, and said he would first need a private placement memorandum from the company.

Various agreements were signed and countersigned, and then the big transaction:

On December 1, 2011, the FBI wired $50,000 from a controlled bank account to So. Florida Film Fund, as payment for the hedge fund’s initial stock purchase in the private placement offering.

That same day, Balbirer sent the purported hedge fund manager, via express delivery, two So. Florida Film Fund checks totaling $15,000, representing the undisclosed 30 percent kickback for the $50,000 wire. One check was made payable to the hedge fund manager and the other to the firm for which the manager’s relative purportedly worked.

So net the FBI is out $35,000, I guess, though in exchange now it owns a chunk of So. Florida Film Fund, which could be big. Anyway then there is this hilariously sad coda:

Over the following days, Balbirer attempted to reach the FBI agent and cooperating witness regarding additional funding for So. Florida Film Fund. Ultimately, however, there were no further transactions.

Most of the complaints end similarly; the saddest must be the complaint against Stephen Molinari and his company Nationwide Pharmassist, in which the FBI agent, on behalf of his fake hedge fund, actually signed a subscription agreement pursuant to which “the hedge fund would purchase 1,764,706 shares of Nationwide stock for $3 million,” but then only paid $50,000 for an initial purchase, got $10,000 of it back in kickbacks, and then “Over the next several weeks, Molinari attempted to reach the agent and CW regarding additional funding for Nationwide. Ultimately, however, there were no further transactions.” Poor Molinari! He had a contract! He should sue the FBI.

Balbirer and Molinari and some others were charged with fraud for paying (FBI agents posing as) corrupt fiduciaries – hedge fund or pension managers – to buy stock for their clients: you pay the fake hedge fund manager $10,000 for his own account, he spends $50,000 of client money buying your stock, everyone’s happy. Except the clients.¹

But my favorites are the slightly more complicated schemes, where the goal was not just to sell stock to the FBI agent’s clients but also to boost a pump and dump scheme. Here’s Jeffrey Schulz, CEO of Redfin Network:²

During their meeting, Schultz and the cooperating witness also discussed that the cooperating witness would “bring in the buying” that would attract “new players,” and Schultz remarked that “buying begets buying.” Schultz also claimed that people he knew would support the scheme, and that these people would help arrange the purchase of Redfin stock from the cooperating witness and his group when they wanted to sell.·

During the meeting, Schultz also told the cooperating witness he wanted to increase the liquidity of Redfin stock and get the share price “to that 10 cent mark.”

In exchange for the cooperating witness’s agreement that he and his purported buying group would purchase Redfin stock in the open market, Schultz agreed to provide the cooperating witness with an inducement payment of 25% of the amount that the cooperating witness paid for the Redfin stock.

And so they did:

On August 1, 2011, the FBI purchased a total of 225,000 shares of Redfin on the open market at prices per share ranging between 7.2 and 8.25 cents, for a total cost of approximately $17,557.

Also on August 1, 2011, Schultz met with the cooperating witness in Ft. Lauderdale and gave him $5,000 in cash toward the agreed-upon inducement payment. That
same day, Schultz sent the cooperating witness a text message that Redfin would issue a “good” press release the following morning.

On August 2, 2011, Redfin issued a press release forecasting strong growth of its products and services. Redfin issued this press release to create the false impression that the buying activity was spurred by positive news about Redfin.

Also on August 2, 2011, the FBI purchased a total of 20,000 shares of Redfin on the open market at 8.35 cents per share, for a total cost of approximately $1,670.

Some 233,000 shares traded that day – 213,000 of them not bought by the FBI! – at prices from 8 to 12 cents, well above recent non-FBI averages. Which at least suggests that the manipulation worked: that some people were actually suckered by the FBI’s penny-stock manipulation into buying Redfin stock. I mean, they only lost $20,000,³ but, y’know, they probably weren’t billionaires of high finance to begin with, what with their trading Redfin stock. They should sue the FBI too.

SEC Announces Charges Against Florida-Based Penny Stock Schemes [SEC]

1. Here, though, the clients are fake, so really everyone should be happy, but there’s some conservation law of happiness so instead Balbirer, Molinari et al. are very sad.

2. By the way, the complaints are sketchy on detail but in basically all of them it seems like the FBI pitched the defendant on the fraud. You could think various things about that, including:

Entrapment?

“You can’t fool an honest man.”

Again: South Florida FBI agents have a lot of fun.

3. Since Redfin has lost some 95% of its value since the heady days of trading at 8-12 cents, and now trades at a less lofty 0.35 cents.

 

SEC Announces Charges Against Florida-Based Penny Stock Schemes

 

FOR IMMEDIATE RELEASE
2013-155

Washington D.C., Aug. 14, 2013 —

The Securities and Exchange Commission today announced the latest charges in a joint law enforcement crackdown on penny stock schemes with ties to the Florida region.

The SEC charged two microcap companies, their CEOs, and one penny stock promoter for spearheading illegal kickback schemes.  The SEC also charged two other microcap companies, their CEOs, and four other promoters with arranging the payment of bribes to hype the companies in which they had a stake in order to create a false sense of market activity and illegally generate stock sales.

“Interested only in lining their own pockets, these company officers and promoters used underhanded tactics to cheat investors and manipulate penny stocks” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Their utter disregard for investors underscores the importance of stamping out microcap fraud.”

The SEC has worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation’s Miami Division to uncover the penny stock schemes.  Parallel criminal charges were announced today against the same nine individuals facing SEC charges.

The SEC has now charged 40 individuals and 24 companies in this series of penny stock investigations.  The first actions were announced in October 2010.

The SEC’s complaints filed today in U.S. District Court for the Southern District of Florida charged the following penny stock companies and officers:

Health Sciences Group (HESG) formerly based in Indian Harbour, Fla., and now based in Newport Beach, Calif.

President and CEO Thomas Gaffney of Satellite Beach, Fla.

Nationwide Pharmassist Corp. based in Boca Raton, Fla.

CEO and Chairman Stephen F. Molinari of Boca Raton, Fla.

Redfin Network (RFNN) based in Fort Lauderdale, Fla.

President and CEO Jeffrey L. Schultz of Fort Lauderdale, Fla.

VHGI Holdings (VHGI) based in Fort Worth, Texas

CEO Douglas P. Martin of Wellington, Fla.

The SEC’s complaints charge the following penny stock promoters:

Mark Balbirer of Pompano Beach, Fla.

Jack Freedman of Fort Lauderdale, Fla.

Richard P. Greene of Davie, Fla.

Peter Santamaria of Coconut Creek, Fla.

Sheldon R. Simon of Palm Beach Gardens, Fla.

According to the SEC’s complaints, one of the schemes (Health Sciences Group/Gaffney) involved an arrangement to pay an undisclosed kickback to a pension fund manager in exchange for the fund’s purchase of restricted shares of stock in the company.  Two other schemes (Nationwide PharmAssist/Molinari and Balbirer) involved agreements to pay undisclosed kickbacks to hedge fund principals in return for their funds’ purchase of restricted shares.

The SEC’s complaints allege that other schemes involved the arrangement of inducement payments by officers or promoters of penny stock companies to coordinate the manipulation of their stock.  Those who arranged the payment of bribes to create fictitious market movement were Redfin Network/Schultz, VHGI/Martin, and promoters Greene, Santamaria, and Simon.  In his scheme, Freedman arranged to pay an undisclosed bribe to a stockbroker who agreed to purchase a microcap company’s stock in the open market for his customers’ discretionary accounts.

The SEC’s complaints allege that the companies, officers, and promoters violated Section 17(a)(1) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and/or 10b-5(c).  The SEC seeks financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions.  The SEC also seeks penny stock bars against each of the officers and promoters, and officer-and-director bars against Gaffney, Martin, Molinari, and Schultz.

The SEC’s investigation was conducted in the Miami Regional Office by senior counsels Trisha D. Sindler and Michelle I. Bougdanos under the supervision of assistant regional director Chedly C. Dumornay.  The SEC’s litigation will be led by Patrick R. Costello and Andrew Schiff.  The SEC appreciates the assistance and cooperation of the U.S. Attorney’s Office for the Southern District of Florida and the FBI’s Miami Division.