|From: scion||5/22/2014 11:56:59 AM|
|SEC Announces Latest Charges in Joint Law Enforcement Effort Uncovering Penny Stock Schemes |
FOR IMMEDIATE RELEASE
SEC complaint - Altomare
SEC complaint - Berkowitz
SEC complaint - Brown
SEC complaint - McKnight and Bauer
SEC complaint - Urban AG and Ray and Clark
Washington D.C., May 22, 2014 — The Securities and Exchange Commission today announced the latest in a series of cases against microcap companies, officers, and promoters arising out of a joint law enforcement investigation to unearth penny stock schemes with roots in South Florida.
In complaints filed in federal court in Miami, the SEC charged five penny stock promoters with conducting various manipulation schemes involving undisclosed payments to induce purchases of a microcap stock to generate the false appearance of market interest. The SEC also charged a Massachusetts-based microcap company and the CEO with orchestrating a pair of illicit kickback schemes and an insider trading scheme involving the company’s stock. A stock promoter in Texas is charged for his role in the insider trading scheme.
“These stock promoters employed a menu of schemes, tricks, and deceits in their pursuit of unearned money at the expense of other investors,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “Their bold misconduct highlights the continuing need for law enforcement action to aggressively root out microcap fraud.”
The SEC has now charged 48 individuals and 25 companies in this series of penny stock investigations out of the agency’s Miami Regional Office, which has worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation. The first of the joint enforcement actions was announced in October 2010.
The U.S. Attorney’s Office for the Southern District of Florida today announced criminal charges against many of the same individuals charged today by the SEC.
According to the SEC’s complaint against Boca Raton, Fla.-based stock promoters Kevin McKnight and Stephen C. Bauer, they engaged in market manipulation fraud involving the penny stock of Environmental Infrastructure Holdings Corp. (EIHC). They generated the appearance of market interest in EIHC to induce investors to purchase the stock and artificially increase the trading price and volume. In a separate complaint against Jeffrey M. Berkowitz of Jupiter, Fla., the SEC alleges that he participated in a market manipulation scheme involving the stock of Face Up Entertainment Group (FUEG) and similarly worked to falsely generate the appearance of market interest in that stock. The SEC’s complaint against Eric S. Brown of Brooklyn, N.Y., alleges that he engaged in a pair of market manipulation schemes involving the stock of International Development & Environmental Holdings Corp. (IDEH) and DAM Holdings Inc. (DAMH), the latter of which is now known as Premier Beverage Group Corp. (PBGC). And according to an SEC complaint against Boca Raton, Fla.-based stock promoter Richard A. Altomare, he engaged in market manipulation scheme involving the stock of Sunset Brands Inc. (SSBN).
The SEC alleges in a separate complaint that North Andover, Mass.-based Urban AG Corp. (AQUM) and its president and CEO Billy V. Ray Jr. of Cumming, Ga., schemed to make an undisclosed kickback payment to a hedge fund manager in exchange for the fund’s purchase of restricted shares of stock in the company. In a separate kickback scheme, Ray made an inducement payment to a stock promoter who would purchase shares of Urban on the open market ahead of planned press releases to help him manipulate the stock. Meanwhile, stock promoter Wade Clark participated in Ray’s insider trading scheme involving Urban stock by providing the hedge fund fiduciary with an advance copy of a press release containing material nonpublic information about the company so the hedge fund manager would purchase stock prior to the news being issued.
The SEC’s complaints allege that Altomare, Bauer, Berkowitz, Brown, Clark, McKnight, Ray, and Urban AG Corp. violated Section 17(a)(1) of the Securities Act of 1933 and/or Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions. The SEC also seeks penny stock bars against all of the individuals charged in these cases as well as an officer-and-director bar against Ray.
The SEC’s investigations have been conducted by Michelle I. Bougdanos, Trisha D. Sindler, and Amy L. Weber under the supervision of Chedly C. Dumornay in the Miami Regional Office. The SEC’s litigation of these complaints will be led by James Carlson, Patrick R. Costello, Russell Koonin, and Andrew Schiff. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Florida and the Miami division of the Federal Bureau of Investigation.
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|To: scion who wrote (118101)||5/22/2014 12:15:21 PM|
|5. Unbeknownst to Defendants, the corrupt hedge fund fiduciary was an undercover FBI agent. The fiduciary’s purported friend who helped arrange the deal, the stock promoter, was a witness residing in the Southern District of Florida who was cooperating with the FBI.|
SEC complaint - Urban AG and Ray and Clark
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|From: StockDung||5/22/2014 4:12:38 PM|
|Wall Street finds new subprime with brokers pitching 125 percent loans |
Wall Street finds new subprime with brokers pitching 125 percent loansBy ZEKE FAUX Bloomberg News stltoday.com
1 hour ago •
By ZEKE FAUX Bloomberg News
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NEW YORK • Doug Naidus made his fortune selling a mortgage company to Deutsche Bank months before the U.S. housing market collapsed. Now he's found a way to profit from loans to business owners with bad credit.
From an office near New York's Times Square, people trained by a veteran of Jordan Belfort's boiler room call truckers, contractors and florists across the country pitching loans with annual interest rates as high as 125 percent, according to more than two dozen former employees and clients. When borrowers can't pay, Naidus' World Business Lenders seizes their vehicles and assets, sometimes sending them into bankruptcy.
Naidus isn't the only one turning to subprime business lending. Mortgage brokers and former stock salesmen looking for new ways to make fast profits are pushing the loans, which aren't covered by federal consumer safeguards. Goldman Sachs and Google are among those financing his competitors, which charge similar rates.
"This is the new predatory lending," said Mark Pinsky, president of Opportunity Finance Network, a group of lenders that help the poor. "And the predators, just as they did in the mortgage market, have gotten increasingly aggressive."
Subprime business lending — the industry prefers to be called "alternative" — has swelled to more than $3 billion a year, estimates Marc Glazer, who has researched his competitors as head of Business Financial Services Inc., a lender in Coral Springs, Fla. That's twice the volume of small loans guaranteed by the Small Business Administration.
Naidus, 48, chief executive officer of World Business Lenders, declined to be interviewed. Marcia Horowitz, a spokeswoman at public relations firm Rubenstein Associates Inc., said the company explains loan terms in plain English and takes steps to ensure that borrowers understand.
"World Business Lenders' sales and marketing techniques, as well as the interest rates it charges and the default rates it experiences, are generally consistent with those throughout the industry," Andy Occhino, general counsel for the company, wrote in a May 21 letter. "In serving the underserved small-business community along Main Street USA, World Business Lenders complies with all applicable laws and endeavors to ensure a positive experience for its customers."
Maher and Tamer Kasem, a father and son who sell cigarettes and cosmetics to corner stores in Brooklyn and Philadelphia, are typical customers. They borrowed from World Business Lenders in December to keep their company afloat after being rejected by a bank and turned down for a hurricane-recovery loan.
A saleswoman initially talked about an unsecured $45,000 loan, they said. They had fallen further behind on bills by the time they received the final terms to borrow $12,500. The money, plus almost $1,000 in fees, was to be repaid over six months with $144.73 deducted from their bank account each business day, according to a contract they provided. That worked out to a total of $18,236 or an annualized rate, inclusive of fees, of about 110 percent.
Tamer and his mother Lamis said they signed personal guarantees that they would repay the money even if the business went bust, and the family put up a vacant lot as collateral.
"I was just wanting to get money to survive my business any way," Maher Kasem, 57, said in an interview at his office in the Bensonhurst section of Brooklyn, where he keeps boxes of fruit-flavored cigars and makeup ruined in Hurricane Sandy stacked on the crumbling tile floor. "They're slick."
World Business Lenders sued the Kasems and obtained a judgment for $22,828, which included a $3,879 prepayment fee. The firm hasn't yet foreclosed on the property, Kasem said.
Horowitz, the spokeswoman for World Business Lenders, said the company works with borrowers to avoid defaults.
"If the default cannot be cured, World Business Lenders enforces its rights under the loan documents, including the recovery of the pledged collateral," she said.
A PIECE OF THE ACTION
Wall Street banks are helping the industry expand by lending originators money. They're starting to package the loans into securities that can be sold to investors, just as they did for subprime-mortgage lenders.
OnDeck Capital Inc., a lender with funding from Google's venture-capital arm and PayPal Inc. co-founder Peter Thiel, sold $175 million of notes backed by business debt last month in a deal put together by Deutsche Bank. Interest rates on the loans ranged from 29 percent to 134 percent, according to a report from credit rater DBRS Ltd., which labeled most of the deal investment grade.
Representatives for Thiel, Google Ventures and Goldman Sachs, which lends money to OnDeck, declined to comment.
"While I am not real thrilled about some of the prices being charged, in some cases businesses need to get something done in a hurry and it makes sense," said William Dennis, who directs the research foundation at the National Federation of Independent Business. "It may not be the world's best choice, but at least it's your choice."
Brokers are popping up around the country to originate loans on behalf of lenders including OnDeck and World Business Lenders. The companies pay fees to the brokers of about $6,000 for finding people willing to take a $50,000 loan, according to current and former brokers, most of whom asked not to be identified to preserve their job prospects.
Some stock brokers have jumped to business loans after getting kicked out of the securities industry by regulators.
"Our industry is absolutely crazy," said Steven Delgado, who left World Business Lenders last year to become an independent loan broker. "There's lots of people who've been banned from brokerage. There's no license you need to file for. It's pretty much unregulated."
David Glass, 39, was still on probation for insider trading when he co-founded Yellowstone Capital, a New York-based brokerage and lender that originated $200 million in loans last year, including for OnDeck.
He said he learned to sell in the 1990s at Sterling Foster & Co., a Long Island firm where he got his friend a job interview that inspired "Boiler Room," a movie that portrayed a college dropout's foray into high-pressure stock sales. Glass said he coached actor Vin Diesel on cold-calling for the film. "A natural," Glass said.
Glass said it's a lot easier to persuade someone to take money than to spend it buying stock.
"The guys I worked with then were incredible sales guys," Glass said. "I don't really feel like we're selling now because everyone we're calling is an inbound phone call or they've filled out a form on the Internet."
Jonathan Cutler, a spokesman for New York-based OnDeck, said Yellowstone and World Business Lenders have originated less than 1 percent of the company's loans this year. OnDeck drops brokers who charge upfront fees or send a lot of deals that go bad, he said. OnDeck also doesn't require collateral.
"OnDeck customers are experienced, savvy people," said Andrea Gellert, senior vice president of marketing for the company. "Since entering the market, OnDeck has brought down pricing significantly."
AVOIDING USURY LAWS
Since Aristotle condemned the "breeding of money" as the worst way to make it around 350 B.C., societies have both enacted laws against usury and devised ways to work around them. New York State instituted a 25 percent interest-rate cap after a 1965 investigation found the Genovese crime family backing a Fifth Avenue business lender that charged 5 percent a week.
Some loan companies avoid state usury laws by partnering with banks based in Utah, which doesn't cap rates. Others say "cash advances," repaid by collecting a share of businesses' credit-card sales, aren't loans. World Business Lenders lends in only about half of U.S. states and won't make loans in New York, according to its website. The loan to the Kasems was made in Pennsylvania, where they also do business.
"It's kind of the Wild West right now," said Nick Bourke, who studies small loans for the Pew Charitable Trusts, a research and policy group. "Online lending is raising lots of legal questions about which state law governs."
Naidus, described by colleagues as the best salesman they'd ever met, turned the brokerage he founded after graduating from Syracuse University in 1987 into one of the biggest mortgage originators in the nation. He took MortgageIT Holdings Inc. public and then arranged to sell it to Deutsche Bank in 2007 for $429 million. During the sale process, Naidus made at least $12 million selling his shares and options, and the bank agreed to hire him for $17 million in pay and guaranteed bonuses over two years, according to public filings.
Even as MortgageIT's loans went bad during the financial crisis, Naidus earned the trust of top Deutsche Bank executives. He became global head of mortgages and helped start a home-loan joint venture in Saudi Arabia.
Like other banks that bought mortgage originators, Deutsche Bank ended up bearing the cost of allegedly fraudulent loans that helped fuel the housing bubble. The Frankfurt-based lender paid $202 million in 2012 and admitted MortgageIT arranged for government insurance on ineligible loans that soured.
Deutsche Bank also paid $12 million to settle U.S. allegations that the originator imposed higher fees and interest rates on black and Hispanic applicants. It denied those claims. Naidus wasn't a defendant in any of the cases.
Naidus made colleagues at Deutsche Bank aware of his wealth, one former co-worker said. He invited his bosses to play golf at the Bridge, a country club near his summer house in the Hamptons. The club cost $750,000 to join, the Wall Street Journal reported in 2007. He also owned a duplex on the Upper East Side of Manhattan that he bought for $6.2 million in 2005, real estate records show.
Naidus founded World Business Lenders in April 2011, according to a regulatory filing. He rented the 29th floor of an office tower on West 45th Street and began reassembling his lieutenants from the mortgage company. Naidus left Deutsche Bank the following year, said Renee Calabro, a spokeswoman for the bank in New York.
The business plan sounded promising, ex-employees said. Naidus said they'd build the largest small-business lender in the country and share the wealth when he took it public. He also created a company called Palm National Partners that would make loans to Muslims structured to avoid the sharia ban on charging interest.
"We are already helping so many entrepreneurs to realize their dreams," Naidus said in an undated video that was posted on World Business Lenders' website. "I can relate to every one of our customers because I am the prototype of our customer."
World Business Lenders put up job listings seeking former brokers, and they came. A February orientation schedule provided by a former employee shows that training is run by Bryan Herman, who got his start under Stratton Oakmont Inc.'s Belfort, the con man portrayed in "The Wolf of Wall Street." Herman later ran his own boiler room in the 1990s and avoided jail by informing on other brokers when he was charged with fraud in 1998, court records show. Another salesman was released from prison in 2010 after serving about a year for penny-stock fraud.
Herman has paid for his crimes, according to his lawyer, Marty Kaplan.
"It's really like saying Bill Clinton smoked dope in college," Kaplan said. "Who cares?"
125 PERCENT INTEREST
Cold-callers said they typically got paid a draw of $1,300 a month against commission. Four former employees said Naidus impressed them during job interviews with his success and intensity. He'd meet them in his office, which he decorated with a photo of himself striking a martial-arts pose with a sword, shirtless. One ex-colleague said Naidus liked to discuss his street-fighting skills. He looked like action star Jean-Claude Van Damme, another said.
Salespeople said they were told to refer to "short-term capital" instead of loans and "money factors" instead of interest rates. Eight of them said they talked business owners into applying by saying they'd offer a good rate after reviewing bank statements.
World Business Lenders charged most people 125 percent annualized interest rates on six-month loans regardless of their situation, five former employees said. The borrowers often put up cars, houses or even livestock worth at least twice as much as the loan. About one in five were going bust as of last year, two people with knowledge of the matter said. One said that 9 percent of the loans made this year have already defaulted.
"The sweet spot is someone who can limp along well enough for six months but probably isn't going to be around much longer," Opportunity Finance Network's Pinsky said. "They're in the business of helping these businesses fail."
Naidus took the top three salespeople at World Business Lenders to lunch each month, often choosing sushi, former colleagues said. The successful ones were given the preferred leads, people who had called in about loans. Those who didn't close deals survived on $1 pizza slices for a month or two until they were fired.
Former employees said finding qualified borrowers willing to pay their rates proved more difficult than Naidus made it sound. Six said they questioned whether their business was legal. Two others said they wondered why the company seized cars that weren't worth enough to cover the repo man's fee.
"You know payday loans?" said Aleena Skinner, who worked for World Business Lenders for a few months in 2012 and is now a saleswoman for a copy-machine company. "I don't really feel like high-interest loans are in anybody's best interest."
World Business Lenders makes $1 million to $3 million a month in loans and was running at a loss as of last year because so many borrowers weren't paying, one former executive said. Naidus once joked that the business would be better off if it paid salesmen in repossessed Pontiacs, the person said.
Naidus's investors include Fahad Abdullah Al Rajhi, the son of one of the billionaire founders of Saudi Arabia's Al Rajhi Bank. Al Rajhi invested in Palm, the sharia-compliant part of the business, and brought in the Muslim scholar who blessed its practices, according to former employees.
Instead of lending, Palm buys an asset, such as a refrigerator or a pizza oven, and then leases it to the business owner. Other than that, the terms were the same. Finding Muslims to take the loans was hard, the ex-employees said. Messages left for Al Rajhi with his family's bank weren't returned.
Palm and World Business Lenders are legally separate entities and operate at arm's length, Horowitz said. Palm complies with all laws and isn't associated with the Al Rajhi family's bank, she said.
Nick Frederick, 38, a tow-truck driver in Sykesville, Md., said the Islamic lender solicited him by email and phone last year when he needed $15,000 to buy a trailer. The six-month "asset sale and lease" cost the equivalent of an annualized 96 percent interest rate, according to Frederick's contract. Frederick said a saleswoman assured him she would lower the rate in a few months and hire him to tow other people's cars.
"They were real friendly at first," he said. "I should have known better because it sounded too good to be true."
Frederick said he struggled to make the daily $166.98 payments when one of his trucks broke down, so he borrowed from his grandmother to pay off the contract early. Palm wouldn't accept his money, he said. Then without warning, he said, the company took his truck, along with a license-plate scanner and a laptop.
"I'm real close to going out of business because they're jerking me around," Frederick said. "Alls I want out of the deal is I want my property out of it, and I want my damn truck back."
With assistance from Jody Shenn and Patrick Clark in New York.
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|To: scion who wrote (118101)||5/22/2014 4:23:26 PM|
|Six Defendants Charged with Securities Fraud Related Violations |
FOR IMMEDIATE RELEASE
May 22, 2014
180 Defendants Have Been Charged to Date as Part of the Southern District of Florida Securities and Investment Fraud Initiative
Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, George L. Piro, Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, Jose A. Gonzalez, Special Agent in Charge, Internal Revenue Service, Criminal Investigation (IRS-CI), Paula Reid, Special Agent in Charge, U.S. Secret Service (USSS), Miami Field Office, Ronald J. Verrochio, Inspector in Charge, U.S. Postal Inspection Service (USPIS), Eric I. Bustillo, Regional Director, Securities and Exchange Commission (SEC), Fred W. Gibson, Jr., Principal Deputy Inspector General, Federal Deposit Insurance Corporation, Office of Inspector General (FDIC-OIG), David Meister, Director, Division of Enforcement, U.S. Commodity Futures Trading Commission (CFTC), Cindy Liebes, Director, Federal Trade Commission, Southeast Region (FTC), and Drew J. Breakspear, Commissioner, State of Florida’s Office of Financial Regulation, announce the most recent charges filed in connection with the Southern District of Florida Securities and Investment Fraud Initiative (the “Initiative”). The Initiative was first announced in December 2010 and designed to combat securities fraud and protect the interests of the investing public.
The Initiative was established to address an increase in investment and securities fraud schemes in the Southern District of Florida. Participating agencies include the U.S. Attorney’s Office, FBI, IRS-CI, USSS, USPIS, SEC, CFTC, FTC, FDIC-OIG, and the Florida Office of Financial Regulation. These law enforcement and regulatory agencies have shared intelligence and combined their resources to combat securities and investment fraud, including Ponzi schemes, affinity fraud schemes, prime bank/high-yield investment scams, business opportunity fraud, promoter/micro-cap/“pump and dump” schemes, foreign exchange (FOREX) frauds, false bankruptcy petitions, and other schemes to defraud individual investors. Among the goals of the Initiative is to alert the public about the prevalence of these types of schemes, educate the public on how to avoid falling prey to these schemes, and to highlight the law enforcement response to the problem.
Using the strike force model successfully developed in the health care and mortgage fraud areas, the Initiative has yielded similar success. Since its inception in December 2010, the Initiative has resulted in charges against 180 defendants in the Southern District of Florida, resulting in more than $ 1.8 billion in restitution ordered.
Today, we announce charges against six individuals in the following five cases:
1. United States v. Eric Brown, Case No. 14-60107-CR-Cohn
Eric Brown, 50, of Brooklyn, New York, is charged with one count of mail fraud, in violation of Title 18, United States Code, Section 1341. The information alleges that Brown agreed to pay a purported fund manager one share for every four shares of buying that the fund would make in DAM Holdings, Inc. (DAMH). In October 2011, Brown agreed to come to Florida to induce the fund manager to invest in DAMH.
The case is being prosecuted by Assistant U.S. Attorney H. Ron Davidson.
2. United States v. Billy Ray, Jr., Case No. 14-60109-CR-Zloch
Billy Ray, Jr., 56, of Cumming, Georgia, is charged with one count of securities fraud, in violation of Title 18, United States Code, Section 1348. The information alleges that Ray was the CEO and President of the Board of Directors of Urban AG Corporation (AQUM), a Delaware corporation that was publicly traded. Its common stock was traded in the Pink Sheets and registered with the SEC under Section 12 of the Securities Exchange Act of 1934. On approximately May 28, 2013, Ray agreed to pay a kickback to induce a hedge fund manager to invest the fund’s money in AQUM.
The case is being prosecuted by Assistant U.S. Attorney H. Ron Davidson.
3. United States v. Wade Clark, Case No. 14-60108-CR- Dimitrouleas
Wade Clark, 38, of Melissa, Texas, is charged with committing one count of insider trading, in violation of Title 15, United States Code, Sections 78j(b) and 78ff(a), and Title 17, Code of Federal Regulations, Sections 240.10b-5 and 240.10b5-1. The information alleges that on or about July 9, 2013, in a recorded conversation, Clark told an FBI undercover agent who posed as a hedge fund manager about press releases that had not yet been issued. Clark told the purported fund manager “you should probably start buying” stock before a press release was issued.
The case is being prosecuted by Assistant U.S. Attorney H. Ron Davidson.
4. United States v. Kevin McKnight and Stephen Bauer, Case No. 14-80080-CR-Hurley
Kevin McKnight, 41, of Boca Raton, and Stephen Bauer, 63, of Hillsboro Beach, were charged by indictment alleging that they conspired to commit securities fraud, in violation of Title 18, United States Code, Section 1349. According to the indictment, both men were promoters for Environmental Infrastructure Holdings Corp. (EIHC), a publicly traded company whose stock was registered with the SEC. The defendants were charged with engaging in a scheme to manipulate the publicly quoted share price and trading volume of EIHC common stock. The alleged scheme involved, among other things, illegal kickbacks and the “match trading” of stock, which is the unlawful buying and selling of securities in equal quantities by two parties to a transaction, rather than their bidding or offering orders on the open market.
The case is being prosecuted by Assistant U.S. Attorney Roger Cruz.
5. United States v. Jeffrey Berkowitz, Case No. 14-20342-CR-Scola
Jeffrey Berkowitz, 57, of Palm Beach County, a stock promoter, was charged by information with conspiracy to engage in a scheme to manipulate the publicly quoted share price and trading volume of Face Up Entertainment Group (FUEG) stock, in violation of Title 18, United States Code, Section 371. FUEG, a Florida corporation, is purported to be in the business of operating an internet gaming website.
The case is being prosecuted by Assistant U.S. Attorney Michael Sherwin.
Mr. Ferrer commends the investigative efforts of the FBI, IRS-CI, USSS, USPIS, SEC, FDIC-OIG, CFTC, FTC, and the State of Florida’s Office of Financial Regulation.
An indictment or information is merely an accusation and defendants are presumed innocent until proven guilty.
A copy of this press release may be found on the website of the United States Attorney's Office for the Southern District of Florida at usdoj.gov. Related court documents and information may be found on the website of the District Court for the Southern District of Florida at flsd.uscourts.gov or on pacer.flsd.uscourts.gov.
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|From: scion||5/23/2014 8:50:31 AM|
|Penny Stocks Like Latteno Foods Rally, Fueling Big-Dollar Dreams |
Fannie, Freddie and Other Cheap Names Spur a Rush in Activity on OTC Markets
By TOMI KILGORE CONNECT
May 22, 2014 6:14 p.m. ET
Investors are piling into the shares of small, risky companies at the fastest clip on record, in search of investments that promise a chance of outsize returns.
The investors are buying up so-called penny stocks—shares of mostly tiny companies that aren't listed on major U.S. exchanges—at a pace that far eclipses the tech boom of the late 1990s. Those include firms that focus on areas from medical marijuana and biotechnology to fuel-cell development and precious-metals mining—industries that are perceived by some investors as carrying strong growth potential.
Average monthly trading volume at OTC Markets Group Inc., OTCM +5.65% which handles trading in shares that aren't listed on the New York Stock Exchange or Nasdaq Stock Market, NDAQ +0.17% has risen 40% this year in dollar terms from a year ago, to a record $23.5 billion.
The renewed interest in a market that used to be known as the pink sheets—because of the colored pieces of paper once used to record prices for unlisted stocks—shows investors are ramping up risk in a bid to boost returns as U.S. stock indexes are hovering near highs and stock valuations have risen above historical norms.
Steve Templeton, 42 years old and a full-time day trader, said his winnings on unlisted medical-marijuana stocks allowed him to move to Tennessee, where there is no state capital-gains tax, from California earlier this year.
"I like things below three cents, because of the upside potential, and it limits the downside," Mr. Templeton said. "I buy twice what I want, and when it [doubles or triples], I sell half, and keep the rest."
One of his more successful investments this year has been Latteno Food Corp. LATF +5.00% , a maker of edible medical-marijuana products company based in Denver. He bought two million shares at $0.0008 in mid-January, and sold one million shares when the stock more than doubled to $0.002 less than two weeks later. Shares hit $0.0042 each in recent trading, about five times the price he originally paid.
Many smaller companies have seen sharply higher trading volumes this year, including 2050 Motors Inc., ZEGGD 0.00% a Las Vegas developer of carbon-fiber electric cars; MySkin Inc., a Newport Beach, Calif., provider of management services to spas; and GrowBlox Sciences Inc., GBLX +3.85% an Orlando, Fla., medical-marijuana company.
Traffic on penny-stock trader forum InvestorsHub doubled between Christmas and last month, said Clem Chambers, chief executive of U.K.-based financial website ADVFN.com, which operates the forum. He said people who have been registered members for years, in some cases a decade or more, account for three-quarters of the increase.
"A lot of these people, who were looking from afar, are coming back," Mr. Chambers said. "It feels like somebody pulled a switch."
The rebound also comes as individual investors are showing signs of increased interest in stock trading in general. Discount brokers TD Ameritrade Holding Corp. AMTD +0.60% and E*Trade Financial Corp. ETFC +0.94% last month reported jumps in daily trading volume in the first quarter from the same period a year ago.
The rising volume in the tiniest of stocks is taking more investors into what is arguably the riskiest part of the stock market. These companies have less regulatory oversight than those traded on the exchanges, and their low prices mean that small price moves can quickly add up to big percentage moves.
In addition, penny stocks are often prime hunting grounds for scammers and "pump and dump" schemes. Stock promoters—often masquerading as regular investors on chat boards—tout a name, only to unload shares into a thinly traded market, taking profits for themselves but inflicting losses on other investors.
The Securities and Exchange Commission recently issued an investor alert warning of possible scams involving marijuana-related stocks, noting that "fraudsters often exploit the latest growth industry to lure investors with the promise of high returns." The SEC has halted trading in five marijuana-related stocks over the past two months because of fraud concerns.
While many of the shady "boiler room" brokerage call centers have been shut down by regulators, and although most of the volume is in legitimate companies with real profits, Mr. Chambers said it is still a market of "extreme risk."
"It's the closest you can get to pure gambling," Mr. Chambers said. "It's not all nightmarish companies, but the ones that capture the imagination are the most crazy ones."
Penny-stock investors also have broader market risks to consider: Liquidity in OTC markets dried up in 2001 as the tech bubble popped, and in 2009 following the financial crisis.
Some of the recent jump in OTC trading has come from shares of well-known companies, such as the delisted mortgage-finance firms Fannie Mae FNMA -0.69% and Freddie Mac FMCC -1.15% and large, foreign corporate titans that aren't listed on major U.S. exchanges such as Volkswagen AG VLKAY -0.23% , BNP Paribas SA BNPQY +0.54% and Roche Holding AG RHHBY +1.00% . Excluding Fannie, Freddie and foreign shares, trading volumes are up 50% from a year ago.
Some investors say they have made money trading shares that could soon join the unlisted world: shares that are listed on an exchange but subject to possible delisting because of low prices.
Ryan Ung, a store manager in California in his 40s, realized a large profit by purchasing FuelCell Energy Inc. FCEL -0.94% for less than $1 a share in early 2013, after the Nasdaq warned of a potential delisting for low share prices. That threat was removed in January 2013 after the shares rallied. Shares recently traded at $2.10, a little more than half this year's closing peak of $3.93, hit March 10.
Mr. Ung took a long break from trading penny stocks after the stock-market collapse in 2008 but started following the market again in early 2013, after on online newsletter on alternative-fuel stocks rekindled his interest. "I wanted to find something small" with a high profit potential, Mr. Ung said.
Not all penny-stock trades work out so nicely. Mr. Templeton bought Citadel EFT, a credit-card-processing-services company with interest in the medical-marijuana industry, at 82 cents a share. The stock was halted by the Securities and Exchange Commission at 68 cents after the market closed March 20 because of questions regarding the accuracy of several public disclosures.
After the halt was lifted following the company's response to the questions, the stock closed at eight cents a share on April 4, and was recently changing hands at two cents.
Write to Tomi Kilgore at firstname.lastname@example.org
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|From: scion||5/23/2014 3:35:04 PM|
|Another Marijuana Stock|
That Could Give Its Shareholders FITX
Written by Janice Shell
May 23, 2014: On 20 May 2014, John Germinario, chairman of the board of Creative Edge Nutrition, Inc. (FITX) and Cen Biotech, a partially owned subsidiary of FITX, posted an extraordinary letter on the company's Facebook page. The subject line read "The Decimation of an Industry." The letter was addressed to SEC attorneys Elisha Franke, Co-Chair of the Microcap Task Force, and Lori Schock, Director of the Office of Investor Education and Advocacy, and was copied to Mary Jo White and the other four commissioners.
Germinario joined FITX and Cen Biotech a little more than a month ago. The appointment seems to be his first venture into the increasingly crowded marijuana space. His day job is as CEO of a company called Global Securities Services Corporation, which appears to have been created to save the world from unregulated and perhaps fraudulent American Depositary Receipts (ADRs). The site's homepage warns that "Depositary Receipts Are Toxic and Have Poisoned Global Investor Portfolio's [sic] for Decades!"
On a page dedicated to himself, Germinario explains that he's considered to be "one of the world's most knowledgeable experts on International Capital Markets and Depositary Receipts." He once developed ADR programs, but now seems to work as a consultant. He's occasionally quoted in the financial press, usually explaining his concerns about unsponsored ADRs, which have become increasingly popular in recent years. Perhaps ironically, they trade on the U.S. Grey Market or as Pinks.
Germinario's missive to the SEC is not quite what one would expect of someone who's spent decades dealing with relatively boring ADRs. He begins by announcing that he wishes to express his disagreement with the agency's recent treatment of stocks in the pot sector.
I and my team of Whistleblowers are overwhelming appalled with the Commissions shot gun approach of decimating the capitalizations of legitimate shareholder values of company's by a submission of a broad based investor alert by the commission. It has resonating effects on the entire industry which include companies that are not involved in the investigations. The commissions approach to suspend trading activity in companies that are perceived, targeted or evidenced by criminal activity should not be suspended which destroys the investment of legitimate shareholders but to aggressively hold these perpetrator(s) accountable and prosecute those individuals to the full extent of the law.
The investor alert of which he speaks isn't as appalling as Germinario claims. It is, in fact, one of several similar alerts released by the SEC and by FINRA since the summer of 2013. Their intention is to warn retail market participants of possible fraud in a new industry populated by companies that have sprung up overnight, or abruptly changed their business plans to accommodate the public's sudden enthusiasm for anything weed-related. The alert offers familiar information about what should be considered red flags, but there's something new, and that is what seems to have ticked off Germinario. The first topic of discussion is the recent trading suspensions imposed by the SEC on five penny companies in the pot sector: Petrotech Oil and Gas, Inc. (PTOG); Advanced Cannabis Solutions, Inc. (CANN); GrowLife, Inc. (PHOT), and FusionPharm, Inc. (FSPM). The SEC itself apparently forgot about two others: Aventura Equities, Inc. (AVEN) and Citadel EFT (CDFT), which had at least expressed an intention of getting into the marijuana business. Add to that list Fortitude Group (FRTD), which was suspended just this morning.
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