SEC Cracks Down on Penny Stock Purchasers’ Scheme to Avoid Stock Registration

January 10, 2013 — The Securities and Exchange Commission (SEC) is aggressively pursuing securities industry professionals who seek to profit with fraudulent schemes that deprive other investors of critical information. The SEC is often tipped off to such schemes by securities insiders who notify authorities that the fraud is ongoing.

Penny Stock Securities Scheme Adds Up to Millions for Fraudsters
The SEC has charged four professionals in the securities industry with running a fraudulent penny stock scheme. In particular, the SEC’s complaint includes the following allegations of securities fraud:

Between 2007 and 2010, Danny Garber, Kenneth Yellin, Michael Manis and Jordan Feinstein operated a scheme in which they purchased penny stock shares at thirty to sixty percent off the market share price by falsely assuring the stock companies that they planned to invest in the shares over the long term as opposed to reselling them at once. As soon as they acquired the shares at a discount, however, they immediately sold the shares without registering them.

To avoid the required registration, the four men claimed the transactions were covered by a provision referencing certain state law exemptions. To bolster their claims about the state law exemptions, the men created virtual corporate presences in Delaware, Minnesota, and Texas. In reality, state law exemptions were not applicable to the penny stock transactions. Over the three year period, the former securities industry professionals illegally purchased over one billion shares of unregistered stock in microcap companies at a steep discount. Relying on sham exemptions from the federal securities laws, the four men then sold the shares on the market, reaping $17 million in illicit profits.

The SEC alleges that the men knew their trading was not exempt from federal securities laws and that their violation of the applicable registration provisions resulted in the unregistered distribution of company stock without crucial information about the companies being available to legitimate investors.

Insiders Help SEC Identify Schemes that Defraud Investors
Industry insiders help the SEC fight securities fraud. The SEC has created a whistleblower program to handle tips from informants. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 allows tipsters who collaborate with the government to receive financial awards from the SEC. Whistleblowers may expect as much as 30 percent of the money collected by the government, as long as the sanctions recovered exceed $1 million.

The skilled attorneys at Waters & Kraus are here to represent whistleblowers with the courage to speak out. Contact us or call our whistleblower lawyers at 800.226.9880 to inquire about our securities fraud practice and how we can help.

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