Franklin, Andrews, Kramer & Edelstein

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SEC seeks default judgment against Sheptycki

2011-02-17 14:27 ET - Street Wire

Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (U-DPRK) Deep Rock Oil and Gas Inc
Also Street Wire (U-NLST) National Storm Management Inc
by Mike Caswell
http://www.stockwatch.com/News/Item.aspx?bid=Z-C:*SEC-1810214&symbol=*SEC&news_region=C

The U.S. Securities and Exchange Commission has requested a $54.7-million default judgment against fugitive Canadian stock promoter Dean Sheptycki. (All figures are in U.S. dollars.) The penalty represents disgorgement and interest for the pump-and-dump of three pink sheets companies in 2005. In a motion filed on Feb. 11, 2011, the SEC says that Mr. Sheptycki has not responded to a two-year-old suit he faces for aiding the pump-and-dumps.

The regulator claimed that Mr. Sheptycki arranged for blast faxes in 2005 that supported a $43.9-million market manipulation. The faxes typically predicted huge price increases for the stocks and recommended buying them. In one case, they exploited the devastation left behind by hurricane Katrina, the storm that hit New Orleans in 2005, the suit stated.

In its motion for a default judgment, the SEC asks that the judge hold Mr. Sheptycki liable for the entire profits from the scheme, plus $10.8-million in interest. The SEC says that Mr. Sheptycki's blast faxes were crucial to the manipulation, so he should be held jointly liable with the other defendants. The motion also seeks a permanent penny stock ban and orders barring future violations.

The United States government considers Mr. Sheptycki a fugitive and, according to the SEC's motion, has no idea where he is. He was living in the Bahamas in February, 2009, when police arrested him on a U.S. warrant from a parallel criminal case. The U.S. then attempted to have him extradited, but the attempt failed when government lawyers did not file an authority to proceed on time. A Bahamian judge threw out the extradition case and released Mr. Sheptycki. It is not clear where he went from there.

Unfortunately for the SEC, it may have to locate Mr. Sheptycki to succeed on its default judgment. In a brief hearing on Monday, Feb. 14, the judge said the SEC had to properly serve Mr. Sheptycki with its complaint. The attempted service method (through Mr. Sheptycki's former lawyer) was insufficient, the judge ruled.

While Mr. Sheptycki remains wanted, two of his co-defendants are already in jail as a result of the parallel criminal prosecution. These include Oklahoma lawyer David Gordon, who paid Mr. Sheptycki for the blast faxes, and Oklahoma stock promoter Richard Clark, who dumped millions of shares in the scheme. After a 13-day trial in May, 2010, a Tulsa jury convicted them on multiple counts of fraud. They received sentences of 15 and 12 years in jail, which they are appealing

SEC's complaint

The SEC filed civil fraud charges against Mr. Sheptycki on Feb. 10, 2009, in the Northern District of Oklahoma. The complaint identified him as an employee of Stockwire Inc., which ran a touting site called www.stockwire.com. The other defendants were Mr. Gordon and Joshua Lankford, a former broker from Dallas, Tex.

One of the pump-and-dumps described in the complaint was that of National Storm Management Group Inc., a purported storm reconstruction company. Some time in 2005, Mr. Gordon and Mr. Lankford acquired millions of free-trading shares in the company through fraudulent legal opinion letters, the SEC claimed. They then hired Mr. Sheptycki to promote the stock with mass faxes, and arranged for spam e-mail campaigns.

The spamming, which happened in September, 2005, after hurricane Katrina, stated that National Storm "is poised for a massive run up as demand to repair homes skyrockets." The company went from 50 cents to a $2.80 high. (It last traded for 0.45 cent.)

As the spam went out, Mr. Gordon and Mr. Lankford carried out several manipulative trades, the SEC claimed. "To ensure that the market price remained artificially elevated, Gordon and Lankford coordinated their trading so as to not dump too much stock into the market during the promotions and provided buy-side support when there were too many other retail investors selling stock," the complaint read. They concealed their trading through nominee brokerage and bank accounts.

During the scheme, the men dumped millions of shares in the three companies, generating $20-million in profits, the complaint stated. (The SEC now says profits were $43.9-million.) Mr. Sheptycki, who was promised 10 per cent of the proceeds, had also bought shares of his own prior to the promotions. In the case of National Storm, he sold his stock at prices between $1.95 and $2.60, the SEC claimed.

The other two stocks the complaint listed were Deep Rock Oil and Gas Inc. and Global Beverage Solutions Inc., which were the subject if similar promotional campaigns. Trading records show that Deep Rock went from 12 cents to $1.13 in 2005, and that it last traded for 0.7 cent.

The SEC sought disgorgement of ill-gotten gains, appropriate civil penalties and penny stock bans.

Even before it filed its complaint, the SEC was unable to obtain any answers from Mr. Sheptycki. In 2006, the regulator was investigating spam that touted Deep Rock and National Storm and it wanted to ask him about the promotions. Getting Mr. Sheptycki to answer questions was not a simple matter though -- the SEC had to obtain a court order compelling him to respond to a subpoena. He still provided no information, invoking his Fifth Amendment privilege against self-incrimination through his then-lawyer.

In addition to Mr. Sheptycki, the SEC is seeking a default judgment against Mr. Lankford. He too is a fugitive in the criminal case, and has not answered the SEC's charges. The remaining SEC defendant, Mr. Gordon, is fighting the SEC charges from jail. On Jan. 14, 2011, he filed a handwritten petition seeking the return of 20,000 pages of documents seized from his office, which he says he needs to defend himself. The judge has not yet ruled on his petition.

http://www.stockwatch.com/News/Item.aspx?bid=Z-C:*SEC-1810214&symbol=*SEC&news_region=C