Franklin, Andrews, Kramer & Edelstein

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SEC seeks $50-million (U.S.) from pump-and-dump lawyer

2011-06-21 15:14 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-1853870&symbol=*SEC&news_region=C

The U.S. Securities and Exchange Commission has filed a motion seeking $50.3-million in penalties against David Gordon, an Oklahoma lawyer jailed for his part in a 2005 market manipulation. (All figures are in U.S. dollars.) The regulator says there is no genuine dispute that Mr. Gordon participated in a scheme in which he and others pumped and dumped three companies. A jury in Oklahoma convicted him of parallel criminal charges on May 3, 2010.

The SEC's request comes nine months after a U.S. federal judge sentenced Mr. Gordon to 15 years in jail on charges that stemmed from the three pump-and-dumps. Prosecutors argued that he and others, including fugitive Canadian promoter Dean Sheptycki, participated in a market manipulation that defrauded investors of millions. The stocks they promoted included one company they held out as a storm reconstruction outfit in the wake of hurricane Katrina, the storm that devastated New Orleans in 2005.

Mr. Gordon unsuccessfully fought the criminal charges, arguing that there was no proof he was responsible for boosting the stocks. He sought a light sentence on the grounds that he had already suffered the loss of his profession and would be banned from penny stocks. He still maintains his innocence, and is appealing his conviction.

The SEC, meanwhile, says that the courts must impose appropriate civil penalties for Mr. Gordon. In a motion filed on June 16, 2011, it is seeking an order requiring him to disgorge the entire $43.9-million that he and others made in the pump-and-dumps. After deducting $3.9-million that the government has already collected in the criminal case and adding an appropriate amount for interest, the SEC says a $50.3-million disgorgement order is appropriate. On top of that, the SEC is seeking a third tier civil penalty, which can be anywhere from $130,000 to the total amount of investor loss. The regulator is also asking that the judge permanently ban Mr. Gordon from participating in penny stock offerings.

Should the SEC succeed in its request, Mr. Gordon's penalty could be close to the judgment that the regulator won against Mr. Sheptycki. On March 11, 2011, a Tulsa judge ordered him to pay $98.7-million. Roughly half of the amount was disgorgement of profits from the scheme, while the remainder was a civil penalty. The decision was a victory by default, as Mr. Sheptycki did not respond to the SEC case and is a fugitive in the criminal case.

SEC's complaint

The SEC launched the case against Mr. Gordon and others on Feb. 10, 2009, when it filed a civil fraud complaint in the Northern District of Oklahoma. According to the complaint, Mr. Gordon and others, relying on fraudulent legal opinions, acquired millions of shares in three companies. They then sold their stock during fraudulent promotions, realizing millions in illegal profits. The other defendants were Mr. Sheptycki, who helped send faxes touting the companies in return for 10 per cent of the profits, and a former broker from Texas named Joshua Lankford.

One of the three stocks that the SEC accused the men of manipulating was National Storm Management Inc., a purported storm reconstruction company. Some time in 2005, Mr. Gordon and Mr. Lankford acquired nearly all of the company's tradable stock, the SEC said. They then hired Mr. Sheptycki to promote the stock with mass faxes, and arranged for spam e-mail campaigns.

The faxes typically predicted massive price increases for the stock. The spamming, which went out in September, 2005, after hurricane Katrina struck New Orleans, stated that the company "is poised for a massive run up as demand to repair homes skyrockets." The stock went from 50 cents to a $2.80 high. (It was last at 0.45 cent.)

As the spam went out, Mr. Gordon and Mr. Lankford carried out a series of manipulative trades, which they concealed through nominee accounts, according to the SEC. "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.

The other two stocks that the SEC listed in its complaint were Deep Rock Oil and Gas Inc. and Global Beverage Solutions Inc., which were the subjects of similar promotional campaigns. Deep Rock went from 12 cents to $1.13 in 2005, and was last at 0.15 cent.

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

Fugitives

While the SEC has secured a penalty against Mr. Sheptycki and is seeking a default judgment against Mr. Lankford, the regulator may have a difficult time collecting from either man. Mr. Lankford, who was last known to live in the Dallas area, fled before prosecutors filed the criminal charges. He did so despite having young children, possibly on the advice of Mr. Gordon, according to prosecutors.

Mr. Sheptycki was not initially as fortunate, as police arrested him in the Bahamas on a U.S. warrant in February, 2009. The U.S. attempted to have him extradited, but the attempt failed after U.S. authorities did not file an authority to proceed on time. A Bahamian judge threw out the case and released Mr. Sheptycki. It is not clear where he went from there.

The SEC was not the first regulator to impose a fine on Mr. Sheptycki. In 1998, he agreed to pay a $15,000 fine to the Alberta Stock Exchange and to serve an 18-month ban from the brokerage industry. He had been working at the Calgary branch of C.M. Oliver & Company Ltd. at the time.

The fine stemmed from unauthorized trading, in which he bought $95,472 worth of shares in an ASE listing called Timbuktu Gold Corp. The trading left one of his clients with a debt that was beyond his means. Canadian Securities Administrators records show he did not return to the brokerage industry after his suspension expired.

At the time of the National Storm promotion, he was working for a Florida tout service called Stockwire.

http://www.stockwatch.com/News/Item.aspx?bid=Z-C:*SEC-1853870&symbol=*SEC&news_region=C