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$290 Million Lost in Penny Stock Fraud, Prosecutors Say

By JAMES C. McKINLEY Jr.SEPT. 11, 2014
http://www.nytimes.com/2014/09/12/nyregion/290-million-lost-in-penny-stock-fraud-prosecutors-say.html?_r=2

Investors would hear about the companies through newsletters emailed from websites that tout penny stocks, with names like PennyPic.com, OxofWallStreet.com and MonsterStox.com, their missives full of hyperbolic language and exclamation points.

What the investors did not know, prosecutors say, is that the men writing the newsletters owned stock in the companies they were promoting, and also had colluded with officials in those companies to drive up prices with misleading news releases.

When prices rose, the promoters and company officials would sell off millions of shares they controlled, leaving investors with worthless stock. It was an Internet-driven variation on the pump-and-dump stock manipulation schemes that unscrupulous stockbrokers have practiced for decades, prosecutors said.

On Thursday, eight people were indicted on charges they defrauded thousands of investors of more than $290 million from April 2009 to May 2012, using emailed newsletters to hype nearly worthless companies.

Three stock promoters — Anthony Thompson, 38, of Bethesda, Md.; Eric Van Nguyen, 30, of Quebec; and Jay Fung, 40, of Delray Beach, Fla. — were accused of conspiring with officials in control of five public companies to drive up prices of penny stocks.

Mr. Thompson and Mr. Fung were arraigned on charges of grand larceny, scheme to defraud and securities fraud in State Supreme Court in Manhattan and released on $1 million bail each; Mr. Nguyen was still at large.

“They took advantage of their position as promoters to profit for themselves on the backs of public investors,” an assistant prosecutor, Brian Kudon, said at Mr. Thompson’s arraignment.

But Mr. Thompson’s lawyer, Maranda Fritz, said that her client’s newsletter, from FreeInvestmentReport.com, was a paid advertisement for the companies he wrote about, which she said was clearly stated in its disclosures to investors.

“It’s advertising,” Ms. Fritz told Justice Roger S. Hayes. “You might as well indict ‘Mad Men,’ if they actually existed.”

Mr. Fung’s lawyer, Michael Bachner, also said his client had disclosed to readers that he had a financial interest in the companies he promoted.

Prosecutors, however, described in an 85-count indictment an intricate conspiracy to defraud investors. Mr. Kudon said the conspirators bought public shell companies and merged them with newly created private companies. Then they issued or transferred millions of free-trading shares in the shell companies to themselves, family members, friends and associates. Next, they coordinated with the three promoters to issue rosy, misleading news releases about the companies, driving up the stock prices before dumping their shares on the open market, court papers said.

The eight defendants made more than $30 million on sales of the stocks, prosecutors said. The companies involved included Smart Holdings Inc., Lyric Jeans Inc., Hydrogenetics Inc., Xynergy Holdings Inc., Blast Applications Inc., Blue Gem Enterprise Inc., Mass Hysteria Entertainment Company Inc., Recycle Tech Inc. and Sunpeaks Ventures.


A version of this article appears in print on September 12, 2014, on page A28 of the New York edition with the headline: $290 Million Lost in Penny Stock Fraud, Prosecutors Say.

http://www.nytimes.com/2014/09/12/nyregion/290-million-lost-in-penny-stock-fraud-prosecutors-say.html?_r=2