b. FFGO issued an extraordinarily large volume of very low priced shares, 35.28
billion out of five trillion authorized, and SL sought to deposit 2.7 billion
shares. The share price was only $.0001 per share (a market capitalization of
$3.5 million).
FFGO had previously undergone a number of name changes and stock splits,
"all of which are a strong indicator of risk in a penny stock company."
f. FFGO was closely related to HGLC.
g. Google searches showed that the stated address for the SL accounts was a
warehouse that was also the mailing address for 9,000 other entities, most of a suspicious nature (online gambling, adult entertainment).
Background of FFGO and HGLC
29. Au executed trades for Customer SL and Customer LCS in shares of Fortress
Financial Group Inc. ("FFGO") and Hunt Gold Corporation (formerly known as Prime Time
Group, Inc.) ("HGLC"), both of which traded on the Pink Sheets.
30. At the time that Au traded shares of FFGO the entity had already undergone
several name changes and completely changed its purported line of business. The company was
previously known as Great West Gold, Inc., West Africa Gold, Inc. and Adven, Inc. and was the
product of three companies that were reverse-merged into Adven, Inc. According to some
company profiles contained in press releases available online, FFGO was purportedly an
"exploration stage gold mining company." Releases from the firm available online also claimed
that the company had exited that business and was then involved in the business of issuing and
marketing prepaid debit cards, and planned to become "a broadly based" consumer finance
lender. These releases also state that FFGO sold mining rights to HGLC, and FFGO became a
48 percent shareholder of HGLC.
31. At the time that Au traded shares of HGLC, according to publicly available press
releases from the company, it was purportedly engaged in the mining business. According to
publicly available information obtained online from the www.pinksheets.com website, HGLC
was previously known as Prime Time Group, Inc. until November 2007 at which time it was
purportedly engaged in the wireless telecommunications business. Prior to that, until July 2004,
the company was known as Starnet International Corp.
32. After the activity involving HGLC shares in customer SL's Avalon accounts
which is discussed below, during the period from June 15, 2009 to June 26, 2009, the SEC halted
7
trading in HGLC "because of questions that have been raised about the accuracy and adequacy
of publicly disseminated information concerning .. . [HGLC's] gold mining business."
33. Thereafter, on June 25, 2009, the SEC filed a complaint (Case No. 09-80952-Civ)
in the United States District Court for the Southern District of Florida against HGLC and several
individuals, alleging, inter alia, a scheme to disseminate materially false and misleading press
releases concerning HGLC and a fraudulent unregistered distribution scheme during the period
of April 2006 to September 2007.
Suspicious Activity Involving FFGO and HGLC
34. A month after opening multiple accounts with Au at Avalon, on June 16, 2008,
58,779,451 shares of HGLC were electronically delivered via DWAC into five SL-controlled
Avalon accounts. Ten million shares each were delivered into the BC&I, EE, HEI and PCP
accounts and 18,779,451 shares of HGLC were delivered into a fifth SL-controlled Avalon
account, SV.
35. Within several weeks of delivery of the shares, during July 2008, SL, through Au,
liquidated all of the shares in these accounts at prices between $.001 and .005 per share and also
began to purchase and sell additional shares of HGLC stock. SL then, through Au, wired the
proceeds of these sales to bank accounts in the name of each entity (BC&I, EE, HEI, PCP, and
SV) at an Atlanta-based bank.
36. During July 2008, SL then attempted to deposit large blocks of shares of FFGO in
certificate form in three of the accounts that he controlled (BC&I, EE, HEI). As alleged below,
these deposits, totaling 2.7 billion shares, were rejected by Clearing Firm C.
S
37. From July 2008 to February 2009, the SL accounts (BC&l, EE, HEI, PCP, KI and
SV) continued to purchase and sell millions of shares of FFGO at prices between $.0001 and
$.0007 per share and millions of shares of HGLC at prices between $.001 and $.005 per share.
38. During periods between June 2008 and April 2009, the following activity in
FFGO and HGLC occurred in SL-controlled accounts and LCS account:
FFGO transactions
between August 1, 2008 and February
3,2009
Following the LCS account transactions alleged above, DJ, through Au, wired the
proceeds through 10 wires to a Costa Rican bank account in LCS's name during the period from
July 2008 to April 2009. These wires mainly followed liquidations of shares of FFGO.
Clearing Firm C Rejects Share Deposits, Raises Concerns,
and Ultimately Terminates Relationship with Avalon
40. Avalon's clearing firm during the above-described trading, Clearing Firm C,
expressed AML-related concerns to Avalon and Au regarding activity in the SL accounts. In
November 2008, Clearing Firm C terminated its clearing arrangement with Avalon due to its
concern regarding suspicious activity in the SL-related accounts.
41. For example, on July 16,2008, 2.7 billion shares of FFGO were deposited into
three of the accounts controlled by SL (900 million shares each into the EE, SV and HEI
accounts).
42. By email dated July 18, 2008, Clearing Firm C informed Au that it had decided to
return the shares and provided extensive detail as to its concerns about the activity in the
SL-related accounts. In summing up its reasons as to why Clearing Firm C rejected the shares,
the firm identified the following red flags:
the primary AML concerns with this security include the following:
- Not fully registered
- No audited financial statements
- Message board accusations of pump and dump schemes
The client and the issuer appear to be one and the same
The client has been the subject of a number of complaints and
speculation due to 'mysterious business practices, has been
called 'risky Mr. [L]' by news sources and is rumored to have
incorporated hundreds of entities around the world, most for
unknown and/or suspicious purposes.
43. The July 18,2008 email also provided to Au extensive information concerning
SL's background and information with respect to the FFGO shares. Specifically, Clearing Firm
C discussed the following, all of which Au knew or could have discovered with minimal
diligence:
a. "[PJublic domain searches returned a wealth of information about SL, most of
it negative." Clearing Firm C provided links to articles available on the
internet that discussed, among other things, articles questioning SL's business
practices and that he was the president of a company thai was delisted from
the AIM as discussed above.
b. FFGO issued an extraordinarily large volume of very low priced shares, 35.28
billion out of five trillion authorized, and SL sought to deposit 2.7 billion
shares. The share price was only $.0001 per share (a market capitalization of
$3.5 million).
c. FFGO, which traded on the Pink Sheets, was designated as a "limited info"
company because the firm had filed only statements on SEC Form 8K but no
Form 10k filings and there were no audited financials available.
d. SL was closely affiliated with FFGO. Clearing Firm C's research showed that
directors of FFGO were also directors of another entity where SL was
President. Clearing Firm C noted that a former address for FFGO was the
same as the current address for SL's accounts.
e. FFGO had previously undergone a number of name changes and stock splits,
"all of which are a strong indicator of risk in a penny stock company."
f. FFGO was closely related to HGLC.
g. Google searches showed that the stated address for the SL accounts was a
warehouse that was also the mailing address for 9,000 other entities, most of a suspicious nature (online gambling, adult entertainment). Searches of internet
message boards showed that users had discussed scams emanating from the
address.
44. Clearing Firm C's July 18, 2008 email also stated that all of the above-alleged
information was inconsistent with information that Au and Avalon had provided to Clearing
Firm C concerning SL.
45. Rather than investigate Clearing Firm C's concerns and, if necessary, report any
suspicious activity, Au appealed to Clearing Firm C management to reverse its decision not to
accept the FFGO securities.
46. Despite Clearing Firm C's rejection of the shares, in late August 2008, SL
delivered a total of 2.7 billion shares of FFGO in certificate form to three SL-controlled accounts
(EE, SV and HEI accounts). When Clearing Firm C reiterated its previously expressed AMLrelated
concerns about the shares to Au, Au again argued that the share deposits should be
accepted. Clearing Firm C did not reject the FFGO shares, which SL, through Au, immediately
liquidated.
47. On or around October 17, 2008, SL then attempted to deposit approximately 17
billion shares of HGLC into SL-controlled accounts at Avalon (specifically, the HEI, BC, PC,
SV and EE accounts). At or around the same time, DJ attempted to deposit 2.1 billion shares
into the LCS account.
48. Clearing Firm C again expressed AML-related concerns to Au. A memo attached
to an email that Clearing Firm C sent to Au on October 27, 2008 summarized AML concerns regarding HGLC, FFGO and customer SL. That memo emphasized the following red flags regarding HGLC:
