Franklin, Andrews, Kramer & Edelstein

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SEC target Brown protests "financial death sentence"

2011-06-01 13:34 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (U-AAGH) Asia Global Holdings Corp
Also Street Wire (U-GHTI) GH3 International Inc
by Mike Caswell
http://www.stockwatch.com/

Investors Hub operator Matthew Brown, recently ordered to forfeit $4.78-million to the U.S. government as part of his sentence for securities fraud and money laundering, has asked the judge to substantially reduce his penalty. (All figures are in U.S. dollars.) He says the figure amounts to a "lifetime financial death sentence" and exceeds by far his earnings from the scheme. He asks that the judge instead order him to forfeit his actual gain, which was $117,000.

The forfeiture order stems from a scheme in which Mr. Brown, 28, and others manipulated stocks with prearranged trades and posts on Investors Hub. The stocks included in the investigation were Ontario-based Playstar Corp. Mr. Brown, who faced a maximum of 50 years in jail, agreed to plead guilty to the charges in February, 2010, in return for a favourable sentencing recommendation.

Mr. Brown now says he received a surprise when he appeared for sentencing on May 18, 2011, before Delaware Judge Sue Robinson. As expected, she imposed a four-year jail term and ordered him serve three years of probation. The unexpected part, according to Mr. Brown, was a $4.78-million disgorgement order that came along with the jail term.

In a motion filed on May 27, 2011, Mr. Brown argues that the order is a violation of his plea agreement. As he sees it, he only agreed to forfeit gains that he realized from the scheme, which amounted to $117,000. The remainder of the penalty represents gains realized by others. Although he understood that the plea agreement was to his benefit, he did not know that he would be subject to a "monumental financial burden."

Mr. Brown further contends that the government failed to charge people that netted over $3-million from the scheme. "Instead of pursuing these individuals, [prosecutors] have sought to make Brown pay for everybody's gains, despite him having gained among the least amount of money," the motion reads. Mr. Brown says he is not disputing the fact that he must forfeit his illegal gains, he is only asking that the amount reflect the actual money he made.

The judge has not yet set a date to hear his motion.

Brown's indictment

Prosecutors initially indicted Mr. Brown, a resident of Aliso Viejo, Calif., on May 21, 2009, in the District of Delaware. They claimed that he and others dumped hundreds of millions of shares during illegal market manipulations in 2006 and 2007. While the overall investigation included four stocks, Mr. Brown only pleaded guilty to manipulating two companies.

The first was GH3 International Inc., a pink sheets listing that touted an anti-aging treatment. In 2006, he and others received hundreds of millions of GH3 shares through improper Rule 504 offerings, prosecutors claimed. When the manipulation began in December, 2006, they carried out several prearranged trades that were timed to coincide with boosterish news releases. The company claimed that it had revenue of $3-million in 2006, and that its revenue would exceed $6-million in 2007.

The stock, which was a thin trader prior to that month, went from 0.06 cent to 1.8 cents, and then quickly fell to 0.01 cent. Its daily volume went to nearly 300 million shares. (The U.S. Securities and Exchange Commission eventually halted the stock on Dec. 24, 2009, stating that publicly available information was questionable.)

The other manipulation was that of Asia Global Holdings Inc., a company that purportedly had the rights to the show "Who Wants to be a Millionaire" in China. According to prosecutors, Mr. Brown and his associates received millions of free-trading shares through improper Form S-8 offerings (which usually qualify shares issued to employees). They sold the stock while co-ordinating manipulative trades with misleading news.

The indictment listed several instant messages that Mr. Brown exchanged with one of his co-conspirators during the promotion. The messages explained how the men needed to control the price of the stock and "blow it up with news." They also described how the men were promoting the stock on-line. "I got the entire world on aagh, lol, willys room, panettas room, ihub," read an Aug. 14, 2006, communication.

Prosecutors claimed that Mr. Brown and others directed the buying and selling of 26.2 million Asia Global shares during the promotion. The stock, which had a 41-cent high in 2006, was last at 0.25 cent.

The charges that Mr. Brown pleaded guilty to also included an unusual interstate money transfer. Prosecutors claimed that he paid a driver $10,000 to take $146,000 in cash from California to Delaware. The indictment did not state the recipient, but documents filed in a related asset forfeiture case identified that person as Polish citizen Pawel Dynkowski, who was separately indicted for his role in the promotions.

(The asset forfeiture complaint, which sought several assets belonging to Mr. Dynkowski, described how a police officer in Texas happened upon the money. The officer stopped a rented car driven by a 25-year-old Florida man and, for reasons not stated, searched the car. After questioning the driver, police had him deliver the money to Mr. Dynkowski. They then searched Mr. Dynkowski's residence and discovered evidence of the market manipulations.)

While the case against Mr. Brown is mostly over, charges remain outstanding against some of his co-conspirators. These include Mr. Dynkowski, who police released after searching his home. They have not been able to find him since the market manipulation charges were filed, and consider him a fugitive. Two others, Marc Riviello and Jacob Canceli, both from California, have pleaded guilty but have not yet been sentenced. The final defendant, Florida resident Gerard D'Amaro, received three years in jail as well as a $1.49-million forfeiture order.

SEC case

In addition to the criminal charges, Mr. Brown and the others are facing a parallel civil suit from the U.S. Securities and Exchange Commission. The case, filed on May 21, 2009, claimed that the men made $6.2-million pumping and dumping Playstar, GH3 International, Asia Global and Xtreme Motorsports of California Inc. That case has been mostly inactive while the various criminal cases complete.

http://www.stockwatch.com/