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How do they do it?

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XenaLives Member Level  Saturday, 07/28/12 01:02:57 PM
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How do they do it?

Just found this article posted by pdgood on the NIR board - It's about a single case but it also itemizes the methods used to pump and dump or otherwise manipulate a stock. We've all heard that there is "selling" or "buying" when we know very well that it's just "painting".


Hedge Fund Fraud + Pump and Dump = Portfolio Pumping
On February 28, 2011, in California, Canada, Pump and Dump, SEC, Scams, Securities Industry (general), by IW Dog

Expect to see more portfolio pumping scams. The potential of the scam is too great for scam artists to pass it by.

It was only a matter of time before someone put the two scams together. The U.S. Securities and Exchange Commission (SEC) believes it has found a scam that combined a hedge fund fraud with a pump and dump scheme to form what’s known as a “portfolio pumping” scheme. According to the SEC’s press release:

Washington, D.C., Feb. 24, 2011 – The Securities and Exchange Commission today charged two securities professionals, a hedge fund trader, and two firms involved in a scheme that manipulated several U.S. microcap stocks and generated more than $63 million in illicit proceeds through stock sales, commissions and sales credits.

The SEC alleges that Florian Homm of Spain and Todd M. Ficeto of Malibu, Calif., conducted the scheme through their Beverly Hills, Calif.-based broker-dealer Hunter World Markets Inc. (HWM) with the assistance of Homm’s close associate Colin Heatherington, a trader who lives in Canada. They brought microcap companies public through reverse mergers and manipulated upwards the stock prices of these thinly-traded stocks before selling their shares at inflated prices to eight offshore hedge funds controlled by Homm. Their manipulation of the stock prices allowed Homm to materially overstate by at least $440 million the hedge funds’ performance and net asset values (NAVs) in a fraudulent practice known as “portfolio pumping.”

“Ficeto and Homm repeatedly abused their positions as securities industry professionals to commit a wide-ranging, cross-border fraudulent scheme,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office. “By manipulating U.S. stocks through a U.S. broker-dealer, they defrauded investors in offshore hedge funds and reaped millions of dollars from their illicit activities.”

According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Homm along with Ficeto and Heatherington conducted the scheme from September 2005 to September 2007. Homm misused the assets of the hedge funds to allow him, Ficeto, Heatherington and HWM to manipulate upwards the prices of the U.S. microcap stocks in which the hedge funds held a position. They used a number of classic manipulative techniques such as placing matched orders, placing orders that marked the close or otherwise set the closing price for the day, and conducting wash sales. This manipulation enabled Ficeto, Homm and Heatherington to generate enormous profits through Ficeto’s and Homm’s co-ownership of HWM and their sale of the microcap stock shares to the hedge funds at inflated prices. Ficeto garnered further illicit profits through his control of Hunter Advisors, LLC, which directed the investment activities of a “fund of funds” that also participated in the stock manipulation.

The SEC’s complaint alleges that the principal traders at HWM and the London-based hedge funds manager Absolute Capital Management Holdings Limited (ACMH) exchanged hundreds of instant messages (IMs) that were recorded on a secret, alternate messaging system that allowed them to communicate freely without fear that their scheme would be detected by the SEC. As reflected in those secret IM messages, ACMH’s trader (typically Heatherington) under Homm’s direction would instruct Ficeto or HWM’s trader (Tony Ahn) acting under Ficeto’s direction to place matched orders, transactions that marked the close, or wash sales for the purpose of artificially raising or stabilizing the microcap stock prices.

Notice two things about this case. First, notice the international flavor. The alleged scamsters lived in the U.S., London, Canada, and Spain. Cooperation by scamsters in multiple countries happens more and more often. Savvy scamsters understand that crossing national borders makes detection of the scam and recovery of the proceeds more difficult. It also attracts investors who believe that the best investment opportunities lie overseas.

Next, notice the alleged misconduct tied to hedge fund investments. Hedge fund investors place complete trust in the investment manager who controls the fund. While that concentration of power in the hands of the manager allows him or her to move more quickly, it also poses a risk that any vigilant investor recognizes; a risk that smart investors pay attention to and investigate before investing.

Expect to see more portfolio pumping scams. The potential of the scam is too great for scam artists to pass it by. Take sensible precautions before entrusting your money to anyone, or before you make any alternative investments (hedge fund, limited partnership, etc.). The cost of not doing so could be your entire investment. Which of us can afford a 100 percent loss?


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