SEC Charges Four Penny Stock Purchasers with Fraud
FOR IMMEDIATE RELEASE 2012-278
Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today charged four securities industry professionals with conducting a fraudulent penny stock scheme in which they illegally acquired more than one billion unregistered shares in microcap companies at deep discounts and then dumped them on the market for approximately $17 million in illicit profits while claiming bogus exemptions from the federal securities laws.
The SEC alleges that Danny Garber, Michael Manis, Kenneth Yellin, and Jordan Feinstein acquired shares at about 30 to 60 percent off the market price by misrepresenting to the penny stock companies that they intended to hold the shares for investment purposes rather than immediately re-selling them. Instead, they immediately sold the shares without registering them by purporting to rely on an exemption for transactions that are in compliance with certain types of state law exemptions. However, no such state law exemptions were applicable to their transactions. To create the appearance that the claimed exemption was valid, they created virtual corporate presences in Minnesota, Texas, and Delaware. The SEC also charged 12 entities that they operated in connection with the scheme.
According to the SEC’s complaint filed in federal court in Manhattan, Garber, Manis, Yellin, and Feinstein all live in the New York/New Jersey area and operated the scheme from 2007 to 2010. They each have previously worked in the securities industry either as registered representatives or providers of investment management or financial advisory services.
“These penny stock purchasers had enough securities industry experience to know that their penny stock trading was not exempt from the securities laws as they claimed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “They repeatedly violated the registration provisions and in the process also committed securities fraud. We will continue to fight microcap stock abuses that result in the unregistered distribution of shares without vital information about those companies being known to investors.”
The SEC’s complaint alleges that Garber, Manis, Yellin, Feinstein and the named entities violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC’s complaint seeks a final judgment, among other things, ordering all of the defendants to pay disgorgement, prejudgment interest and financial penalties; permanently enjoining all the defendants from future violations of the securities laws; and permanently enjoining all the defendants from participating in penny stock offerings.
The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Laura Yeu, Elzbieta Wraga, Haimavathi Marlier, Yitzchok Klug and Paul Gizzi of the New York Regional Office. Mr. Gizzi and Ms. Marlier will lead the SEC’s litigation.
54. Third, the Defendants retained attorneys to draft opinion letters stating that the transfer agents could issue the penny stock certificates without a restrictive legend, enabling an immediate resale to the public. The premise of these letters was incorrect, as discussed below, for a variety of reasons. Most of all, neither the Defendants nor the transactions had any connection to Minnesota, Texas, or Delaware. Moreover, the state law exemptions that the Defendants relied upon did not satisfy the requirements of Rule 504(b )(1 )(iii) and, with respect to Texas, the Defendants failed even to satisfy the Texas rules.
55. The opinion letters were based on the Defendants' false representations, which were reiterated from the subscription agreements. Specifically, the subscription agreements misstated that the purchaser had investment intent, would not use the shares in a distribution and, often, misstated the nominal purchaser's nexus to the state. For example, an attorney stated in an August 2008 opinion letter for Rio Sterling's purchase of 10 million shares pursuant to Rule 504(b)(1 )(iii) and Texas state law that: Rio Sterling will "not use the shares in a distribution," has "investment intent," has its "principal place of business .. . within the State of Texas and has business interests [other than this offering August 2008 opinion letter for Rio Sterling's purchase of 10 million shares pursuant to Rule 504(b)(1 )(iii) and Texas state law that: Rio Sterling will "not use the shares in a distribution," has "investment intent," has its "principal place of business .. . within the State ofTexas and has business interests [other than this offering] within the State ofTexas." All of these representations were false.
56. The attorney opinion letters were also misleading because they portrayed Perlinda and other entity Defendants as based in whatever state suited the transaction at hand. As an example, within a two-week period in 2007, and for the purpose of acquiring stock from various Penny Stock Companies, Manis and his attorney described Perlinda as "an accredited New York investor;" Garber signed a subscription agreement describing Perlinda as "an entity formed pursuant to the laws of Minnesota and maintain[ing] its principal place of business within the state of Minnesota;" an attorney opinion letter described Perlinda as a shareholder "formed or incorporated pursuant to the laws of the State of Minnesota with its principal place of business in the State of Minnesota;" and another attorney opinion letter from the same attorney described Perlinda as a shareholder "formed or incorporated pursuant to the laws of the State of Texas with its principal place of business in the State of Texas."
57. The Defendants knew that the opinion letters were provided to transfer agents in order to obtain un-legended stock certificates. (The Penny Stock Companies used transfer agents to, among other things, handle the issuance of stock certificates.) The Defendants also knew, or recklessly disregarded, that statements in the opinion letters were false when made.
58. Fourth, the Defendants caused the opinion letters to be submitted to the transfer agents in order to obtain unregistered shares. After reviewing the attorney opinion letters, which falsely stated that Rule 504(b )( l )(iii) was satisfied, the transfer agents issued stock certificates without restrictive legends, in the names of the nominal purchasing entity Defendants. In almost every instance, the shares were delivered to the individual Defendants at their homes or offices, or to their brokerage firms in New York or New Jersey, regardless ofthe supposed principal address of the nominal purchasing entity in Texas, Minnesota or Delaware.
59. Fifth, the Defendants frequently deposited the stock certificates into numerous brokerage accounts in the names of the New York entities OGP, Azure, Leonidas, Spartan and Perlinda.
60. These brokerage accounts were often in the name of a different entity than the one listed on the stock certificate (and named in the subscription agreement). For example, on more than 100 occasions, the subscription agreement was signed by Perlinda (at least 75 times in its guise as a Minnesota entity and at least 25 times in its guise as a Texas entity) and the shares were issued to Perlinda. On these occasions, the Defendants did not deposit Perlinda' s stock certificates into a Perlinda brokerage account or even into the account of a Minnesota or Texas entity. In nearly every instance, the shares issued to Perlinda were deposited directly into Azure's and Leonidas's accounts, both of which are New York corporations with no connection to Minnesota or Texas, not even a mail drop.
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