On January 25, 2017, the Securities and Exchange Commission (“SEC”) instituted public administrative cease and desist proceedings pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Section 9(b) of the Investment Company Act of 1940 (“Investment Company Act”) (the “Order”) against New York based brokerage firm Windsor Street Capital LLP, formerly known as Meyers Associates LLP (“Meyers”), and its former anti-money laundering officer John D. Telfer (collectively , “Respondents”). These enforcement actions were brought on the accusation that Windsor failed to file suspicious activity reports (“SARS”) on approximately $24.6 million in dubious transactions, and thereby enabled two financiers to run a “pump and dump” scheme while earning approximately $493,000 in commissions from facilitating these illegal penny stock sales.
These financiers, Raymond H. Barton and William G. Goode, were separately charged by the SEC with a pump and dump scheme. Barton and Goode are accused of buying shares of sparsely traded shell companies for purported dietary supplement businesses, hyping them in “news” releases, and then dumping the shares at inflated prices.
A “pump and dump” scheme is a form of fraudulent market manipulation, in which a company (generally small, so called “microcap” companies) are promoted through false and misleading statements and mischaracterizations, in order to inflate or deflate the price of their stock. These false messages can be spread through social media platforms, chat rooms, newsletters, or telemarketer phone calls, and are generally perpetrated either by paid promoters or company insiders. Once these insiders “dump” their shares, the price of the stock typically falls, and investors lose money. The reverse of this strategy is when fraudsters purposely try to deflate the price of a stock through fraudulent actions, so as to buy it on the cheap, however this is a more unusual scenario.
The SEC alleges in the Order that Respondents should have known there was suspicious activity occurring in Barton and Goode accounts. These customers, among others who engaged in similarly illicit activity, would deposit large blocks of penny stock shares, heavily promote these shares, and then rapidly liquidate them and transfer the proceeds away from the firm. From June 2013 to the present, Respondents facilitated these penny stock transactions, without registering any of these sales with the SEC under Securities Act Section 5. Barton and Goode misrepresented that under Rule 144 of the Securities Act they were exempt from Section 5, because they were not affiliated with the stock issuers, and that they had held the securities in question for more than a year, and that the issuers of these securities were not shell companies.
According to the Order, these representations were either all or partly false, and therefore any sale of these penny stocks was required to be registered with the SEC, pursuant to Securities Act Section 5. The SEC alleges that if Respondents had made a reasonable inquiry of these penny stock sales they would have “cast doubt on the factual underpinnings for the customers’ reliance on Rule 144.” This matter will be scheduled for a public hearing before an administrative judge, who will decide what if any actions against Respondents are appropriate.
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