Compiled and written by Stacey Doyle
All investments are risky, meaning thorough research is crucial for wise decisions. Microcap stocks offer potentially high appreciation with the benefit of increased diversification. An analysis is more critical with these investments due to generally limited information about microcaps.
Focusing your analysis on the wrong microcaps could of course lead to costly pitfalls. The lowdown on recent penny stock SEC violations reveals what can happen when microcaps go amuck.
Artificial Inflation and Failure to Disclose the Sale
Abraham “Avi” Mirman, 53, was a registered representative and head of the Investment Banking Department at New York broker-dealer John Thomas Financial from 2012 to 2013.
The Commission’s January 2023complaint alleged, among other things, that in August and September of 2012, Mirman worked with another person to artificially inflate the price of Liberty Silver Corp. common stock while failing to disclose the sale of 6,600,000 shares of the stock to JTF’s retail customers.
The final judgment ordered Mirman to pay a disgorgement of $278,519.45, a prejudgment interest of $127,006.15, and a civil penalty of $125,000.
Fraud and Church Bond Securities Values
Steven E. Larson, 73, was associated with Oakbridge Financial Services from 2011 until 2016. He was also an investment adviser associated with Private Label Money Management, from 2016 to 2018.
A Consent Order dated Jan. 30, 2023 entered by the Missouri Commissioner of Securities alleges Larson over-concentrated reverse convertibles in customer accounts, engaged in fraudulent activity by providing misleading and fraudulent statements to customers on church bond securities values, and failed to supervise a Missouri-registered agent subject to his supervision.
The Consent Order permanently enjoins and refrains Larson from offering and selling securities in Missouri. Larson is also barred from registering as an agent, broker-dealer, investment adviser, or investment adviser representative in the state.
The Cost of Discount Penny Stocks
Justin W. Keener, 48, formerly resided in Miami Beach, Florida, and did business under JMJ Financial. From 2015 to 2018, Keener bought and sold billions of shares of microcap securities with millions of dollars in profits. However, Keener needed to register as a dealer and allegedly did not do so.
The final judgment of the United States District Court of the Southern District of Florida dated Jan. 10 permanently enjoined Keener from directly or indirectly using the mail or other means of interstate commerce for the purchase and sale of securities unless he registers as a dealer with the SEC or is associated with a registered broker-dealer.
Losing at the Shell Game
The complaint further alleges Keener’s business model was buying convertible notes from penny stock issues and converting them into newly issued stock shares at deep discounts against the prevailing market price, then selling the discounted shares for a significant profit. Accordingly, the SEC determined that public administrative proceedings be instituted to determine the truth of these allegations and what, if any, remedial action is appropriate.
Paul Hess, 66, owned Braintree Mobiletech and Braintree Hill Ventures and was associated with a dually-registered adviser and broker-dealer from 2001 to 2010.
The SEC complaint dated Jan. 12 alleged Hess schemed to raise money putatively for start-up tech companies and acted as an unregistered broker-dealer, promoting, selling, and fraudulently offering securities. Further allegations include the largest scheme involving Mozido, where Hess and others from 2010 to 2017 used shell companies to raise over $49 million from investors with the promise the notes were a way to invest in Mozido. The complaint alleged Hess and other defendants gained over $55 million selling unregistered securities.
Additionally, the SEC complaint alleged Hess and other Massachusetts matter defendants raised over $12.9 million from investors for Defendant Joshua Cabrera’s start-up tech company, Medsis International, Inc., originally located in Panama. Further allegations include Hess and Cabrera making material misrepresentations and misleading statements to investors about revenue, business operations, contract values, and business partnerships and relationships between 2015 and 2020.
The final judgment enjoined Hess from directly or indirectly participating in the issuance, purchase, offer, or sale of any security but did not prevent him from purchasing or selling securities for his personal accounts.
For Whom the Bell Tolls
Matthew A. Bell, 52, currently residing in Texas, was accused in an SEC complaint dated Jan. 17 of engaging in a scheme to inflate the price of CodeSmart Holdings stock to profit from his brokerage customers and selling unregistered securities. Bell was a registered representative and investment adviser during 2013 and the time in issue at Alamo Investment Advisors, WFG Investments and other registered broker-dealers.
The final judgment entered in December 2022 permanently enjoined him from future violations. In October 2014, Bell pled guilty to conspiracy to commit securities fraud and conspiracy to commit mail fraud and wire fraud before the United States District Court for the Eastern District of New York but has not yet been sentenced.
Fraud and Misrepresentation = Probation and Restitution
Thomas Garnette Martin, Jr., 69, of North Carolina, was the president and owner of Carolina Financial Investments. In January Martin pled guilty to one count of securities fraud beginning in 2013 that included defrauding investors in connection with the sale of securities in Dynamic Equity Management Fund (DEMF), a Delaware limited partnership and investment fund he formed and managed. By misrepresenting DEMF’s past monthly and annual performance and what he did with the funds, Martin induced investors to invest and leave their money invested.
Martin was sentenced to probation for 36 months and ordered to make restitution of $136,561. In addition, administrative proceedings are to be instituted to determine the truth of specific allegations and whether Martin should be barred from association with investment advisers, brokers, dealers, and the like.
Research and Insider Trading
Randy Herschaft, 52, of New Jersey, worked as a researcher and never held a securities license or was registered by the Commission. He was accused of insider trading in Asta Funding securities on Jan. 30 based on nonpublic information he allegedly misappropriated from his close friend, a senior exec at Asta.
Herschaft was ordered to pay a disgorgement of $35,187.66, prejudgment interest of $3,429.72, and a civil money penalty of $35,187.66 to the SEC. He must also cease and desist from committing or causing any future violations.
The Less-Than-Sunny Side of Penny Stocks
Satyajeet “Sunny” Mitra, 65, of Georgia, engaged in the fraudulent offer and sale of securities to retail investors without registering to operate as a broker-dealer from 2014 to 2016. During this time, he advertised, obtained account documentation from investors, met with them, made recommendations, and received transaction-based compensation, according to a Feb. 6 SEC complaint. Additionally, a Florida Order found Mitra engaged in fraud by failing to inform investors about REIT securities’ non-traded and illiquid nature.
Mitra is barred from association with any investment adviser, municipal advisor, dealer, broker, municipal securities dealer, transfer agent, or nationally recognized statistical rating organization. He is also barred from participating in any offering of a penny stock.
The Less-Than-Sunny Side of Penny Stocks
Michael J. Assenza, a/k/a “Michael Grimaldi,” was associated with Social Voucher.com, and Stocket. An SEC Order dated Feb. 6 found that between 2013 and 2018, Assenza was also “Director of Technology” of Social Voucher and Stocket and was licensed and associated as a registered representative with several registered broker-dealers. He allegedly conspired with others to defraud hundreds of investors out of around $20.8 million from selling Stocket and Social Voucher stock.
Assenza pled guilty to one count of conspiracy to commit wire fraud and admitted while working for Social Voucher and Stocket that he personally solicited, offered, and sold shares of both companies. He also admitted that a company he controlled scored almost $2.1 million in investor funds from Social Voucher and Stocket.
As a result, on Feb. 6 Assenza was sentenced by the federal district court to 53 months in prison and ordered to pay restitution of $20.8 million for securities fraud. He is also barred from association with any broker dealers, and from participating in any offering of a penny stock.
These cases reveal the importance of doing your research. Stay tuned for more eye-opening updates.