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What began with an undercover F.B.I. agentâ€™s posing as a corrupt hedge fund manager led to the indictments of six people yesterday on charges of fraud in the shadowy world of penny stocks, federal prosecutors said.
A year-long investigation code-named Missed Information uncovered five separate stock schemes, according to the United States attorneyâ€™s office for the Southern District of Florida.
In each case, the undercover agent posed as a hedge fund manager at Fillmore Capital, a fake firm created by the F.B.I. in Palm Beach.
The unidentified agent got word out to the penny stock community that he was willing to buy stocks in struggling companies in return for bribes. Prosecutors said he accepted kickbacks from company insiders and stock promoters for buying stocks, some through an online brokerage account, to pump up prices.
The case was brought in conjunction with the Securities and Exchange Commission, which brought civil charges against seven defendants; six defendants were indicted by the United States attorney on criminal charges in the case, the S.E.C. said.
The charges exposed a murky underworld of penny stocks, a longtime staple of boiler rooms running illegal pump-and-dump schemes. Such shares trade over the counter, rather than on an exchange.
In each of the cases, company insiders or stock promoters tried to build support for their share prices by making a deal with the undercover hedge fund manager to buy large stakes of shares. In return, the insiders would pay the hedge fund manager a kickback, usually 25 to 35 percent of the total purchase price, the prosecutors said.
In each instance, the agent insisted he had to hide the transaction from his hedge fund clients â€” because of a â€śfiduciary obligationâ€ť to them, leading the parties to execute a fake consulting agreement with a fake company, Global Connect Services. â€śThis case illustrates the commissionâ€™s ability to work together with criminal authorities in creative ways to uncover fraudulent schemes and to protect our markets,â€ť said Linda Chatman Thomsen, director of the S.E.C.â€™s division of enforcement.
The five suspected penny-stock schemes were remarkably similar. In mid-April, prosecutors say, Virgil G. Williams, the 59-year-old chief executive of Asgard Holdings, a Nevada-based investment firm, contacted the agent posing as a hedge fund manager and asked him to buy Asgard Holdings shares.
Mr. Williams agreed to pay the agent 25 percent of the price of the transaction as a kickback, the prosecutors said. The next day, Mr. Williams contacted his broker to make sure that the broker accepted the appropriate bid in the marketplace, the complaint says.
The agent told Mr. Williams he had a fiduciary duty to his hedge fund requiring that he hide the kickback. As a result, the complaint charges, the agent and Mr. Williams agreed to set up a fake consulting agreement to hide the bribe.
But then the operation almost went awry. On April 24, the agent and the stock owner talked about the transaction and agreed to the terms, but the next day, the seller said he was uncomfortable with the deal and did not want to do anything illegal. Two days later, Mr. Williams rescinded the offer because he thought he was part of a sting operation, the complaint says.
In late July, Mr. Williams contacted the agent again to do the deal. In August, the agent used an E-Trade account to buy two million shares of Asgard Holdings at $0.015 a share. In the preceding month, only 172,00 shares had been traded.
A few days later, a Florida corporation believed to be controlled by Mr. Williams wired $7,500 to the agentâ€™s fake consulting firm.
In a separate scheme, according to the complaint, the agent entered into a deal with William L. Haynes, a 42-year-old Palm City, Fla., resident and stock promoter, to have the hedge fund buy shares in Environmental Service, a home environmental inspection company.
The agent bought one million shares of the company. Prosecutors said he had agreed to receive a kickback of 35 percent, which included a 2.5 percent kickback to Efrim Gjonbalaj, a colleague of Mr. Haynes who introduced the two.
After receiving a $532.68 payment, Mr. Gjonbalaj returned the money to the agent with a letter saying he did not recall participating in any dealing with the agent, prosecutors said.
Many of the schemes involved individuals with past regulatory infractions. Mr. Haynes was enjoined by the S.E.C. in 2001 in a fraud case associated with a $7 million stock offering and barred from associating with a broker- dealer. A defendant named in the civil suit, Vincent Cammarata, is on supervised release after serving time in federal prison on drug-related charges.
Other criminal defendants include Ron Williams, 57, of Miami; Mark Foglia, 52, of Hypoluxo, Fla., and Rex Morden, 57, of Henderson, Nev.
If convicted, Mr. Haynes faces a fine of $5 million and 25 years in jail while the others face 20 years in jail and potential fines of $250,000 to $500,000.
The other civil defendant is Sean Sheehan.
Lawyers for the defendants could not be reached for comment.
Source - The Shadowy World Of Penny Stocks