The U.S. Securities and Exchange Commission has filed a lawsuit against Cayman Islands-based Caledonian Bank and Caledonian Securities and three other broker dealers in Belize and Panama in connection with sham stock offerings and penny stock pump and dump schemes that allegedly netted the orchestrators of the fraud US$75 million.
Caledonian and its co-defendants Clearwater Securities Inc. and Legacy Global Markets SA in Belize and Verdmont Capital SA in Panama are accused of offering stocks for sale to investors in the U.S. without the required registration of the shares for public sale.
The SEC alleges that shares in four shell companies – Swingplane Ventures, Goff Corp., Nostra Energy and Xuamnii Inc. – were subject to bogus registration statements that purported the stock had been sold to public shareholders in Serbia, Mexico, Ireland, Norway, Panama and Jamaica.
The agency claims that the stock offerings were a sham and the shares remained in the control of the issuers and their affiliates. The restricted securities were then “passed off” as free-trading shares and sold to the public in the United States, the SEC said in a 39-page writ filed Friday, Feb. 6, in the U.S. District Court for the Southern District of New York.
The lawsuit states that by depositing the stock into brokerage accounts in the U.S. and selling it to the public, the defendants had violated Section 5 a) and c) of the Securities Act, given that no registration statements were in effect for their offer and sale.
“The defendants operated as affiliates, dealers, sales outlets and underwriters by offering and selling the penny stocks,” the SEC said.
“(T)hese violations occurred simultaneously with aggressive and extensive promotion campaigns for the penny stocks of those shell companies,” the SEC said. “The defendants’ unregistered sales of securities generated more than $75 million in proceeds on penny stocks that were virtually worthless and whose prices fell to their former token levels within months of the defendants’ sales.”
A spokesperson for Caledonian told the Cayman Compass, “We are aware of the allegations, and we are working through our counsel with the SEC in order to resolve the matter as quickly as possible.
“Caledonian always holds itself to a high standard, and we believe that will be demonstrated in the outcome of this matter.”
According to the writ, Caledonian sold $14.85 million of stock in Swingplane, $6.86 million in Goff Corp., $4.53 million of stock in Norstra and $12.1 million of XUMANII stock. All four companies had minimal or no assets and no operational activity and were heavily promoted by press releases and financial blog activity.
It is unclear whether and to what extent, other than fees, Caledonian Bank and Caledonian Securities benefited from the sale. The SEC seeks disgorgement, restitution, penalties and an injunction. The SEC action appears to stem from an earlier investigation by securities regulator Financial Industry Regulatory Authority, known as FINRA.
Industry publication The Deal released a news report on Nov. 13, 2013, stating that, based on documents it had received, FINRA had opened investigations into a number of offshore broker-dealers that have been linked to “timely stock trades during apparent pump and dump schemes,” involving the stock of companies promoted by Awesome Penny Stocks.
The broker-dealers named in the article included the five defendants as well as one stockbroker in Cyprus and two broker-dealers in Switzerland.
Awesome Penny Stocks is a stock promotion company linked to John Babikian. Mr. Babikian is a fugitive Montreal-based penny stock promoter who is being pursued by Canadian tax authorities for allegedly owing $15 million in back taxes.
In July 2014, Mr. Babikian settled SEC’s charges that he defrauded investors in coal mining company America West Resources Inc., another pump and dump scheme, and agreed to pay $3.73 million. Awesome Penny Stocks has since closed down.
The agency claims that the stock offerings were a sham and the shares remained in the control of the issuers and their affiliates.