Nine months after the U.S. Securities and Exchange Commission negotiated a settlement with the liquidators of failed Caymanian bank Caledonian, a U.S. court has issued default judgments against the other defendants in the case.
Judge William H. Pauley III of the U.S. District Court for the Southern District of New York entered final default judgments against Belize-based Clear Water Securities Inc. and Legacy Global Markets S.A., as well as Panama-based Verdmont Capital S.A.
The SEC had charged the brokerage firms with conducting unregistered sales of penny stock securities. The worthless stocks were hyped with fake press releases and announcements causing their share price to rise and then collapse. The pump-and-dump schemes allegedly netted the perpetrators of the fraud more than $75 million in illegal sales proceeds.
The final judgment orders Verdmont to pay $19.2 million in disgorgement and interest and a penalty in the same amount. Clear Water and Legacy Global have to pay $17.3 million and $14.9 million, respectively, in disgorgement, interest and civil penalties. The companies are also permanently barred from penny stock trades.
In a separate order, the court directed certain funds that were the subject of the SEC’s prior asset freeze to be turned over to the SEC.
Caledonian failed in 2015 when the asset freeze of the bank’s U.S. assets caused a run on the bank.
Following a settlement between the liquidators of Caledonian Bank and Caledonian Securities, the U.S. court last year found the Caledonian entities jointly and severally liable in the amount of $25 million, but payment was waived because of the liquidation proceedings filed in the U.S. and the Cayman Islands.
The $25 million disgorgement represented a compromise between the $1.4 million that Caledonian received in commissions in the alleged fraudulent pump-and-dump schemes and the $38 million its clients, who perpetrated the fraud, obtained in net proceeds. Clear Water Securities and Legacy Global Markets, two of the three defendant entities now found guilty, were controlled by Canadian-American Gregg Mulholland, according to the SEC.
In a separate case in May 2016, Mulholland pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. publicly traded companies and then laundering more than $250 million in fraudulent proceeds through at least five offshore law firms. He was sentenced to 12 years in prison earlier this year.
Phil Kueber, who also allegedly controlled Clear Water Securities, was arrested for his role in the scheme. He too pleaded guilty and awaits sentencing.
In one of the penny stock deals, involving Cynk Technology Corp, Mulholland allegedly secretly controlled all of the free trading shares through nominees. The company, which was listed on the publicly traded OTC Markets, saw its share price rise from 10 cents to $13.90 before it collapsed. This gave it a market valuation of $6 billion even though the company had no revenue or assets.
In pushing for the default judgments, the U.S securities regulator relied in part on the written witness testimony of one of Mulholland’s collaborators.
The witness, whose name was not revealed because of his involvement in other trials, said he was responsible for the deposition of shares with Caledonian Securities. He claimed that the Cayman-based broker had told him that the Mulholland group was “far and away” their biggest client and depicted Caledonian Securities’ due diligence in connection with the stock he deposited as “either ridiculous or non-existent.”
He said during his time with the group that Mulholland and his associates were involved in approximately 42 pump-and-dump schemes and he was personally involved in preparing the paperwork for 28 stock frauds.
The third defendant entity, Panamanian broker Verdmont, filed for liquidation in 2016 and is no longer operating.