If you’re thinking about running a (fraudulent) promotional campaign to artificially boost stock prices before you dump the shares, think again!

Just last week, the Securities and Exchange Commission (SEC) announced overseas stock manipulator Joe Yiu Cheung has agreed to pay the Commission nearly $800,000 and to a permanent bar from involvement in penny stocks. At issue is Cheung’s hiding of his significant stake in a small oil & gas company while secretly funding a fraudulent promotional campaign to artificially boost the company’s stock price before he dumped his shares.
According to Andrew Calmari, Director of the SEC’s New York Regional Office, SEC enforcement investigators meticulously peeled back layers of shell companies and nominee owners to uncover that Cheung held a majority position in United American Petroleum Corp. (UAPC). To perpetuate his fraud and conceal his ownership of UAPC, the SEC says Cheung incorporated an elaborate network of overseas bank and brokerage accounts (mostly in bank secrecy jurisdictions). Moreover, he failed to file required reports that would have publicly disclosed his growing stake in UAPC. Instead, Cheung paid to distribute promotional materials to 2.2 million U.S. residents to disseminate rosy falsehoods about UAPC’s operations and prospects. And as the promotions spiked investor interest and the stock price rose, Cheung secretly ordered his foreign brokers to dump his shares.

“Investors are often attracted to microcap companies,” Calmari says. ” In this case, we worked with numerous foreign authorities to get the evidence we needed to expose Cheung as the man behind false promotional materials and hidden stock transactions.”

Following the money trail

Cheung, who lives in Canada and Hong Kong and also goes by Dylon de lu Zhang, violated a goodly part of the SEC alphanumeric rules and regulations, including Sections 17(a)(1) and (3) of the Securities Act of 1933, Sections 10(b), 13(d), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5(a) and (c), 13d-1, 13d-2, 16a-2, and 16a-3. Without admitting or denying…anything, Cheung agreed to cease and desist from doing more bad things and to pay $542,498.33 in disgorgement, $94,131.66 in interest and a $150,000 penalty. Additionally, he agreed to a penny stock bar and a 10-year officer-and-director bar.

Among the numerous “bad boy” initiatives Cheung undertook was the financing of promotional campaigns, including the mailing of two, 16-page brochures to 2.2 million US residents filled with “material misstatements about UAPC operations and unrealistic projections about its stock price. The goal? To induce investors to purchase UAPC stock.
The marketing false statements and projections held that:

• UAPC used “one of EXXON S greatest oil finding secrets EVER;”
• The company “already has a potential oil strike worth $440 million dollars;
• “UAPC’s market cap is a tiny $56.3 million which could easily hit $1 billion;” and
• UAPC was “A PRIME ACQUISITION CANDIDATE for such neighbors as ConocoPhillips, EOG Resources, and others.”

Cheung hid his financing of the promotional campaign through a chain of wires from Switzerland through Hong Kong and Canada to a marketing firm in the United States, with none of the wire transfers bearing his name. And while he was financing the UAPC promotions, he was dumping UAPC shares.

Financial twists and turns

Break out your breadcrumbs and track this trail of funds and marketing:

1. February and March 2012 — Cheung places orders with a Swiss wealth administration firm to dump $1.4 million worth of UAPC shares he held in the name of Koryak Investments, Ltd.
2. March 28, 2012 — Cheung transfers $850,000 of these proceeds to another of his accounts held in the name of Yaksha.
3. March 30, 2012 — Cheung transfers $510,000 from Yaksha to a purported marketing entity in Hong Kong that Cheung and a relative financed.
4. Later that same day, (March 30, 2012) — the Hong Kong marketing firm forwards $500,000 to a firm in Vancouver, Canada, that supervised the copywriters and graphic designers who created the UAPC email blasts and mailers.
5. April 3, 2012 — the Vancouver firm wires $400,000 to a second marketing firm based in California that spends $385,696 purchasing lists of the marketing targets for the campaign and arranges for the actual distribution of the promotional materials during the last three weeks of April.

The promotional campaign artificially inflated UAPC’s stock price from $.35 per share on January 4, 2012, to a high of $1.49 on April 10, 2012. The inflated price sat above $1.20 through May 14, 2012, and at or above $1.00 from May 17 to June 25, 2012, with one exception in each period. During the six-month promotional campaign, the volume jumped to a daily average of 232,464 shares from an average daily volume of 5,178 for the preceding six months.

Cheung’s take: Approximately $542,498.
SEC’s take: $800,000 in payback, interest, and penalties.

To snag this culprit, the SEC investigators worked with the Financial Industry Regulatory Authority, Swiss Financial Market Supervisory Authority, Hong Kong Securities and Futures Commission, Liechtenstein Financial Market Authority, Guernsey Financial Services Commission, British Columbia Securities Commission, Québec Autorité des Marchés Financier, Ontario Securities Commission, Turks and Caicos Islands Financial Services Commission, and Cayman Islands Monetary Authority. Whew. Quite a bit of the global regulatory alphabet!

Caveat emptor?

Every investment carries a certain amount of risk. But that’s not what keeps regulators up at night. Rather, it’s bad actors acting badly. That’s why compliance matters. And that’s what keeps compliance professionals like you up at night. So, let’s talk (212-233-1155). Ask about Patrina’s comprehensive, 8-module compliance solution and compliant data capture, file storage, and records archiving specifically designed for the financial services community. We’ve got you covered.