If it’s too good to be true…it is. That is the case of the recent Securities and Exchange Commission (SEC) action against two individuals and their companies. Early this month, the SEC filed an emergency action and froze the assets of two individuals and their companies in a scheme that generated more than $165 million of illegal sales of stock in at least 50 microcap companies. The Commission’s investigators unraveled the multi-year scheme with the assistance of more than a dozen international regulators and sophisticated analysis of nearly 400 bank and brokerage accounts.
Whew! That was a lot of investigating. To what end? To stop U.K. citizen Roger Knox and his Swiss-based company Wintercap SA from continuing to help microcap securities holders evade federal securities laws that restrict sales by large shareholders. Knox, a 47-year-old citizen of the United Kingdom who resides in France, is the founder and CEO of Wintercap S.A. He was allegedly aided by Michael Gastauer, a 43-year-old German citizen who resides in Switzerland. Gastauer is the founder and CEO of the various Delaware corporations alleged to be a part of the scheme.
Through a series of maneuvers, Knox helped “control” persons conceal their identities which enabled them to secretly dump their stock – often millions of shares at a time—into the securities markets and perpetrate a fraud on investors. The stock sales “appeared” as ordinary sales by ordinary investors, when the reality was that these were sales by control persons, such as corporate insiders who were dumping their holdings into the market in violation of the laws governing such sales.
“Anonymous” gets caught
The SEC complaint charges that Knox and Wintercap, formerly Silverton SA, helped sellers conceal their stock ownership and provided anonymous access to brokerage accounts to sell the shares in the U.S. market. For three specific issuers detailed in the complaint, Knox sold the stocks when their price and trading volume were inflated by promotional campaigns. Gastauer, allegedly aided and abetted the fraud by establishing several U.S. corporations and allowing Knox to use those bank accounts to disburse the proceeds of his illegal stock sales.
How to determine an investment is too good to be true?
Look for unseemly returns and unusual trading volume says Paul Levenson, Director of the SEC’s Boston Regional Office, who adds “The allegations here should put investors on guard that spikes in trading volume may be a mirage produced by insiders secretly dumping their shares.
Raquel Fox, Director of the sec’s Office of International Affairs, concurs: “Fraudsters must not be allowed to profit at the expense of retail investors by concealing the true nature of their interests and activities and trading through foreign countries.” She credits the assistance of the SEC’s foreign counterparts with enabling the Commission to act quickly to secure illegal profits abroad with the goal of returning assets to investors.”
The SEC’s complaint, filed in federal district court in Boston, charges Knox and Wintercap with violating the antifraud and registration provisions of the federal securities laws and with acting as unregistered broker-dealers. It charges Gastauer and his entities with aiding and abetting Knox’s violations of the antifraud and registration provisions. The complaint also names as relief defendants two family members of Gastauer and a U.K. entity Gastauer controlled.
In addition to the asset freeze and other temporary relief obtained yesterday, the SEC seeks permanent injunctions, disgorgement of allegedly ill-gotten gains plus interest, penalties, and penny stock bars.
In a parallel criminal case, the U.S. Attorney’s Office for the District of Massachusetts today announced criminal charges against Knox.
Was compliance a consideration?
Not for Knox and Gastauer, two rogue fraudsters helping others commit greater fraud for profit. But for the cooperation of a witness cooperating with the Federal Bureau of Investigation, Knox’s fraudulent enterprise likely would have remained undetected. In June 2018, a witness recorded a conversation with Knox in which he described his business model, including, among other things, his:
Nonetheless, he was caught. And there will be a cost to the entities, individuals, and others who participated and benefited from the fraud. Which is often the case. Frauds do not often last forever. At some point, someone will spill the beans and bring down the house of cards. Are the risk and exposure worth it? Hard to say when it comes to a costly bad end and compliance can be so must cheaper. That’s where Patrina comes in. We’ve built our business based on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.