The U.S. Securities & Exchange Commission sued a New York lawyer on Monday for allegedly writing bogus opinion letters to help stock promoters improperly procure unrestricted stock certificates in three unregistered “penny” stock offerings.The lawsuit, filed in U.S. District Court in Manhattan on Monday, alleges that Stephen Czarnik, a partner at Cohen and Czarnik LLP, assisted three stock promoters in the abuse of a rule that allows accredited investors to acquire unrestricted shares from transfer agents in unregistered securities offerings that don’t exceed $1 million.
The SEC said Czarnik continues to serve as a “one-man ‘opinion-mill’ for unregistered penny stock offerings.” The regulator said Czarnik has authored at least 111 opinion letters for unregistered stock offerings, involving the transfer of more than 2.5 billion shares to penny stock promoters by 43 issuers.
Disclosure: No positions in any stocks mentioned and no relation to anyone mentioned. I have a terms of use.
sued Summit Advisory Partners, LLC and its managing partner, Robert Feeback, for directing and providing essential services in a scheme to “pump and dump” the stock of various penny stock companies in Texas. According to the complaint, the actions of Feeback and Summit allowed three stock promoters – Ryan Reynolds, Jason Wynn and Carlton Fleming – to purchase millions of shares of stock for pennies per share, hype the companies through promotional mailers and other advertising, and illicitly sell their shares to the public for millions of dollars in profits. The Commission alleges that because the shares were not registered, public investors were deprived of full and fair disclosures necessary to make an informed decision to purchase the stock.
The pump and dumps mentioned in the complaint are “My Vintage Baby, Inc., Alchemy Creative, Inc. and Beverage Creations, Inc.” I suggest reading the SEC’s full legal complaint (pdf). The best part of the complain is the SEC’s description of how the pump & dump allegedly worked:
In each of the MVBY, Alchemy, and BCI offerings, the Promoters applied the same basic “pump and dump” formula. The Promoters (a) organized a reverse merger of the company into a public shell, (b) purchased large blocks of common stock at pennies a share from the Issuer in a purported Rule 504 offering (in an effort to evade registration requirements and obtain a large percentage of the company’s stock without investing much of their own cash), (c) created initial trading volume for the stock by selling some of their shares to a tightly controlled group of friends, family, and affiliated brokers, (d) touted the company to the public through spam, television advertising, and mass mailers, and then (e) dumped their shares on the investing public without registration at prices grossly inflated by their promotion activity.
Furthermore, the SEC complain alleges that
The Promoters also touted the Issuers through a penny stock promotion website, www.thestockpic.com, then run by Ryan Reynolds’s sister. In addition, the Promoters helped create a flurry of press releases for each Issuer to release during the first few weeks of public trading.
The pump & dumps worked and the stock prices of all three stocks pumped soared:
BCI’s stock price more than doubled, from an intraday low of $.55 per share on January 30 to its February 21 close at $1.25 per share. Likewise, in the first five weeks of trading, Alchemy’s stock price soared almost 75%, from an intraday low of $1.90 per share on December 5, 2007 to an intraday high of $3.32 per share on January 11, 2008. My Vintage Baby’s stock price experienced even greater gains over its first five weeks of trading, rising from an intraday low of $.40 per share to an intraday high of $2.88 per share.
The scheme was also allegedly highly profitable:
“Fueled by the pump, the Promoters sold their purported 504 shares to the investing public for a total profit of over $20 million.
Disclosure: No positions in any stocks mentioned and no relation to anyone mentioned. I have a terms of use.
When writing about stock fraud and other illegal activities it is important to keep in mind that people’s reputations can be destroyed. Much of the time this is right and just punishment for wrongdoers who have violated the laws and harmed others. However, I am cognizant of the undue harm to a person’s reputation that can come to someone who is charged with a crime by the SEC or others when those charges are later dropped. I have in the past cut a section of an article in response to a request from someone who was named in a securities enforcement action but later dropped from that action. But just as I believe that I should not contribute to the undue sullying of the reputations of those who do not deserve it, I believe that those who violate the laws deserve to have their reputations destroyed.
So when I received an email from Nicholas Czuczko asking me to take down this past blog post about his loss in court to the SEC, my inclination was to not comply. Simply put, my reporting of the SEC’s litigation release on the matter was fair and accurate. Furthermore, a search of SEC litigation releases since that time did not reveal any additional information related to the case. So I am certain that my blog post did not libel Czuczko.
For those of you who are not familiar with the case, here is a quote from the SEC’s litigation release, highlighting the judgment of the US District Court for the Central District of California:
The Commission filed its complaint on August 1, 2006. On December 5, 2007, the court entered judgment enjoining Czuczko from future violations of the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder), as well as from future violations of the ownership disclosure provisions of the federal securities laws (Section 16(a) of the Securities Exchange Act and Rule 16a-3 thereunder). In addition, the court ordered Czuczko to disgorge $1,552,463 in ill-gotten gains plus $121,105.64 in prejudgment interest, imposed a $100,000 civil monetary penalty, and barred him from participating in penny stock offerings and from serving as an officer or director of a publicly traded company.
I suggest that interested readers also read the SEC’s original complaint (pdf) in the case and the press release announcing the SEC’s civil lawsuit against Czuczko. I have also found and uploaded the court’s final ruling in the case (pdf).
Below is the email I received from Czuczko through the contact form on this blog. Surprisingly enough, he did not accuse me of libel in asking me to remove the blog post. Instead, he cited copyright and trademark infringement.
To whom this will concern:
As a media organization, I’m sure you value your trademarks and copyrighted
material. Be advised I am requesting removal (as soon as possible) of
copyrighted and trademarked material under U.S. Law that I own from your site.
The webpage is:
Since there are no backlinks to the page, the material seems to have no
editorial value to your website.
I have documented that your website has been publishing this content without
permission since 2007.
Although this request is meant to be a friendly request, I am advising you that
I will file a Digital Millennium Copyright Act (DMCA) take-down notice, and all
other necessary steps to have this content removed from your website, if not
done in a timely manner. Thank you ahead of time and your timely removal of my
copyrighted and trademarked material from your website.
Sincerely,
Nicholas A. Czuczko
Upon reading the above letter I was flabbergasted; nothing in my blog post could be construed as violating copyright or trademark. My post was text and except for a brief quote from the SEC litigation release (for which Czuczko most certainly does not own the copyright), it was all in my own words. Needless to say, I will not be removing my original blog post.
——
Let me conclude by pointing out that in some cases, issuing a DMCA takedown notice can itself violate the law. I do not know if that would be the case here if Czuczko were to issue a DMCA takedown notice, but anyone who has considered issuing a DMCA takedown notice should consider whether this might apply to them. I suggest that the interested reader see the decision in Online Policy Group v. Diebold, Inc., 337 F.Supp.2d 1195 (N.D. Cal. 2004). Below the court cited the relevant section of the law:
17 U.S.C. ß 512(f) provides as follows:
Misrepresentations.–Any person who knowingly
materially misrepresents under this section–
(1) that material or activity is infringing, or
(2) that material or activity was removed or
disabled by mistake or misidentification,
shall be liable for any damages, including costs and
attorneys’ fees, incurred by the alleged infringer, by
any copyright owner or copyright owner’s
authorized licensee, or by a service provider, who
is injured by such misrepresentation, as the result
of the service provider relying upon such
misrepresentation in removing or disabling access
to the material or activity claimed to be infringing,
or in replacing the removed material or ceasing to
disable access to it.
The court stated (in a decision in favor of the plaintiffs, who had sued Diebold for using a DMCA takedown notice against them), “Thus, any person who sends a cease and desist letter with knowledge that claims of infringement are false may be liable for damages.”
Disclosure: No positions in any stocks mentioned and no relation to anyone mentioned. I have a terms of use.
Those of you who have followed me for a bit know I have a thing for Maxlife Fund Corp (OTC BB: MXFD). Today they filed a new 10-Q (the filing was late, too). There was nothing surprising in the filing. Sales remain at $0, the company’s book value continues to shrink, and the stock barely trades. I have to admit that now I am a bit mystified by this company. When the stock price first soared back in 2007, my belief was that the company was nothing more than a promotable shell for a pump & dump stock promotion. That a stock promoter named Itamar Cohen owned almost half the shares only reinforced my belief, and evidently the writer of Forbes Informer agreed with me; he wrote the following in early 2008:
A potentially controlling 46% of the shares belong to Itamar (Eddy) Cohen of Concord, Ont. He also owns four-year-old investor relations firm Maxwell Network Group, whose Web site proclaims, “We will work to quickly and dramatically increase your stock’s marketability and liquidity.” Not always with lasting results: Shares of recent clients Royal Spring Water and Red Rock Pictures Holdings have fallen 97% off their 2007 peaks. Cohen, 46, tells FORBES he’s not promoting MaxLife and “This is not a pump and dump.”
Cohen canceled his shares in August of 2009, which would support his earlier assertion that MaxLife wasn’t a pump & dump. But Maxlife is also not a real company (it has had no consistent revenues and remains in the ‘development stage’), despite having had two years since I started watching it to develop a real business. During that time the company has seen its book value fall to $284,411 (as of the most recent 10-Q) from $557,473 (as of the January 2008 10-QSB) and its accumulated deficit has increased from $29,616 to $1,697,564. It had actual revenues for only one or two quarters and the company’s total gross profit since inception in 2006 is $26,750 (on the sale of one life settlement policy).
Maybe Maxlife Fund Corp will become a real company with real revenues. Maybe not. But no matter what, this company is a great illustration of how there are many shell companies and barely functioning companies with no revenues trading on the OTC BB exchange. While there are plenty of outright scams and barely-legal pump & dumps, ‘investors’ in the poorly functioning or shell companies can do just as poorly. Considering Maxlife Fund Corp’s continuing insane valuation (over $100m) investors in the company will likely suffer no matter what happens to the company.
Disclosure: No positions. This blog has a terms of use.
The SEC just published a litigation release today, announcing a large settlement with Investools, a company that runs investment workshops. The release makes for some juicy reading. The SEC’s complaint is available online.
Investools agreed to a civil injunction and to pay a $3 million civil penalty. Drew and Miller agreed, respectively, to pay civil penalties of $380,000 and $130,000, and to be enjoined from violating the antifraud provisions of the federal securities laws. Drew and Miller additionally agreed to be enjoined, for five years, from receiving compensation for their participation in, among other related activities, the sale of classes, workshops, or seminars given to actual or prospective securities investors concerning securities trading. In settling the matter, Investools, Drew and Miller neither admitted nor denied the allegations in the Commission’s complaint.
Perhaps the funniest part is that while the Investools salesmen claimed they were great traders, they were allegedly poor traders who lost money.
The Commission’s complaint alleges that from 2004 to approximately June 2007 at Investools how-to-trade-securities workshops former Investools employees Drew and Miller misleadingly portrayed themselves as expert investors who made their living trading securities. They did so to mislead investors into believing that they too would make extraordinary profits trading securities if they purchased expensive Investools instructional courses and other products and followed Investools’ securities trading strategies. The complaint further alleges that in reality, neither Drew nor Miller made the trading profits they claimed. For example, in 2005 and 2006, while Drew was portraying himself as a successful investor, he had hundreds of thousands of dollars in net trading losses. In 2006 and 2007, while Miller was portraying himself as a successful investor, he had tens of thousands of dollars in net trading losses.
The SEC also states in the release that the investigation of Investools is ongoing.
Investools Ad
What is the moral of the story? Don’t trust anyone. If someone says they are a good trader and have a good trading system, ask for verification. If their results are audited, check out the auditor.
Disclosure: I have no positions and I have no connection to anyone involved. I have a disclosure policy.
The SEC has a habit of belatedly suing those that Andrew Left of Citron Research has criticized. This time the company is Home Solutions of America, a company that I have writtenabouta few times. I have written about Left many times before. Definitely make sure to see my “Can you trust the StockLemon” series, Part 1,Part 2,Part 3, Part 4.
The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company’s stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company’s public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.
The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots.
Unlike most SEC complaints, just about every executive at HSOA was named, and four of the lesser executives have already consented to the SEC’s findings, without acknowledging guilt of course
Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint.
Former Home Solutions CFO and COO Rick O’Brien agreed to pay a $130,000 penalty.
Former Fireline controller Stephen Gingrich agreed to pay a $25,000 penalty and to an administrative order barring him from practicing before the Commission as an accountant for at least three years.
Former Fireline COO Thomas Davis agreed to pay a $25,000 penalty and to pay disgorgement and interest of $32,850.
In addition, O’Brien, Gingrich and Davis each consented to final judgments permanently enjoining them from violating Sections 17(a)(2) and (3) of the Securities Act and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
Finally, Jeff Craft, a business partner of Marshall, consented to a final judgment permanently enjoining him from violating Rule 13b2-2 under the Exchange Act.
So it turns out that once again the short seller was right, the executives were (allegedly) crooked, and the SEC was slow.
Disclosure: I have no positions and I have no connection to anyone involved besides reading Left’s blog.
A merger-arbitrage ETF is coming to town, ticker MNA. It should start trading in a month or so. With expenses of 0.75%, this looks like a nice addition to portfolios.
IndexIQ, a pioneer in the area of hedge fund and inflation hedge ETFs, is preparing to launch another fund, the IQ ARB Merger Arbitrage ETF. The fund is scheduled to begin trading later this month under the clever ticker MNA. The proposed ETF will track the IQ ARB Merger Arbitrage Index, a strategy that involves investing in global companies for which there has been a public announcement of a takeover. The index also includes short exposure to global equities as a partial equity market hedge.
Okay, just needed to get this off my chest. I can’t stand the idiocy on all sides of the healthcare debate. Here are a small portion of the lies I have recently read about healthcare, with my refutations. I don’t link all the facts I’ve seen to refute these lies; look them up yourself.
1. The current bill will be revenue neutral. No it won’t. The assumptions in the bill are absurd. It will increase the deficit significantly.
2. Government death panels will ration care under proposed health bills. Under the bills most likely to pass, this is not the case. The death panels will be outsourced to the private insurers, who already have death panels. Sorry, but resources are not infinite. People will always die under every health system because their treatment is not cost effective. Someone will always make that decision.
3. Preventative care saves money. No, it usually doesn’t. Consider high blood pressure. Giving blood pressure medications to everyone who has high blood pressure reduces the number of heart attacks, but because the medications are given to many people who would never have had a heart attack, money is not saved. Preventative care is still usually cost effective, though, and that is what matters, saving life-years at as small a cost as possible.
4. We need single-payer healthcare (ie, government-funded care like Canada has). No we don’t. There are many different systems used in OECD countries, and plans (such as that of Switzerland) that do not have single-payer at all but require private health insurance have similar costs and outcomes to single-payer plans. Furthermore, there are many different hybrid systems, such as in France.
5. Surveys show people in America/England/Canada like their healthcare. This is irrelevant. 90% of people are fairly healthy; for them they will likely be satisfied anywhere. I for one have had the opportunity to see radiologists in both France and the United States. In both cases the diagnosis was quick and cheap. I paid maybe $300 out of pocket for multiple wrist x-rays and a consultation with a hand surgeon in the USA (and this is with a high-deductible health plan), and I was seen three days after calling for an appointment. In France I was seen in about the same time and paid maybe 40 Euros out of pocket for a consultation with a radiologist and a back x-ray.
6. A single-payer system will keep costs down. No, not really. Single payer or hybrid systems in England and France are having cost troubles just like here. The cost problems in the American system will not be cured by single-payer. See this great article in the New Yorker.
7. It is only because of greedy profiteering companies that our healthcare costs are so high. Actually, there are a decent number of health insurance companies and hospitals that are non-profits. Look at car insurance for a comparison: a non-profit mutual insurance company like Amica competes well with for-profit companies like Geico and Allstate, but the for-profit companies are on par in cost and service with the non-profits. With hospitals, for-profit hospitals often provide more charity care than non-profit hospitals.
8. The problems with our system can be fixed by reducing government interference and regulation. I am as much of a free-market ideologue as anyone (in fact, I consider myself to be an anarcho-capitalist rather than a libertarian, and I am definitely not a conservative), but there are problems with health insurance that are structural. The main problem is that many diseases are chronic, but health insurance is renewed annually. This is the pre-existing condition problem. One legitimate way around this problem is to force everyone to hold insurance. A free-market way around this problem would be for insurance companies to offer pre-existing condition insurance, separate from health insurance, such that if a person acquired a chronic disease during a 30-year term the insurance would pay for all future costs of the disease. This is a very risky kind of insurance to offer, though, and is unlikely to come into existence on its own. What is certain is that the present system of forcing insurance companies to cover pre-existing conditions, but only under certain conditions, is quite flawed.
9. Low American life expectancy (relative to other OECD countries) is proof that our health care system is flawed. I have blogged about this before. Life expectancy is driven by all sorts of things, and the US has higher violent death rates and accidental death rates than other countries. Furthermore, the quickest way to reduce life expectancy at birth is to have plenty of babies die. The US has more pre-term babies and babies to teen mothers than other OECD countries. Despite heroic neonatal ICU expenditures, many of those babies die. Rather than look at life expectancy, it makes more sense to compare disease rates and cure rates of diseases.
10. We should keep our current system of employer-provided health insurance. Even Obama tells people that the health care bills won’t take away their insurance. No matter what system you believe in, it makes no sense to tie health insurance to employment. This makes the labor force less mobile and reduces entrepreneurship.
11. Everybody has a right to good healthcare. Nobody should die because they can’t afford healthcare. These statements sound noble but when you apply them to other situations you will realize that they are absurd outside of a socialist utopia. People die every day in Detroit and Gary and Cleveland because they cannot afford to live in the suburbs and thus avoid crime. Tens of thousands of poor people die every year because they acquire disease from a poor diet or lead poisoning from living in a poorly kept-up building. Or they die of heat stroke because they cannot afford air conditioning or they die of diabetes or a heart attack because they do not have time to exercise due to working multiple jobs. The one thing that people consider most important is their health. As long as we are not living in a socialist utopia the rich will live longer and healthier lives because they can spend money on healthcare, personal care, safety, and quality food.
12. Single-payer healthcare will at least ensure access to decent basic care for the poor. Here in Michigan we have single-payer education: almost every school district receives the same amount of money from the state per capita. The poor students still get far worse education than the rich students, and for many school districts the education is truly horrendous.
13. Obamacare will be socialized medicine. Yes, it will be slightly more socialized than our current system, but Medicare, Medicaid, SCHIP, and the VA already spend a large chunk of our health dollars. In other words, our health are system is already quite socialized.
Stocks in the S&P 500 with the highest short interest as a percentage of their stock-market float have soared 13.2% since Sept. 2, well above the 6.9% gain for the S&P 500. These stocks include Advanced Micro Devices, MBIA, Wynn Resorts, Gannett and American International Group, all companies with significant business or balance-sheet risk.
See the rest of this article on the Wall Street Journal’s website. When highly-shorted stocks lead the market it is usually a sign of froth and panic buying. I believe that the current market action presages significant market declines. Of course, I am not a market speculator: I am a daytrader (see my day-trading blog ReaperTrades) for whom the direction of the market is not that important, so this will not affect my decisions significantly.
