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Penny-Stock Fraud Operators Mastered The Art Of Cross-Selling

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Today the Justice Department indicted nine people for operating "one of the largest international penny stock frauds and advance fee schemes in history" and as you'd expect from that description it was a very professional multinational operation.1 I mean, y'know, it was a penny-stock pump-and-dump scheme, one involving "distributing false press releases, announcing non-existent business ventures and fake mergers, posting false information on social media sites and bribing stock promoters and brokers," but it was a penny stock pump-and-dump scheme that made $120 million, so that's impressive.2

So, fine. Here you are having successfully executed a pump-and-dump scheme. You pumped, then you dumped. You have $120 million, other people have worthless stock. You could stop there and call yourself a pretty successful criminal. But then you get to thinking: the people you defrauded have something else, in addition to their worthless stock. They have something that is actually extremely valuable. They have: an abnormal willingness to piss away money on terrible ideas! They have a complete lack of common sense! And you know who they are!

So why not make some money off of that? A second-rate crook might think "well I'll sell them some more penny stocks" but of course they've just been burned. They're idiots, yes, but they're idiots who've been put off penny stocks for a while. They're still mad about the last penny stock. But what if there were some way to take advantage of exactly that fact?

To carry out the Advance Fee Scheme, the Advance Fee Defendants fraudulently solicited investors in penny stocks, including the Target Stocks (the "Advance Fee Victims"), to pay advance fees that purportedly would enable the Advance Fee Victims to sell their nearly worthless penny stocks at a profit. The Advance Fee Defendants invented non-existent businesses such as law firms, consulting agencies and other companies (the "Fake Companies") as part of the scheme to convince the Advance Fee Victims to pay a fee in advance of selling securities. ...

On other occasions, the Callers falsely claimed to be associated with a law firm that sought to sue the Target Stock Companies. The Callers falsely advised the Advance Fee Victims who sought to join the lawsuit that they needed first to pay a fee ("Lawsuit Fee").


  • 1. Defraud people
  • 2. Go to them and offer to sue the people who defrauded them to get their money back
  • 3. In exchange for a small up-front fee of course.3

What could possibly go wrong?

I feel like these guys would have done well in traditional financial services. They have all the most important skills: creativity, persistence, networking, and a single-minded desire to maximize the revenues from every transaction and every account. They don't perhaps rate five gold stars on the compliance scale, but, one, who does, and two, you'll notice that that last scheme doubles as a pretty good way of covering up their fraud. Why would you go to the police or a lawyer to complain about the penny-stock scam? You're already suing! You have to be, right? You paid all that money, anyway.

Nine Individuals Indicted For One Of The Largest International Penny Stock Frauds And Advance Fee Schemes In History [EDNY USAO and indictment (pdf)]

1.Multinational enough to involve the Mounties:

The indictment and arrests are the result of one of the largest international penny stock investigations ever conducted by the Department of Justice and the FBI and mark the unveiling of a multi-year, ongoing investigation, which included significant assistance from the Royal Canadian Mounted Police (RCMP), as well as from other U.S. law enforcement agencies and law enforcement authorities in England, as well as assistance from Thailand and China.

The defendants are a grab bag of Canadians and Americans, some living in China, Thailand, or Vietnam, often under fake names. From the indictment:

The defendant SANDY WINICK, also known as "Jerry Sarrano," "John Peter Smith," "Abdiel Vergara," "Robin Cheer," "Glen Forman," "Kyle Bendford" and "Stephen Thompson" ... was a Canadian citizen who had lived at various times in China, Thailand, Vietnam, Canada and the United States. ...

The defendant KOLT CURRY, also known as "Michael East," was a Canadian citizen who lived, at various times, in Thailand and Canada. ...

The defendant JOSEPH MANFREDONIA, also known as "Maurizio," "Richard," "Panama Joe" and "Guillermo Mendoza," was a United States citizen who lived in New Jersey.

2.In a bit more detail:

First, the defendants gained controlling interests of huge quantities of worthless stock in 11 public companies known in the industry as ‘file cabinet businesses’ – thinly traded companies with minimal assets and non-existent business operations, which in many cases were mere shell companies. They then ‘pumped up’ the share prices of the companies’ stock by engaging in fraudulent and illegal sales campaigns, which included distributing false press releases, announcing non-existent business ventures and fake mergers, posting false information on social media sites and bribing stock promoters and brokers.

These efforts fraudulently inflated share prices so that the pump and dump defendants could trade billions of shares of penny stocks that they owned and controlled at a profit, ultimately generating more than $120 million worth of fraudulent stock sales in accounts under their control.

Or, from the indictment: "The Penny Stock Defendants promoted the Target Stocks, themselves and through stock promoters, using email blasts, chat rooms, social networking sites, message boards, stock touting websites and newsletters."

3.Or, y'know, large:

Defendant Kolt Curry described the Advance Fee Scheme in the following way over an intercepted wire communication: “I would say that 100 percent of these stocks are like uh pink uh… just dumps . . . . so … ya know they’re totally, they’re like, so a lot of these guys are dying . . . . to get rid of this crap. . . . The money is good, it’s easy. It’s easy money. Definitely easy money, and it’s good money.” In fact, while bragging about his prowess as a fraudster, defendant Kolt Curry further stated, “I had a guy send me a million dollars over one phone call . . . . He actually sent me almost two million dollars over the period of the hit . . . . I guess in the industry they coin it as a smash and grab.” As for the group’s recent plans to open a call center in Brooklyn, New York, defendant Kolt Curry said, “I tell you what man . . . hitting the Americans would be like taking money from a baby.”


Appellate Court Willing to Entertain the Possibility that Citi Was Not Committing Fraud

I've had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it's nice to see others joining in the pastime, even if this sounds a little far-fetched: The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors. That piece of rank conjecture is from the Second Circuit's opinion on an appeal* of Judge Rakoff's rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here's DealBook: