The FBI Manipulated Some Penny Stocks


The SEC announced securities fraud charges against a fairly random assortment of South Florida crooks today and the message I took away from the assorted complaints is that it'd be a lot of fun to work in the South Florida office of the FBI. Basically the job seems to consist of setting up fake hedge funds and then using them to con people into giving you money, which is pretty much my dream job, and also the dream job of a lot of South Florida crooks I guess. Only in the FBI version the people you're conning are themselves con men, and the money is illegal bribes, and then you arrest them, so it's okay.

Here, for instance, is the complaint against one Mark Balbirer:

On November 4, 2011, through an introduction by the cooperating witness, Balbirer met with the purported hedge fund manager (i.e., the undercover FBI agent) and the cooperating witness in Broward County, Florida, to discuss a possible stock transaction involving a company Balbirer planned to create purportedly to finance the production of films, So. Florida Film Fund. ...

The hedge fund manager told Balbirer he would be willing to have clients of the hedge fund purchase shares in the company so long as the manager was paid a kickback in return, and said he would first need a private placement memorandum from the company.

Various agreements were signed and countersigned, and then the big transaction:

On December 1, 2011, the FBI wired $50,000 from a controlled bank account to So. Florida Film Fund, as payment for the hedge fund's initial stock purchase in the private placement offering.

That same day, Balbirer sent the purported hedge fund manager, via express delivery, two So. Florida Film Fund checks totaling $15,000, representing the undisclosed 30 percent kickback for the $50,000 wire. One check was made payable to the hedge fund manager and the other to the firm for which the manager's relative purportedly worked.

So net the FBI is out $35,000, I guess, though in exchange now it owns a chunk of So. Florida Film Fund, which could be big. Anyway then there is this hilariously sad coda:

Over the following days, Balbirer attempted to reach the FBI agent and cooperating witness regarding additional funding for So. Florida Film Fund. Ultimately, however, there were no further transactions.

Most of the complaints end similarly; the saddest must be the complaint against Stephen Molinari and his company Nationwide Pharmassist, in which the FBI agent, on behalf of his fake hedge fund, actually signed a subscription agreement pursuant to which "the hedge fund would purchase 1,764,706 shares of Nationwide stock for $3 million," but then only paid $50,000 for an initial purchase, got $10,000 of it back in kickbacks, and then "Over the next several weeks, Molinari attempted to reach the agent and CW regarding additional funding for Nationwide. Ultimately, however, there were no further transactions." Poor Molinari! He had a contract! He should sue the FBI.

Balbirer and Molinari and some others were charged with fraud for paying (FBI agents posing as) corrupt fiduciaries - hedge fund or pension managers - to buy stock for their clients: you pay the fake hedge fund manager $10,000 for his own account, he spends $50,000 of client money buying your stock, everyone's happy. Except the clients.1

But my favorites are the slightly more complicated schemes, where the goal was not just to sell stock to the FBI agent's clients but also to boost a pump and dump scheme. Here's Jeffrey Schulz, CEO of Redfin Network:2

During their meeting, Schultz and the cooperating witness also discussed that the cooperating witness would "bring in the buying" that would attract "new players," and Schultz remarked that "buying begets buying." Schultz also claimed that people he knew would support the scheme, and that these people would help arrange the purchase of Redfin stock from the cooperating witness and his group when they wanted to sell.·

During the meeting, Schultz also told the cooperating witness he wanted to increase the liquidity of Redfin stock and get the share price "to that 10 cent mark."

In exchange for the cooperating witness's agreement that he and his purported buying group would purchase Redfin stock in the open market, Schultz agreed to provide the cooperating witness with an inducement payment of 25% of the amount that the cooperating witness paid for the Redfin stock.

And so they did:

On August 1, 2011, the FBI purchased a total of 225,000 shares of Redfin on the open market at prices per share ranging between 7.2 and 8.25 cents, for a total cost of approximately $17,557.

Also on August 1, 2011, Schultz met with the cooperating witness in Ft. Lauderdale and gave him $5,000 in cash toward the agreed-upon inducement payment. That
same day, Schultz sent the cooperating witness a text message that Redfin would issue a "good" press release the following morning.

On August 2, 2011, Redfin issued a press release forecasting strong growth of its products and services. Redfin issued this press release to create the false impression that the buying activity was spurred by positive news about Redfin.

Also on August 2, 2011, the FBI purchased a total of 20,000 shares of Redfin on the open market at 8.35 cents per share, for a total cost of approximately $1,670.

Some 233,000 shares traded that day - 213,000 of them not bought by the FBI! - at prices from 8 to 12 cents, well above recent non-FBI averages. Which at least suggests that the manipulation worked: that some people were actually suckered by the FBI's penny-stock manipulation into buying Redfin stock. I mean, they only lost $20,000,3 but, y'know, they probably weren't billionaires of high finance to begin with, what with their trading Redfin stock. They should sue the FBI too.

SEC Announces Charges Against Florida-Based Penny Stock Schemes [SEC]

1.Here, though, the clients are fake, so really everyone should be happy, but there's some conservation law of happiness so instead Balbirer, Molinari et al. are very sad.

2.By the way, the complaints are sketchy on detail but in basically all of them it seems like the FBI pitched the defendant on the fraud. You could think various things about that, including:

  • Entrapment?
  • "You can't fool an honest man."
  • Again: South Florida FBI agents have a lot of fun.

3.Since Redfin has lost some 95% of its value since the heady days of trading at 8-12 cents, and now trades at a less lofty 0.35 cents.



As Some Idiot Predicted Months Ago, Blue Apron Is Officially A Penny Stock

If even we could see this coming, how was it allowed to happen?

After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information: