Penny Stock Fraud – Why Penny Stock Email Promotions Are Bad For You

SEC Logo
SEC cracks down on microcap securities fraud.

Like me, you may get bombarded with long email ads for some penny stock.  They always tout how the stock is about to break out from $0.01/share to $0.05 or $10.00/share.

Did you ever get the sense that these may be scams.  Gadzooks!  Say it ain’t so!

The SEC today announced fraud charges and an asset freeze against the promoter of AwesomePennyStocks.com, a frequent trash dumper into my email accounts.

It charges that John Babikian used his sites for a “scalping” scam with the stock of America West Resources Inc. (AWSRQ).  AWSRQ was low priced and thinly traded.  Babikian fired off about 700,000 emails touting the stock.  However, he failed to disclose that he owned 1.4 million shares of AWSRQ and was ready to sell them through a Swiss bank.  The stock took off, and he made “ill-gotten” gains of more than $1.9 million.

The Babikian case is another example of the SEC’s focus on microcap stock fraud.

“The Enforcement Division, including its Microcap Fraud Task Force, is intensely focused on the scourge of microcap fraud and is aggressively working to root out microcap fraudsters who make their living by preying on unwitting investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

Proving that the SEC has some teeth when it needs them,

The court’s order, among other things, freezes Babikian’s assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery.  Pursuant to the order, the SEC has taken immediate action to freeze Babikian’s U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.

 

Bitcoin Ban – U.S. Senator Demands Regulators Ban Bitcoin

Bitcoin ban urged by Sen. Manchin, previously best known for a compaign commercial where he used a shotgun to shoot a copy of the Cap and Trade bill.

Senator Joe Manchin (D-WV) sent a letter to federal regulators demanding a ban on Bitcoin.

Should we be surprised?  Well, as one particularly brilliant commentator stated:

“There has been a lot of news lately about the efforts of a variety of U.S. regulators to understand Bitcoin, and these regulators are not in the business of exempting financial products that compete with government issued currencies or act outside of the established financial regulatory environment. . .

As a result of all of the above, there is substantial expense and risk in using and accepting Bitcoins, as there should be a risk premium attached due to the very real possibility that the U.S. and other governments could shut them down.”

Other countries, such as China, India, Japan and Russia have either moved to ban or restrict Bitcoin or have threatened to do so.

In addition, Bitcoin has been under review in the U.S. as well.

And now, we have a U.S. Senator urging an outright ban because Bitcoin is unregulated (which is arguable, but for reasons we don’t need to get into here).

As Sen. You-Kids-Get-Off-My-Lawn said, Bitcoin is:

“highly unstable and disruptive to our economy. For the reasons outlined below, I urge regulators to take appropriate action to limit the abilities of this highly unstable currency.”

He is also using the criminal use of Bitcoin as an excuse.  He discussed the “deflationary nature” of Bitcoin, technical problems around Mt. Gox (which I cannot believe he understands in the least) and volatility as other reasons to ban it.  He even trotted out the Consumer Price Index!

He also had to include a softball to “hard-working Americans” in his letter in his final hit:

“The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary of its use.  The Senate Homeland Security and Governmental Affairs Committee issued a report just this month stating, “There is widespread concern about the Bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation.” Before the U.S. gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.”

If the “clear ends of Bitcoin” are for illicit activities, why not put the risk of deflationary pressures and volatility on the persons engaging in such activities?  Whatever.

Bitcoin’s pricing will smooth out once there is greater acceptance in the marketplace.  It should not surprise anyone that a relatively new currency experiences volatility or that a new technology experiences some bugs.  The early adopters will absorb the early losses, and changes addressing the early problems may generate the trust that allows for widespread usage.

However, as I have said from the beginning, the risk of Bitcoin lies not with technology or the vagaries of market pricing.  The risk of Bitcoin lies with regulation.  The U.S. government is not in the business of allowing non-government sanctioned currencies or payment channels to exist.

Sen. Marlboro Man gets tough with a pile of paper.

 

SEC Due Diligence Alert Released For Investment Advisers

SEC due diligence alert regarding processes for selecting alternative investments is released.



Link: SEC Risk Alert – Investment Advisor Due Diligence Processes for Selecting Alternative Investment and their Respective Managers

The SEC has been reviewing due diligence processes for investment advisers for alternative investments and is getting concerned. After all, assets under management, or “AUM” in industry talk, reached $6.5 trillion for alternative investments. The SEC issued an alert reminding advisers to perform due dilience to determine whether the investment:

  • Meets the clients’ investment needs; and
  • Is consistent with disclosed investment strategies.

According to the SEC, “alternative investments” include hedge funds, private equity, venture capital, real estate and funds of private funds.

The SEC conducted examinations of registered advisers and noted the following trends in alternative investment due diligence to identify risk indicators:

  1. Advisers are seekeing more information directly from alternative investment managers
  2. Advisers are using third parties to supplement their analyses and verify data
  3. Advisers are performing additional quantitative analysis of performance returns and risk measures
  4. Advisers are expanding their due diligence processes and focus areas

The SEC then used the alert to remind advisers about their obligations to adopt and review their compliance programs and codes of ethics.

 

SEC Logo
SEC Office of Compliance Inspections and Examinations issues risk alert for due diligence processes by investment advisers

 

 

 

 

 

 

 

First Public Bitcoin Company, An Ecommerce Reseller Of Consumer Products, Goes Public Using A Reverse Merger

First Bitcoin public company (sort of) went public through reverse merger.

Charles Allen, CEO and CFO, of Bitcoin Shop recently went on CNBC to discuss why a reverse merger was the best choice for his company to go public. His reasons included:

  • Publicity from being public
  • Transparency
  • Time to market, merger done in three weeks
  • They wanted to be the first public Bitcoin company
  • Ability to raise funds

For this post, let’s overlook my opinion that reverse mergers are generally a terrible idea. You never know what you are getting into, such as Bitcoin Shop’s recent extensive revisions of two years worth of financial disclosures following the notice of nonreliance on previously issued financial statements and audit reports.

Logo - Bitcoin
Bitcoin Shop goes public through a reverse merger transaction.

There are private companies that not only can navigate the process, but have the systems set up to successfully transition to being a public company. However, they are few and far between. In addition, the fundraising seldom materializes.  To Bitcoin Shop’s credit, they did raise about $1.8 million in a private placement related to the reverse merger.

As to Bitcoin Shop’s Bitcoin-related business, as Mr. Allen described on CNBC, it basically is an affiliate seller of products for other sites. It lists products and permits payment by Bitcoin. It has a goal to be a leading virtual currencly marektplace, but it is not a “Bitcoin” company. It markets stuff sold by others and processes payment and takes fees. It currently has a single vendor, but it plans more.

Bitcoin Shop may be able to earn revenue through markups on products and processing fees and undercut credit and debit card processing fees. Time will tell if this is a viable strategy. But, for all of the technical discussion in its investor presentation and SEC filing discussion the transition, Bitcoin Shop is an ecommerce company that lists products for sale by another vendor and processes payment denominated in Bitcoin.

There is nothing wrong with that, and I would not be surprised to see many more follow suit. However, I am reminded of seemingly hundreds of companies with little relationship to technology slap a “.com” at the end of their name back in the 1990’s. Is history repeating itself?

 

Microcap Fraud Crackdown Continues At SEC

SEC’s efforts to combat microcap fraud continue as it suspends trading in dormant shell companies. Commence Operation Shell-Expel!

One favorite technique of microcap fraud operators is to use shell companies as vehicles for pump-and-dump schemes. The SEC has tried over the years to clamp down on operators who take advantage of unsuspecting investors through these types of companies. For example, the SEC recently announced a microcap fraud task force to deal with fraud involving microcap securities.

Securities and Exchange Commission
Securities and Exchange Commission cracks down on Microcap Fraud.

In this regard, the SEC has also announced that it has taken a proactive step in its shell company enforcement. It has suspended trading in 255 dormant shell companies of the type it describes as “ripe for abuse in the over-the-counter market.”

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

Operation Shell-Expel has been in effect since 2012. The SEC has been scrutinizing penny stocks and looking for inactive companies. Trading is then suspended until updated financials are provided. Since this is generally unlikely, the trading suspension ends the value of the dormant company to scammers.

Due to the number and low profile of dormant companies, enforcement this sector can be a challenge.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence. “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors. The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”

 

 

Gibson Les Paul Sticks It To The Man With New Model

New Gibson Les Paul commemorates government raid and property seizure.

In August 2011, federal agents raided Gibson Guitar Corp.’s facilities SWAT-style.  To seize wood.  For alleged violations of foreign exporting laws that the foreign governments declared not a violation.

Some declared the raid to be a political hit job since Gibson’s CEO gives to Republicans while other CEOs of musical instrument purveyors support Democrats.  Regardless, Gibson resolved the issue with a financial penalty and donation to a federal agency for some BS research project.

To commemorate the shakedown, Gibson has released the Government Series II Les Paul. The fingerboards on these guitars include wood returned to Gibson from the U.S. government after the resolution of the matter. The guitars also sport a distinctive “Government Tan” finish and a bald eagle graphic on the pickguard.

This is a topic near and dear to me as a Gibson Les Paul owner myself.  I have a black 1986 Les Paul that I bought in high school.  I bussed a lot of tables at a local restaurant to afford that guitar.  It was my first professional grade guitar.  It is still one of the best in my collection.

In the words of a musical group that does not use guitars:

Gibson USA: Government Series II Les Paul - Government Tan
Gibson USA: Government Series II Les Paul - Government Tan

Fight the Power!

Bitcoin Regulation Urged In New York Hearing

Bitcoin regulation the subject of FINANCIAL hearings in New York. This is my surprised face.

I have been fascinated at the way Bitcoin seems to be going mainstream. My practical side recognizes the risk that governments will not let Bitcoin be Bitcoin. Governments are not in the business of allowing uncontrolled currencies to roam free. See, for example, here and here.

Now comes news that financial regulators in New York and California are exploring ways to regulate the elecctronic currency.

Bitcoin
Bitcoin regulation seems to be underway in New York and California.

In hearings by New York’s top financial regulator, law enforcement officials practically declared Bitcoin to be a financial dirty bomb.

“Mr. Zabel went through a list of six ways in which virtual currencies are more prone to crime than current forms of money transfer, including the ease with which money can be laundered over borders at the click of a mouse.”

There was the predictable noise about not discouraging growth while limiting illegal activity.

“Mr. Lawsky has indicated that Bitcoin is becoming popular enough that regulators need to create regulations that can encourage its growth but limit illegal activity. . . but there has also been a growing list of serious crimes committed in the Bitcoin network, which government officials have struggled to clamp down on.”

Well, one high profile crime ring, anyway.

The law enforcement officials disputed the contention of Bitcoin defenders that Bitcoin is no worse than other currencies for illegal activities. This despite the fact that those testifying were the ones able to nab Bitcoin-denominated criminals.

“Mr. Zabel was involved in the team that tracked down Ross Ulbricht, whom the authorities contend is the owner of the Silk Road online market, where drugs and child pornography were available. Mr. Ulbricht used a so-called Tor network to obscure himself, the authorities said, and Mr. Zabel said it was only after overcoming “substantial hurdles” that his office found Mr. Ulbricht.”

Well, there are hurdles in any investigation and prosecution, as Law and Order has taught us, such as the anonymous use of cash.

However, the unclear status of Bitcoin’s legality continues to be a pressing issue. For those already creating businesses in that space, expect rent-seeking and proposals for regulations that protect more established players.

““Regulation could be a good thing,” said Fred Ehrsam, the co-founder of Coinbase, the largest middleman for Bitcoin transactions.”

 

Law Grad Working In Retail Seems to Miss Some Opportunities

Law Grad Working Retail offers cautionary tale of bad decision and bad attitude.

Business Insider recently highlighted the “Law Grad Working Retail” blog about a hard luck law school graduate without a job forced to sell cologne in some kind of department store.  He clearly feels the job is beneath him.

“I am too good for this job. You know who else is too good for this job? EVERY SINGLE OTHER PERSON THAT WORKS HERE. Retail jobs fucking suck. What’s up with all these idiots white knighting minimum wage retail jobs? If you don’t think this work is dehumanizing then you are insane.”

He says that he’s “liveblogging the loss of my last shred of dignity” and discussing his job and coworkers.

He claims that he went to a top 50 law school, was on law review and had a second year summer associate position, but he did not get a job offer.

It is both difficult and easy to feel sorry for anyone who went to law school in or after 2009.  It is easy because they are entering the worst long-term job market for attorneys that many of us have known or will know.  It is difficult because after the disastrous 2007 and 2008 economies, it should have been clear to anyone being honest with themselves that the market for new law school grads would be extremely difficult.  Even now, there is still a huge glut of legal talent that will take years to balance.

If we assume that even part of his writing is honest, there is a personality issue at play.  A combination of a bad job market and a personality case make for bad job prospects.

Here is something all law students should understand when interviewing.  If your school is good enough, and especially if you got the summer associate position in the first place, it is assumed you have the intellectual ability to do the job.  However, the interviews and summer associate position test your personality.  If working with you is miserable because you are annoying, lazy, ethically questionable or otherwise unpleasant to be with, people will NOT want to spend hours upon hours with you in a conference room reviewing documents.  People will NOT want to take the chance that they will get excuses instead of work product.

He said in his blog that he hasn’t taken the bar exam.  However, he has co-workers asking legal questions.  It seems he is missing an opportunity to rise above a job he feels is beneath him.  Get a license and a laptop and you can be in business.  You do not need the other trappings of an office in a high rise.

“This blog is not about complaining that I can’t get a legal job. Where in the fuck did I ever say that? I haven’t taken the bar so I’m not even trying to get a legal job. But up until the bar exam I applied for thousands of legal jobs and couldn’t get shit. Since the bar exam I’ve applied for hundreds of non-legal jobs and have come up empty. It’s not like I’m gonna pass the bar and suddenly everything is going to be fine. I have plenty of friends who did pass the July bar and don’t have jobs. Stop saying “he hasn’t even taken the bar!” like you found some kind of gotcha against me.”

Here is where is he so misguided.  No, getting the license is not going to make everything “fine.”  However, it is a prerequistite to the practice of law.  Since he did not get hired out of law school, he needs to pass the bar to even be considered for any type of legal job.  He had a probationary period with a law firm that may have carried him through the exam, but for some reason it did not work out.  I seriously doubt anyone else will take the same chance.  No one is going to hire him as an attorney without it.

My guess is, even if his stories are true, he is really an aspiring writer.  Fine.  However, there are a number of red flags here for anyone who would consider hiring him, and it makes his lack of job offer from the firm where he spent his second summer understandable.

That said, his writing is somewhat entertaining.  His co-workers sound like interesting people, and their stories will make you continue reading through the various posts.

In any respect, I wish him the best of luck.  For aspiring lawyers, use it as a cautionary tale. Credentials are just the beginning. Personality and attitude also matter.

Going Solo Unexpected Rules – Attorney Requirements for Maintaining a “Bona Fide” Office

Going solo in the Freelance Economy requires that you follow requirements for where, not just how, you do business.

Going Solo Risk – Delaware attorney suspended for, among other things, not maintaining a “bona fide” office

The ABA Journal recently reported on a disciplinary case where the attorney received a two-year suspension for not maintaining an exclusive office space, among other things.  Delaware requires attorneys to maintain a “bona fide” office for the practice of law in Delaware.  The respondent did not, and being available by phone is simply not enough to comply with the rule.

 

“Barakat’s lease does not include any designated office space that is exclusively his. Rather, the employees of the landlord collect Barakat’s mail and greet any visitors Barakat may have. The building security guards direct visitors to the fourth floor, where a receptionist is stationed during normal business hours. Under this arrangement, Barakat is entitled, for additional fees, to rent a conference  room or office space, and utilize secretarial, reproduction, facsimile, word processing, and shipping services. The landlord’s billing records (the “Occupant Ledger”), and the testimony of two employees who work on the fourth floor, evidence that Barakat’s presence at 901 North Market Street is “sporadic and unscheduled.””

For attorneys going solo, or anyone entering the Freelance Economy and working from their home, this case should be an eye opener.  Licensing requirements for office space are just as important as practical realities in choosing where to set up shop.

In reading the case, we don’t want to get too hung up on the office requirement since the attorney at issue was deficient in this administration in other matters, such as safeguarding client funds (a very big ethical issue, as you non-attorneys may guess) and lying about these issues in response to prior inquiries.

However, for the purpose of setting up your business, make sure where you practice complies with licensing requirements and ethical obligations just as much as how you practice.

Online Contracts – How Deceptive Is Too Deceptive To Form A Valid Contract?

Online contracts obtained through deception may be easier than you’d think, despite a 9th circuit opinion knocking one down.

Link:  Lee v. Intelius Inc.

Have you ever purchased something online only to find recurring credit card charges for something you don’t want, didn’t ask for and never heard of?  A recent 9th circuit decision shows the limits of clickthroughs to create binding contracts and the risks for consumers who click without looking.

Background

A plaintiff purchased an online background check from Intelius.  After the purchase, the website offered $10.00 cash back for a survey, which also asked for an email address with a statement that entering the email constitutes  an electronic signature and authorization to charge/debit their account.  The plaintiff was not asked to reenter his credit card information.  Following an additional click, which included a statement on the website for the background check, the website said that the click constitutes an agreement to “Offer Details” and authorized Intelius to pass the plaintiff’s information to “a service provider of Intelius.”

It turns out that the service provide was Adaptive Marketing, a third party, not part of Intelius and not mentioned by name on the website.  The additional efforts were actually to purchase a monthly service from Adaptive.

The Court’s Reasoning

The arbitrator clearly saw the process to be a misleading set up to get purchasers of Intelius’ background checks to subscribe for Adaptive’s services.  The description of the process was “designed to deceive.”  However, this did not settle the matter.

It is clear that an electronic “signature” can be legally sufficient under Washington law even if it is not clear under what circumstances a “click” constitutes a signature.

However, the law reuires that the “essential elements” of a contract be set forth in writing, including the identification of the parties to the contract.  Adaptive claimed that the parties need not be named and cited cases regarding companies doing business under assumed names.  However, nothing on the website identified Adaptive as the party with whom the plaintiff was contracting.  In addition, it was ambiguous at best that anyone other than Intelius was involved.

The Result

The arbitrator ruled that a contract had not been formed.

Lessons

This case was not as consumer friendly as the holding suggests.  Just adding “Adaptive Marketing” in some manner on the website may have been enough to justify enforcing the contract.  If the court was looking to say “We will look closely at circumstances where there is simply no way the user is purchasing some bogus subscription,” it did not exactly make a strong statement.

Even confusing and deceptive language and formatting on a website can induce the formation of an enforceable contract.  However, all of the elements of a contract must be present, not just “as suggested by.”