by Mike Caswell
The U.S. Securities and Exchange Commission has filed civil charges against two U.S. residents for illegally distributing billions of shares in at least 12 pink sheets companies. The SEC claims that the men, Ezat Rahimi of California and Ian Lamphere of Vermont, repeatedly bought discounted shares in unregistered transactions and immediately dumped the stock, making $1.6-million in profits. (All figures are in U.S. dollars.) The stocks include Toronto-based Magellan Inc. and Toronto-based Brownstone Resources Inc.
The charges are contained a civil complaint the SEC filed on Jan. 6, 2011, in the Eastern District of California. In addition to Mr. Rahimi and Mr. Lamphere, the defendants are Cassandra Armento, a New York lawyer who wrote opinion letters used in the scheme, and Gendarme Capital Corp., a private company that Mr. Rahimi and Mr. Lamphere control.
According to the complaint, Gendarme Capital illegally distributed shares in 12 pink sheets companies starting in early 2008 and ending in May, 2010. Typically, Gendarme acquired shares from small public companies at a discount of 30 to 50 per cent, falsely representing to the issuer that it was buying the shares for investment purposes. Then, within days or weeks, Gendarme resold the stock on the market, the SEC says.
During the scheme, Gendarme claimed on its website that it was an accredited investor that bought shares under Rule 504, an exemption that applies to accredited investors who do not plan to resell the stock. According to the SEC, Gendarme actually bought the stock with a view to immediately selling it. In doing so, it acted as an underwriter and was required to register the transactions.
One example described by the SEC is that of WGL Entertainment Holdings Inc., a Florida-based company that produced a TV show called the WGL Million Dollar Shootout. Between March and September, 2008, Gendarme entered into warrant agreements that allowed it to buy shares of WGL at a 30-per-cent discount to the market price. The SEC says that Gendarme used those agreements to acquire over six billion shares for $615,000. According to the complaint, it then sold the stock within days or weeks, grossing $780,000. (The stock, which traded around two cents in March, 2008, was at 0.01 cent by October, 2008.)
In negotiating to buy the shares, Mr. Rahimi indicated to the company that he would help establish a market, the SEC claims. He told the CFO that Gendarme would "try to find a life in your stock" and "if your stock starts trading with our help, you will have a liquid stock on your hands."
One of the key helpers in the scheme, as described by the SEC, was Ms. Armento. According to the complaint, she drafted more than 50 opinion letters stating that Gendarme could receive shares in the companies without any trading restrictions. She made no inquiry as to whether Gendarme planned to sell the shares to the public, the SEC claims. "Armento knew that, as a result of her opinion letters, Gendarme was obtaining shares without a restrictive legend, and thus would have the ability to quickly sell the shares to the public, even if doing so violated ... the Securities Act," the complaint states.
The SEC is seeking appropriate civil penalties and disgorgement of ill-gotten gains against all defendants, as well as penny stock bans against all defendants except Ms. Armento.
The other stocks listed in the complaint are Macada Inc., Perihelion Global Inc., Bederra Corp., Z Com Networks Inc., RCC Holdings Inc., 141 Capital Inc., RBID.com Inc., Russell Industries Inc. and TidwalWave Holdings Inc. (The complaint does not accuse the companies of any wrongdoing.)
Magellan and Brownstone both list Canadian addresses, and one of the other stocks has a lesser Canadian connection. In 2009, RCC Holdings claimed that it had appointed William Hess, the former president of the Canadian Venture Exchange, as a director. (The company initially said he was president of the Toronto Stock Exchange, which it later corrected.) As it turned out, Mr. Hess did not ever become a director of the company, as his appointment was contingent on the company completing an acquisition that it never finalized.