Stock Promoter and Registered Securities Representative Charged with Securities Fraud in Connection with Scheme to Fraudulently Register Shell Companies and Secretly Sell Stock
An additional stock promoter and a registered securities representative were charged with conspiracy to commit securities fraud in connection with a scheme to fraudulently register shell companies with the U.S. Securities and Exchange Commission (SEC), issue shares in the companies that they and other conspirators secretly controlled, and sell the shares to the investing public at a profit. To date, six defendants have been charged in connection with this fraudulent scheme.
Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, George Piro, Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, and Eric I. Bustillo, Director, U.S. Securities and Exchange Commission (SEC), Miami Regional Office, made the announcement.
Sheldon R. Rose, 77, of Sarasota, Florida, and Ian C. Kass, 45, of Ft. Lauderdale, Florida, were charged by criminal information with one count of conspiracy to commit securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff(a), and 17 C.F.R. § 240.10b-5, all in violation of 18 U.S.C. § 371 (Case No. 16-CR-20706). Rose and Kass face a maximum statutory sentence of five years in prison and a fine up to $250,000 or double the proceeds of the offense. The case is assigned to U.S. District Judge Jose E. Martinez in Miami.
Daniel McKelvey, 49, of Foster City, California, and Jeffrey L. Lamson, 51, formerly of El Dorado Hills, California, previously pled guilty for their participation in the securities fraud conspiracy (Case No. 16-20546-CR-RNS). McKelvey is scheduled to be sentenced on December 15, 2016 and Lamson on September 8, 2016, before U.S. District Judge Robert N. Scola Jr.
Steven Sanders, 73, of Lake Worth, Florida, and Alvin S. Mirman, 78, of Sarasota, Florida, previously pled guilty for their participation in the securities fraud conspiracy (Case No. 16-20572-CR-CMA). They are scheduled to be sentenced before U.S. District Judge Cecilia M. Altonaga on October 27, 2016.
According to court documents, co-conspirators Sanders, Mirman, Rose, McKelvey, and Lamson would recruit individuals to serve as straw chief executive officers (CEOs) for shell companies. Specifically, Rose acted as a stock promoter and recruiter, and would inform the straw CEO that they would have no further role with the company and would only be paid when the business was later sold. Sanders, Mirman, Rose, McKelvey, and Lamson would prepare corporate documents for the shell companies, such as board meeting minutes, stock certificates and shareholder lists, all of which were false and fraudulent. The conspirators would submit these documents, as well as other false information, to the SEC on Form S-1 in order to register securities offerings in the name of the shell companies. The false filings would include representations as to the role of the straw CEO in the company and the intent and purpose of the company itself.
Once a company’s registration was effective, Sanders, Mirman, Rose, McKelvey, and Lamson would recruit individuals to serve as nominee shareholders, to make it appear that there was a group of shareholders that were unaffiliated with the company. This was done in order to create a class of unrestricted shares that could later be publicly traded. In reality, these nominee shareholders were promised a fixed amount of money once the company was ready to be sold, in exchange for allowing their names to be used as shareholders on subscription agreements. By obtaining control of all or nearly all of the purportedly unrestricted shares of the company without disclosure to the SEC or the public, the conspirators were in a position to subsequently sell or transfer the shares to others, or to the investing public, while avoiding the SEC’s prohibitions against insider trading or undisclosed trading by persons who exercise control over a public company.
The conspirators would also solicit broker-dealers, including Kass, a registered securities representative who worked for various broker-dealers, to provide false information to the Financial Industry Regulatory Authority (FINRA) to obtain authorization for the company’s shares to be publicly traded (“over the counter”). The conspirators would then seek buyers who would acquire control of the shell companies as well as the secretly controlled unrestricted shares. The buyer’s acquisition of the company would typically take the form of a “reverse merger,” and be publicly disclosed to the SEC and the investing public on a Form 8-K. The secretly controlled unrestricted shares would typically be transferred to a third party or other account designated by the buyer, and would not be disclosed to the SEC or the public.
The conspirators would also obtain the assistance of attorneys who would provide false and fraudulent opinion letters indicating that the shares held in the names of the straw shareholders, or the conspirators, were not owned or controlled by “affiliates” of the companies, and thus could be considered “free-trading” and not considered restricted. Thereafter, with the assistance of Kass, the conspirators would engage in fraudulent trading activity, including prearranged matched trades, with the shell buyers, in order to profit from the scheme, transfer ownership of the free-trading shares to the shell buyers, and avoid SEC reporting requirements pertaining to stock trades involving company insiders or 5% shareholders. In this way, the shell buyer would be in a position immediately to engage in stock swindles or other manipulation schemes.
According to court documents, Sanders, Mirman, Rose, McKelvey, Lamson and Kass collectively created at least 36 fraudulent shell companies between 2007 and 2014, and reaped more than $10 million in proceeds from the scheme.
Mr. Ferrer commended the investigative efforts of the FBI. Mr. Ferrer also thanked the U.S. Securities and Exchange Commission’s Miami Regional Office, which today filed a civil enforcement action against Rose and previously charged several others for their involvement in the scheme. The matter is being prosecuted by Assistant U.S. Attorneys Jerrob Duffy and Alison Lehr.
An Information is merely an allegation and a defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.