SEC Cites Brokers for Questionable Accounts
by Mike Caswell
April 28, 2010
The U.S. Securities and Exchange Commission has launched an administrative action against employees of New York brokerage Leeb Brokerage Services Inc. for facilitating illegal penny stock sales. The SEC says they helped stock promoters dump millions of questionably issued shares in the midst of spam campaigns and other promotional activities. The firm's customers included at least one unidentified Vancouver company that used Leeb to sell $30-million worth of stock and had the proceeds wired to Liechtenstein. (All figures are in U.S. dollars.)
The case, filed on April 27, 2010, names as respondents Leeb brokers Robert Bloomfield, Victor Labi and John Earl Martin Sr. It also names the firm's chief compliance officer, Robert Gorgia, and its president, Eugene Miller.
According to the SEC, the firm routinely took in customers whose activities were obviously questionable. The regulator does not name any of these customers, but it says their actions should have tipped off Leeb's employees. They included one person with a prior pump-and-dump judgment, another who controlled multiple accounts under different names and an offshore corporation that regularly wired money to Liechtenstein, a known tax haven.
The SEC says Leeb allowed these customers to sell large blocks of penny stocks to the public without sufficiently investigating whether the sales were legal. In one example, a promoter repeatedly deposited shares he received in private transactions, and sold those shares in what looked to be a scalping scheme, the SEC claims. The accounts earned $20-million.
One of the Vancouver-linked examples the SEC cites is Golden Apple Oil & Gas Inc., a pink sheets listing that purported to have an oil and gas property in Canada. In February, 2006, a Leeb customer received 1.2 million shares directly from the company, which he deposited in an account at Leeb. The shares were based on a sham promissory note which the company's financial statements did not reflect, the SEC says.
Between February, 2006, and May, 2007, Leeb sold 1.17 million of the customer's Golden Apple shares to the public. In doing so, the brokers on the account, Mr. Bloomfield and Mr. Martin, ignored several red flags, according to the SEC. These included the fact that the customer was incorporated in Nevis, a known money laundering haven, and operated out of Vancouver. In addition, the customer's initial sales of the stock occurred during a spam campaign, and they accounted for 32 per cent of the company's trading volume on one day, March 2, 2006. In addition, the financial information about Golden Apple was outdated, and the company had not publicly disclosed the issuance of 1.2 million shares.
Another example cited is Lifeline Biotechnologies Inc., a pink sheets listing that purported to have a product that would assist in early detection of breast cancer. During 2006, a Leeb customer delivered more than one billion shares of Lifeline to two accounts he controlled. The SEC says the Leeb employee who handled the account, Mr. Labi, should have been suspicious, because the customer was a stock promoter who had previously sent Mr. Labi an instant message telling him about the timing of a promotional campaign for that company. Moreover, the customer had obtained two billion shares out of 6.5 billion that the company had issued from March through December, 2006. The stock represented 31.7 per cent of all the company's newly issued shares.
In addition to the allegations against Leeb's employees, the SEC cites Mr. Miller for failing to properly supervise his brokers. The SEC says he received repeated regulatory inquiries concerning customer accounts and specific penny stocks traded through Leeb. "Despite concern over the number of such inquiries, Miller did not subject any registered representative or customer account to heightened scrutiny, did not question Bloomfield, Martin and Labi regarding whether they conducted inquiries into the customers' penny stocks, and did not conduct additional account reviews," the SEC states.
The regulator also claims that Mr. Gorgia, as the firm's compliance officer, should have developed procedures that would have detected the questionable selling. He recognized that the firm's penny stock business was a "compliance nightmare," but he also recognized that Mr. Miller's primary concern was revenue. The penny stock business generated almost half of the firm's commission income, the SEC says.
While the SEC's case names just a few stocks, the regulator says the same promoters used Leeb to sell dozens of companies. One of its Vancouver customers delivered shares in more than 50 stocks to an account, and more than 91 per cent of that customer's trading activity was selling, the SEC claims. The customer's address and phone number in Vancouver are connected with an entity that provides clients with "confidential global services." The SEC does not provide that address or phone number, or any other clue that would identify the Vancouver customer.
The SEC is seeking appropriate fines and orders preventing future violations of the U.S. Securities Act. Leeb is not named as a respondent, and the firm is now defunct.
SEC's Golden Apple case
While Golden Apple only received a brief mention in the SEC's case against the Leeb brokers, the regulator previously filed a civil suit against Vancouver lawyer John Briner and Toronto resident Jay Budd for pumping and dumping the company. In that case, the regulator alleged that the men pumped Golden Apple to $3.70 in 2005 using misleading news releases about a home warranty business and oil and gas properties in Canada. A private company controlled by Mr. Budd then sold $3.1-million worth of Golden Apple shares, and a private company controlled by Mr. Briner sold an undisclosed number of shares, the SEC claimed.
Mr. Budd settled the case without a hearing and without admitting any wrongdoing. He agreed to pay a civil penalty and disgorgement in amounts to be determined by the judge. The case remains outstanding against Mr. Briner, who denies any wrongdoing.
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