See the SEC’s litigation release in full below. See also the full complaint (pdf). My comments, along with excerpts from the legal complaint, are below the litigation release.
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22370 / May 16, 2012 Securities and Exchange Commission v. Nicholas Louis Geranio, et al.
Civil Action No. CV-12-4257-DMG (JCx) (C.D. Cal.)
SEC CHARGES U.S. PERPETRATORS IN $35 MILLION INTERNATIONAL BOILER ROOM SCHEME
The Securities and Exchange Commission announced that the SEC filed an action today against SEC recidivist Nicholas Louis Geranio, Keith Michael Field, The Good One, Inc. and Kaleidoscope Real Estate, Inc. for their roles in a $35 million scheme to manipulate the market and to profit from the issuance and sale of certain U.S. companies’ (“Issuers’”) stock through offshore boiler rooms. The scheme ran from approximately April 2007 to October 2009.
According to the SEC’s complaint, the scheme worked as follows: Geranio organized eight U.S. Issuers, installed management (including Field), and entered into consulting agreements with them through his alter-ego entities The Good One and Kaleidoscope. Geranio then allegedly set up a common system to raise money through the Issuers’ sale of Regulation S shares to offshore investors by boiler rooms that Geranio recruited. Field allegedly drafted materially misleading business plans, marketing materials, and website material for the Issuers, which the offshore boiler rooms provided to investors as part of their fraudulent solicitation efforts.
The complaint further alleges that Geranio directed traders, including Field, to engage in matched orders and manipulative trades to establish artificially high prices for at least five of the Issuers’ stock and to deceptively convey to the market the impression that legitimate transactions had created bona fide prices for the stock. According to the complaint, this manipulation of the publicly-traded stock price allowed the boiler rooms to sell the Regulation S shares at a higher price to the overseas investors. The complaint alleges that the boiler rooms, teams of unregistered telemarketers operating mostly from Spain, used high-pressure sales tactics and materially false statements and omissions to induce the investors (many of them elderly and located in the United Kingdom) to buy the Issuers’ Regulation S stock. Investors then sent their money to U.S.-based escrow agents, who paid 60% to 75% of the approximately $35 million in proceeds to the boiler rooms as their sales markups, kept 2.5% as their fee, and paid the remaining proceeds to the Issuers. The Issuers (or in some cases the escrow agents) then funneled approximately $2.135 million of the proceeds of the Regulation S sales to Geranio, through The Good One and Kaleidoscope, and paid Field approximately $279,000.
The SEC filed its action in the U.S. District Court for the Central District of California, alleging that: Geranio, Field, The Good One and Kaleidoscope violated Sections 17(a)(1) and (3) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5(a) and (c) thereunder; Field also violated Section 17(a)(2) of the Securities Act and aided and abetted the Issuers’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder; and Geranio also is liable as a control person of The Good One and Kaleidoscope under Exchange Act Section 20(a). The SEC seeks in its action permanent injunctions, disgorgement plus prejudgment interest, civil penalties, and penny stock bars against all defendants, and also officer and director bars against Geranio and Field. The complaint further seeks disgorgement and prejudgment interest against relief defendant BWRE Hawaii, LLC based on its alleged receipt of investor funds.
The Issuers from April 2007 through October 2009 were: Green Energy Live, Inc.; Spectrum Acquisition Holdings, Inc.; United States Oil & Gas Corp.; Mundus Group, Inc.; Blu Vu Deep Oil & Gas Exploration, Inc.; Wyncrest Group, Inc.; Microresearch Corp.; and Power Nanotech, Inc.
In 2000, the United States District Court for the Central District of California enjoined Geranio from future violations of the antifraud and securities registration provisions of the federal securities laws as part of his settlement of an enforcement action that the SEC brought against him and California Laser Company. See Litigation Release No. 16628 (July 14, 2000).
One of the more interesting things about this lawsuit is that it shows just how much control the ‘man behind the scenes’ has over penny stocks. The SEC alleges that Geranio bought up the corporate shells used in the pump and dumps, chose the CEOs, and gave those CEOs detailed instruction on what to do. He also allegedly orchestrated the boiler rooms and directed manipulative trading.
32. During the relevant time period, Geranio located and acquired shell companies through a “prospecting” system that he developed. As part of this system, Geranio sent out letters to shell companies he identified from lead-lists. Geranio found the companies that became the Issuers through these prospecting efforts.
33. Geranio then found and appointed management for the Issuers, which typically consisted ofField as a director and/or officer and a CEO who performed administrative recordkeeping duties related to Regulation S sales and prospecting for acquisitions. In some cases, Geranio appointed friends or business associates as officers of the Issuers. For example, the former CEO ofBlu Vu was someone Geranio met “kite surfing” in Malibu.
34. During the relevant time period, Geranio also hired the CEOs of Spectrum, Green Energy, Blu Vu, USOG, and Mundus; the presidents ofPower Nanotech and Wyncrest; and an interim president ofMicro research.
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74. Geranio instructed Traders A, B, C and D and others to engage in a total of at least five matched orders. In addition, Geranio made at least four additional manipulative trades through The Good One.
75. “Matched orders” are orders for the purchase or sale of a security that are entered with the knowledge that orders of substantially the same size at essentially the same price have been or will be entered by the same or different persons for the sale or purchase ofthe same security.
The alleged operation of the boiler rooms is particularly interesting: according to the SEC, the boiler rooms were in Spain, and the shares that were sold were Regulation S shares (exempt from registration because they are sold to people outside the USA). These shares were mostly sold to British investors, often at a discount to the (artificially high) market price. The boiler rooms used not only high pressure sales tactics but allegedly engaged in outright fraud and lies.
125. Geranio recruited the boiler rooms to raise money for the companies. Prior to the creation of Green Energy, Geranio traveled to Spain to talk to overseas advisors to find investors or ways to raise capital without having to go through investment bankers.
126. Geranio recruited, and negotiated the terms ofthe agreements with, at least two boiler room teams and with the persons who served as liaisons with three other boiler room teams.
127. The fonner CEOs of Green Energy ‘and Spectrum asked Geranio about one boiler room’s exorbitant 80% sales commissions and Geranio responded by claiming that the boiler room would not work for less and adding, “As we get bigger and more established, we’ll get better deals …. Trust me, this is what -this is good as you’re going to get -or we’re going to get.”
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140. First, the boiler rooms made explicit additional false statements to investors about the Issuers, such as claims that:
• Mundus, Microresearch and W AM traded on the NASDAQ stock exchange when, in reality, none ofthose companies has ever traded on a listed exchange;
• Blu Vu had discovered oil seventy miles off the coast of Miami;
• the u.S. government provided research grants and the US Navy provided facilities for Mundus; • Green Energy was doing test runs with McDonalds restaurants to convert its refuse into petroleum;
• W AM had projects in South Africa and Mongolia and had received two large investments by Barclays and an additional $26 million infusion;
• Boeing had developed a 747 aircraft to run on fuel developed by Power Nanotech; and
• the U.S., German, and Swiss governments were interested in Power Nanotech’s technology.
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142. Third, in telephone conversations with investors, the boiler rooms failed to inform the investors up front that their shares were restricted shares, and therefore subject to a one-year holding period pursuant to Regulation S. For example, one investor expected to receive Initial Public Offering shares and was surprised to see any restriction.
The main defendant in the lawsuit, Nichoals Geranio, is no stranger to the SEC:
13. Defendant Nicholas Louis Geranio, also known as Nick Louis, is a resident ofHaleiwa, Hawaii. During the relevant time period, he controlled The Good One and Kaleidoscope. On July 14, 2000, Geranio settled an emergency enforcement action that the Commission filed against him on April 30, 1999, consenting to an injunction against future violations ofthe antifraud provisions for his role in an alleged offering fraud involving California Laser Company. SEC v. Nicholas L. Geranio and California Laser Company, Civil Action No. 99-4702 WJR (AIl) (C.D. Cal. Jul. 7, 1999), SEC Lit. ReI. No. 16628 (Jui. 14,2000). On at least one occasion during the relevant period, Geranio used an address at a UPS Store in Calabasas, California to procure services for Green Energy Live.
Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.