SEC Charges Gatekeepers in Microcap Frauds
Agency Releases White Paper on Risks of Penny Stock Investing
The Securities and Exchange Commission today barred several market participants from the penny stock industry for their roles in various sham initial public offerings (IPOs) of microcap stocks that defrauded investors.
In one case, Newport Beach, Calif.-based securities lawyer Michael J. Muellerleile authored false and misleading registration statements used in sham IPOs for five microcap issuers in order to transfer unrestricted shares of penny stocks to offshore market participants. Muellerleile’s law firm M2 Law Professional Corp. also is charged along with Lan Phuong Nguyen, an attorney who assisted Muellerleile by signing false and misleading attorney opinion letters, and Joel Felix, the CFO of one of the issuers, for making false and misleading statements. The SEC today suspended trading in that issuer, American Energy Development Corp.
In another case, Nevada-based stock transfer agent Empire Stock Transfer and its supervisor of operations Matthew J. Blevins transferred large blocks of several penny stock securities without restrictions to offshore nominees despite red flags indicating the shares were likely part of an illegal operation. The SEC previously charged several offshore entities behind the illegal sales of unregistered penny stocks made possible by Empire Stock Transfer and Blevins.
“These enforcement actions bar any further penny stock activity by these market participants, including attorneys and a transfer agent supervisor who betrayed the trust that investors place in gatekeepers to protect them in this highly risky market,” said Stephanie Avakian, Deputy Director of the SEC’s Enforcement Division. “The SEC is committed to combating microcap fraud through the investigative work of its Microcap Fraud Task Force, the initiatives of its Microcap Fraud Working Group, and repeated warnings to investors about the red flags of penny stock investing.”
All of the market participants named in today’s cases have agreed to settle the charges without admitting or denying the SEC’s findings.
Muellerleile agreed to pay $154,267 and Nguyen agreed to pay $13,039 while accepting penny stock bars and permanent suspensions from appearing and practicing before the SEC as attorneys, which includes representing clients in SEC matters including investigations, litigation, or examinations and advising clients about SEC filing obligations or content. Felix agreed to a penny stock bar, officer-and-director bar, and payment of $63,695.
Empire Stock Transfer agreed to pay more than $154,000, and Blevins agreed to pay $20,000 and be permanently barred from the securities industry.
The SEC’s investigations were conducted by Tracy Sivitz, Ernie A. Amparo, Douglas Smith, David Stoelting, Christopher Dunnigan, and Sandeep Satwalekar. The cases were supervised by Lara Shalov Mehraban and Anita B. Bandy. The SEC appreciates the assistance of the Financial Industry Regulatory Authority, Swiss Financial Market Supervisory Authority, Québec Autorité des Marchés Financiers, British Columbia Securities Commission, Hong Kong Securities and Futures Commission, Liechtenstein Financial Market Authority, Turks and Caicos Islands Financial Services Commission, and Guernsey Financial Services Commission.
The SEC also has released a white paper produced by its Division of Economic and Risk Analysis outlining some consequences of investing in stocks quoted in the microcap markets versus those listed on a national securities exchange. The white paper analyzed 1.8 million trades by more than 200,000 individual investors and determined that individual investor returns in the microcap markets tend to be negative, with returns worsening for penny stocks of less transparent companies and those that have experienced an alleged promotional campaign. Demographic analysis revealed that older, retired, low-income, and less-educated investors experience significantly poorer outcomes in microcap stock markets. The white paper also reports recent trends in the microcap markets and synthesizes academic research on the documented risks of investing in these stocks.
The SEC’s Office of Investor Education and Advocacy recently issued a series of three bulletins to educate investors about microcap stocks and their marketplaces. The bulletins discuss the unique characteristics of microcap stocks and where they’re traded, outline resources for investors to get information about microcap companies, and note the risks and red flags for investors to keep in mind.