SEC Files Charges in Elaborate Microcap Stock Fraud

The Securities and Exchange Commission today announced charges against four individuals and related businesses for their roles in two microcap frauds and unlawful securities offerings.  In sum, the alleged illegal transactions resulted in proceeds of more than $25 million.

According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock.  The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally.  The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public.  The complaint alleges that Marc Manuel, Magna Group’s former head of research and due diligence, personally negotiated and structured the sham transactions. 

The complaint also alleges that in November 2013, Magna Equities II, which also was wholly-owned by Sason, and Manuel, purchased another fake promissory note from Pallas Holdings.  Magna Equities II and the note’s issuer, NewLead Holdings Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement.  To obtain approval of the settlement, Sason and Magna Equities II falsely swore to the court that the fake promissory note was a bona fide debt of NewLead.  Kautilya “Tony” Sharma and Perian Salviola, who controlled Pallas Holdings, are alleged to also have participated in the scheme. 

“As alleged in our complaint, Magna Group and its co-defendants used fake debt instruments to unlawfully obtain shares in microcap companies, which they then dumped on unsuspecting retail investors,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “This action demonstrates the resolve of the SEC in pursuing fraudsters who use elaborate financing schemes to engage in securities fraud.”

The SEC’s investigation was conducted by Lee A. Greenwood, Philip A. Fortino, John O. Enright, Christopher Ferrante, Diego Brucculeri, and Sheldon L. Pollock of the New York office.  The SEC’s litigation will be handled by Messrs. Fortino, Greenwood, Enright, and Alexander M. Vasilescu.  The case is being supervised by Mr. Wadhwa.