Litigation: Skype messages show Caledonian’s trading activity in penny stock frauds

OTC Markets Group warns investors with a skull and crossbones symbol to take extra care when investing in certain securities.
OTC Markets Group warns investors with a skull and crossbones symbol to take extra care when investing in certain securities.

Documents submitted by the U.S. Securities and Exchange Commission to a U.S. court in February have shed new light on the involvement of Caledonian executives and clients in trading securities used in four penny stock manipulation fraud schemes.

The SEC claims the evidence paints a picture of “Caledonian knowingly, or at least recklessly, assisting its clients in carrying out their pump-and-dump schemes.”

Hinting at potential criminal charges for those involved, the SEC says the documents “will also prove beneficial to the ongoing law enforcement investigations of these matters and others.”

The securities regulator submitted the documents to support a settlement with the liquidators of Caledonian Bank and its brokerage Caledonian Securities. The records include a 3,346-page transcript of Skype conversations between representatives of Caledonian and its client Legacy Global Markets.

According to the SEC, the Skype messages “demonstrate that high-level employees at Caledonian executed the relevant trades with clear awareness of their customers’ highly suspicious pattern of selling large blocks of penny stocks for companies with no significant trading history or revenues, simultaneously with huge spikes in the volume and price of those penny stocks. These transactions – which, again, related to companies with no assets, operations, or revenues – netted approximately $38 million in proceeds.”

Caledonian went into bankruptcy in February 2015, days after the U.S. Securities and Exchange Commission filed a lawsuit against Caledonian Bank, Caledonian Securities and three other broker-dealers in Belize and Panama in connection with sham stock offerings and penny stock pump-and-dump schemes that allegedly netted the orchestrators of the fraud US$75 million.

Caledonian and its co-defendants Clearwater Securities Inc. and Legacy Global Markets SA in Belize and Verdmont Capital SA in Panama are accused of offering stocks for sale to investors in the United States without the required registration of the shares for public sale.

In pump-and-dump schemes, a stock is hyped to increase the share price with false or misleading press releases, SEC filings and other statements. This can, for example, include the announcement of a purported purchase of a mining plot, the prospective acquisition of a company or any other potentially value-increasing transaction.

The schemes often use stock promoters who attempt to push the stock price with telemarketing and aggressive “boiler room” sales techniques, mass email campaigns or paid-for favorable blog and news coverage of the company and its stock.

The shares are then “dumped” on the public at inflated prices. When it transpires that the company is effectively worthless and has no valid prospects of generating any revenue and profits, the share price collapses.

Caledonian has not denied trading in the four penny stocks but argued that it only did so on behalf of its clients.

In its filing, the securities regulator said at least one high-level Caledonian employee knew that a client’s trades coincided with highly optimistic press releases – or pumps – for the relevant securities. “Moreover, Caledonian employees deleted messages with the relevant clients on more than one occasion, thereby attempting to conceal their activities; traveled to Panama to visit one client; and bragged to that client – mid pump – that Caledonian’s ‘system makes it pretty easy.’”

The Commission argues that Caledonian benefited from the illegal activity by preserving its relationship with its client and earning commissions.

“Caledonian participated in that illegal activity by selling the relevant securities in its name on four separate occasions in the face of increasingly suspicious trading activity. Moreover, Caledonian’s recent document production indicates that Caledonian was complicit in its clients’ fraud, and that it took significant efforts to please its clients and support their efforts, making the imposition of a larger amount of disgorgement even more appropriate,” the SEC said.

District Judge William Pauley III in the Southern District of New York who had criticized the SEC for its handling of the case earlier, instructed the regulator that any proposed settlement between the securities regulator and the liquidators of Caledonian “should address any discussions between Caledonian and the SEC about the beneficial ownership of the shares Caledonian sold” when it is submitted to the U.S. court.

Caledonian’s clients

The documents that Caledonian produced through the Cayman Islands Monetary Authority as part of the settlement process now show, the SEC said, that the Caledonian customers involved with the four relevant securities were Titan Secuities, Philip Kueber, Clearwater, Legacy Global and Bennington Law.

As previously reported by The Cayman Islands Journal, offshore brokerages Titan International Securities and Legacy Global Markets and its president Brian de Wit were among six individuals and corporate defendants indicted in September 2014 for allegedly orchestrating a $500 million offshore asset protection scheme, securities fraud and money laundering. The indictment also alleged that Legacy’s de Wit actively manipulated the share price of penny stock Cannabis-Rx, Inc.

A superseding indictment released in July 2015 added Phil Kueber and accused him of fraudulently manipulating the stock of more than 40 U.S. publicly traded companies and then transferring, through attorney escrow accounts associated with five offshore law firms, approximately $300 million in fraudulent proceeds into accounts in the U.S. and Canada controlled by Gregg Mulholland, another defendant in the case.

According to the superseding indictment, Mulholland bought Legacy Global Markets in February 2012 and secretly owned and controlled the broker from 2012 until September 2014. Mulholland, a dual U.S.-Canadian citizen, was arrested in June 2015 at Phoenix International Airport during a layover on his flight from Canada to Mexico.

Kueber, who allegedly controlled Caledonian co-defendant Clearwater, surrendered to U.S. authorities in August 2015, one month after being charged in the superseding indictment. He pleaded guilty in September.

In contrast to this case, which was based to a large extent on the work of an undercover FBI investigator, the Caledonian suit was developed through FINRA referrals and market data reflecting the role of Caledonian and Verdmont as a seller in numerous suspected penny stock manipulations.

From 2012 through 2015, the SEC received 114 FINRA referrals for Caledonian in connection with the potential manipulation of penny stocks.

The SEC says in its filing that Clearwater and Legacy Global were the primary Caledonian customers that traded in the four manipulated securities named in the lawsuit – Swingplane Ventures, Goff Corp., Nostra Energy and Xuamnii Inc.

Caledonian terminated the accounts of Clearwater and Legacy Global in March 2014, six months before their indictment in the Belize case.

Skype messages

The Skype messages in the filing reflect significant trading activity by Legacy Global.

According to the SEC, Brian de Wit placed Legacy’s trading instruction for the four stocks in question with the managing director of Caledonian Securities. A managing director of Caledonian’s parent company, Caledonian Global Financial Services, also participated in Skype communications with Legacy Global. Neither individual was identified by name, but Nathaniel Orr-Depner was managing director of Caledonian Securities Ltd.

The regulator claims the Skype communications show Caledonian was fully aware of the pump-and-dump schemes and facilitated Legacy Global in its efforts to capitalize on those schemes.

One example for Caledonian’s alleged complicity in the trades is the communication about the Swingplane stock.

In mid-October 2012, Caledonian informed Legacy’s de Wit that Swingplane’s stock was rejected by RBC because it had never traded. Three days later, after the first trade in the stock, de Wit asked Caledonian to redeposit the stock.

On Nov. 28, 2012, Caledonian informed de Wit that Swingplane’s stock had been deposited via RBC with the Depository Trust Company, which enabled it to be traded electronically without the physical delivery of the stock certificates.

When the Caledonian employee reported to de Wit that Legacy Global Markets was “now long 42,700,000” shares of Swingplane, de Wit responded: “I can imagine that [Swingplane] will be a go in Dec. or Jan.”

De Wit made this prediction at a time when the stock had traded only once for 22,000 shares and about one month after Swingplane changed its business model from selling golf apparel to mining in Chile.

By Jan. 21, 2013, the stock had traded only on four days for a total of 161,177 shares. However, on Jan. 22, correctly predicted by de Wit, 15 million Swingplane shares were traded in 305 trades in a single day. About 3.5 million shares were traded on orders by Legacy.

The following day, Caledonian sent Legacy a Swingplane press release about the company’s acquisition of certain mining concessions in Chile. On Jan. 23, about 88 million Swingplane shares were traded, approximately 14.5 million of those by Caledonian.

After de Wit asked Caledonian who he could use to bid 1 million Swingplane shares, two Caledonian employees responded but deleted their messages, the SEC said.

“By this time, as evidenced by the Skype transcript, a high-level Caledonian employee was aware that (1) its client deposited shares in a stock with virtually no trading history and predicted the month when its trading volume would explode, (2) the uptick in volume preceded a company press release by a day, and (3) the same client, which had deposited a huge block of Swingplane shares, wanted to buy shares in the midst of selling, a common tactic used in pump and dumps,” the SEC said. “In the midst of all this activity, two Caledonian employees deleted their Skype messages to the relevant client, but still continued to carry out orders.”

The next day, Caledonian informed de Wit that “as of last night, SWVI, Swingplane Ventures, was marked Caveat Emptor by OTC market. Can you please advise or update us on this? I appreciate the understanding of our concern.”

OTC markets group identifies shares with a skull and crossbones symbol to warn investors that they should take extra care when investing in such a security.

At the same time, Caledonian attached a second Swingplane press release which purported the company would acquire another property “with significant potential to further develop current, near surface high grade copper+/-gold mine mineralization identifies in multiple veins into a larger commercial operation.”

One minute after forwarding the press release, the Caledonian employee sent a message to de Wit and immediately deleted it, the SEC said. De Wit responded, “you gotta show me how to remove messages.”

The Caledonian employee instructed de Wit to “right click.” This was followed by more buying instructions by Legacy.

In one instance, the SEC said, Caledonian informed de Wit that he had bought 1.1 million Swingplane shares at $0.37 and sold 1.1 million shares at the same price: “Flat for scratch.” This type of transaction would raise red flags because it potentially constitutes a wash trade – a form of market manipulation that makes it appear that there is more trading activity and demand for a stock than there actually is.

The defendants in the SEC action and their clients collectively distributed 122 million shares in Swingplane for sale proceeds of about $31 million. Within three months, Swingplane’s share price had fallen from $0.90 per share to $0.04.

Additonal Skype communications between Caledonian and Legacy reflected the trading activity in Norstra, Goff and Xumanii.