27 Jun What do three recent SEC suspensions and a FINRA halt mean for the future of promo plays?
Recently the SEC and FINRA have brought several significant enforcement actions against penny stocks. Many wonder if they may signal a growing interest in pump-and-dump promotions on the part of the regulators. Earlier in the year, there'd been very few trading suspension or halts invoked for cause; most were the usual cleanup work intended to rid the markets of delinquent filers and zombie shells that might fall victim to corporate hijackings.
FINRA was the first up to bat. On 17 April it halted trading in Eco-Trade Corp. (BOPT) in mid-afternoon, taking players by surprise. The action was a U3 halt, which the regulator describes as an “extraordinary event” halt. U3 halts may be invoked when “FINRA has determined that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the OTC Equity Security or has caused or has the potential to cause major disruption to the marketplace and/or significant uncertainty in the settlement and clearance process.”
FINRA has the authority to call a U3 halt in OTC stocks by virtue of recent amendments to Rule 6440. The action against BOPT seems to have been the first case in which it exercised its new powers. U3s are imposed for up to 10 trading sessions initially, but may be extended if FINRA feels that is in the public interest. At first, observers wondered whether Eco-Trade would trade normally on OTCMarkets' OTCQB tier after the halt was lifted, or would lose compliance with Rule 15c2-11 and be removed to the Grey Market. That question was answered quickly: on the following day, 18 April, OTCMarkets announced a venue change to the Greys.
When the SEC suspends, it offers an explanation. Though that explanation is usually sketchy—delinquent filings, questions about the accuracy of information provided by the company, and so on—it at least points traders in the right direction. FINRA doesn't comment on halts at all, except to announce when they're lifted.
The trading halt was renewed once, and then lifted on 8 May. Shareholders assumed that the action was provoked by some problem with clearance and settlement, and suspected DTC was somehow involved, but were left in the dark as to the nature of the specific problem. In an update provided by BOPT the day of the halt, the company said predictably that it “maintain[ed] that the recent market activity has been a coordinated effort to short the common stock. As such, attorneys for the Company have spoken with representatives from FINRA and are supplying them with documentation regarding the trading activity in an effort to see an immediately lift of the trading halt.”
Did BOPT management understand what FINRA does, and that it is more than capable of coming up with documentation of trading activity? Whether they did or not, there has been no further talk about short selling.
Eco-Trade had been around for a long time, and had undergone a number of changes of business plan and management. At the end of 2010, it changed its name from Yasheng Eco-Trade Corporation to Eco-Trade Corp, did a 1:100 reverse split, and prepared to install new management. Despite the acquisition of oil lease rights to a property in Montana's wildly-hyped South Bakken Prospect, the stock attracted no interest, and traded negligible volume, until the first week of April 2013, when a promotion began. As early as February, PSS warned that bad actors had been associated with the company for some time, William Lieberman chief among them, and that a pump might be on the way. Lieberman was acting as the sole officer. Canon Bryant and John Pinsent joined him as directors in December 2012.
By the end of March, Lieberman had resigned, and Robert Price had replaced him as acting CEO and CFO. Several new directors had been named, including David Price, known for his work with a number of highly questionable penny stocks. The stage was set.
Some traders suspected Stock Market Authority (SMA) was about to step in. That prospect excited many potential players, as SMA, backed on some occasions by Spaniard Francisco Abellan, is credited with the very big runs enjoyed by Lithium Exploration Group (LEXG) and Raystream Inc. (RAYS) in 2011. The pump began on Twitter, with PennyStockWizard in the lead. And the stock went up, perhaps largely because of the expectation that SMA would enter the arena. Alas, stock price hit its high on the first day of the promo, a Monday; thereafter price declined, though volume increased. SMA finally made its grand entrance on the Friday, in midafternoon, claiming a $3.275 million “production budget.” BOPT sank further, despite SMA's assurance that a “research report” would follow over the weekend. Perhaps aware that something was wrong, SMA got the report out by evening, but it was too late. The stock continued its slide until FINRA halted on Tuesday.
The next stock in the regulators' sights was Polar Petroleum Corp. (POLR), a company with a typically nasty background. In a two-month period, the stock moved from about a dollar to a high of $6.15, closing at $5.75 the day before the SEC suspended. It closed today at $0.70.
Volume was never particularly high, despite an expensive pump job. The chief promoter was “Ken Williams” of Ken Williams' Hard Asset Report, whose logo bears a ridiculous “CONFIDENTIAL” stamp. The report is full of the usual over-the-top rhetoric, and sets a price target of $27 a share. It was also distributed in the form of a hard mailer. Williams, if that is indeed his name, is new to the promo scene. His domain was registered on 8 May 2013, and its name—hardassetalert.com—looks to me as if it was created for a single use. Interestingly, the report redirects from another domain, polrnews.net. Both give a Bellevue, Washington address. When POLR—then Post Data, Inc.—filed its final amended initial registration statement, an S-1, on 27 July 2011, the company's attorney was James B. Parsons, of Parsons/Burnett/Bjordahl/Hume, LLP, located in—you guessed it—Bellevue. The company lists no current legal counsel on its OTCMarkets profile page, so it's unknown whether Parsons still works for POLR. But with his extensive history of involvement with dicey penny issuers, he'd be an excellent fit.
The SEC suspended Polar on 10 June, citing “questions regarding the accuracy and adequacy of assertions by Polar, and by others, to investors in press releases and promotional material concerning, among other things, the company's assets, operations, and financial condition.” The same morning, the company issued an extravagant PR, in which it made repeated mention of ExxonMobile, BP, ConocoPhillips. Rosneft, and even Vladimir Putin. Spamming the names of major oil companies working near POLR's claims was a consistent feature of the company's communications.
Polar Petroleum has not been heard from since.
Biozoom, Inc. (BIZM) was a pump play more closely followed that POLR had been, and it generated greater dollar volume. Promotion Stock Secrets first began investigating the company on 2 March, and followed up with additional reports on 19 May, 28 May, and 13 June.
The stock traded for the first time on 16 May, when it closed at $1.10. Although the stock price rose steadily, volume didn't increase significantly until 28 May; within a few days it was trading millions of shares a day. It peaked on 19 June, hitting an intraday high of $4.50. It then dropped sharply, but was rallying when the SEC dropped the hammer on the 25th.
Biozoom began life as a fully-reporting shell company called Entertainment Art (EERT). EERT went public in 2008, though it never traded a single share. It did no business whatsoever, but became involved with several offshore entities, and, in need of cash, issued a number of promissory notes. In 2010, the original management team departed in a change of control; a disreputable character called Jeffrey Lamson took over. Another change of control took place in October 2012, when Lamson was replaced by Sara Deutsch, who, rather improbably, was a restaurant manager. For a better understanding of these complicated maneuvers, see Nodummy's report.
All this led up to what was intended to be the creation of an operational company. On 6 February, a new corporation called Biozoom Technologies, Inc. was created in Delaware; it was a wholly-owned subsidiary of Entertainment Art. On 28 February, Biozoom Technologies acquired “patents, licenses, and related assets” from three separate German companies: Opsolution Spectroscopic Systems GmbH, Opsolution NanoPhotonics GmbH, and Opsolution GmbH (“the Opsolution Sellers”), for $50,000 cash and 39 million shares of EERT stock. The Opsolution Sellers became 66% beneficial owners of Entertainment Art. In addition, EERT entered into a joint venture with Opsolution GmbH. Notice of this business combination was provided in an 8-K filed with the SEC on 12 March.
Hardy Hoheisel of Opsolution took over as CEO of the new business, but Tefa Dexter, who'd been hired by Sara Deutsch, stayed on as secretary. Deutsch continued to serve as a director. Wolfgang Köcher, who worked with Hoheisel, was named chief technology officer. The new company planned to develop, manufacture, and sell handheld scanners that detect and read “biomarkers in the skin.”
In addition, Entertainment Art issued $1,250,000 shares of Series A preferred stock for a purchase price of $1.25 million in a Regulation S private placement. Reg S offers an exemption from registration that can only be used if the securities in question are sold to individuals or entities located outside the U.S. EERT did not identify the buyer.
Each share of the Series A preferred is convertible into 7.5 shares of common; a conversion price of $0.133333 per share. If converted, the buyer would receive 8,625,023 shares of common, representing a 12.56% stake in the company.
In this complicated document, the company and its counsel made a fatal error. Describing “corporate history and background,” it was noted that:
Unfortunately, although fully-reporting shell companies may—and in fact must—inform the SEC when they become operational, Rule 144 will still not be available to them for another year. Therefore, holders of restricted stock in BIZM must continue to hold until 12 March 2014. Then they may have the legends legally removed from their stock, and will be free to sell.
Who was the lawyer responsible for the paperwork? In its most recent quarterly report, the company names its attorney: Chase Chandler of Brunson, Chandler & Jones, PLLC. The firm is located in Salt Lake City. Only a few months ago, Chandler was working for Vincent & Rees, also of Salt Lake. In May 2012, David Rees was sued by the SEC for his role in the Recycle Tech scam, which could serve as a blueprint for modern promotions in which a private company is formed and reverse merged into a public shell for the sole purpose of running a pump-and-dump scheme. Chandler may have learned much from his former mentor. Or perhaps his mentor is still hanging around, behind the curtain.
Evidently some of that restricted stock was sold into the market recently, and that is why the SEC suspended BIZM on 25 June. In its suspension notice, the agency said specifically that the action was taken “because of concern that certain Biozoom affiliates and shareholders may have unjustifiably relied upon Rule 144 of the Securities Act of 1933 (“Securities Act”) and they, Biozoom, and others may be engaged in an unlawful distribution of securities through the OTCBB.”
Biozoom was enthusiastically pumped. In his 13 June report, Nodummy explained why he believed it might become a Stock Market Authority play, and why it may have had the backing of the notorious Francisco Abellan. Abellan used SMA earlier, to pump LEXG and RAYS. He was joined in the RAYS scheme by Tan Siekmann, a German entrepreneur who ran a successful technology company until it collapsed in the dot.com crash. Opsolutions is headquartered in Kassel, Germany; BIZM now uses that address as well. Siekmann, in his Linked In pages, says he's located in the “Kassel area.” (Though in fact he's two hours away in Burg Lichtenfels, which is closer to Würzburg.)
Neither Siekmann's nor Abellan's name, nor the names of any of their known companies, appears in documents relative to the Opsolution entities. But it is tempting to imagine there might be a connection. We don't, after all, know who holds that Series A preferred; we know only that the owner is not in the United States.
What we do know—once again, see Nodummy's report for a fuller discussion—is that BIZM was pumped by a promotional site and service called The Stock Report. Stylistically, it has much in common with Stock Market Authority, though no connection can be demonstrated. Its 24-page “research report” was distributed as a hard mailer. The Stock Report claims to be owned by an outfit called Global Investors Research (GIR). Last Saturday, a nearly full-page ad promoting Biozoom appeared on the back page of the New York Times business section. That is pricey real estate. It was presented by Global Financial Insight, a company that also claims to be owned by GIR.
Yesterday, Norstra Energy (NORX) became the latest promoted stock to fall victim to an SEC suspension. If there was any doubt that the SEC was now focusing more on pump&dump tickers, this suspension probably erased those doubts.
NORX has been getting pumped for several weeks through an Eric Dany newsletter, several D listers, and multiple rounds of hard mailers. The promotional budget amassed an astounding $3,640,840. See our pre-promo research here. NORX had strong ties to a past suspended ticker, UTOG.
The NORX promotion started on April 8, 2013 and lasted an incredible 38 days before it reached its peak of $2.06/share. The stock was on the decline when the SEC suspension hit, but it was still very much in promotion mode. The latest round of hard mailers had just hit for NORX only 1 week ago.
The SEC suspended Norstra on 26 June, citing “questions regarding the accuracy and adequacy of assertions by Polar, and by others, to investors in press releases and promotional material concerning, among other things, the company's assets, operations, and financial condition.” That is the same reason they suspended Polar.
The regulators and promoted stocks
These three recent enforcement actions have some penny stock players worried. For experienced traders—and sometimes even for the merely lucky—major promos can be very profitable. For those still holding BOPT, POLR, BIZM, NORX when the music stopped, the outcome was quite different. As everyone but the rankest newbie knows, the Grey Market is the graveyard of pennies, whence they go never to return to normal trading.
So... Do these recent actions signal a change in the regulators' approach to manipulative promotions? In the past few years, they've brought a number of major civil suits, and, with the help of the Department of Justice, some criminal prosecutions, against high-profile promoters and promotional groups. But these lawsuits and prosecutions have been initiated long after the big plays associated with these people were over; no one was in danger of losing money at that point except the defendants. In contrast, BOPT, POLR, BIZM, and NORX were taken down quickly, and, in the case of BOPT, unexpectedly. Observers wonder whether FINRA's role in dealing with promoters and promotions will expand in the near future.
One thing all three stocks had in common was that they were promoted, and that hard mailers were used. Francisco Abellan may have been in some way involved in two of those promotions. FINRA did not explain its reasons for halting BOPT, except to suggest that they had something to do with clearance and settlement. BOPT never appeared on the Reg SHO list, and short interest has always been negligible, so short selling resulting in fails to deliver was not a problem. The same is true for POLR; there is no short sale data for BIZM because its name change is so recent. It is blindingly clear, however, that BIZM was suspended because unregistered stock was sold into the market.
The regulators are becoming increasingly concerned about improper and unlawful sales of unregistered stock; it seems possible that such sales occurred in all three examples under consideration here.
Does that mean OTC traders can expect more of the same? Are big and expensive promos still safe to play?
There's no easy answer to that question yet. With Biozoom, the SEC has an open and shut case: the company handed the agency the instrument of its own destruction on a silver platter. Perhaps Eco-Trade and Polar did something similar to ensure their demise.
Unless we begin to see multiple suspensions for cause every week, the penny circus won't be folding its tents and stealing away. There will continue to be promo plays, and some will treat traders well. But in the present climate, some extra caution is advised. The SEC may pounce when it's least expected.