With all the jitters in the world's financial markets, precious metals became a very popular investment or, some would say, refuge. Worried investors bought physical bars; ETFs such as GLD, GDX. or SLV; or shares in any number of metal plays such as Goldcorp, Barrick Gold, Newmont Mining, or Silver Wheaton. On the other hand, if you generate enough of a crowd mentality in any particular investment, you're also going to increase the likelihood of scamsters and con artists flocking to the scene. According to an ongoing case, federal regulators seem to think that's exactly what happened.
In a Complaint filed on September 18, 2011, the Securities and Exchange Commission ("SEC") alleged that four defendants had engaged in a market manipulation fraud involving shares of Guyana Gold Corp. ("GYGC"). Securities and Exchange Commission v. Glenn Grossman, Lawrence Steven Cohen, David Schmidt, and John Zanic, (08 Civ. 8078 (DC) (S.D.N.Y.).
NOTE: A Complaint contains allegations and defendants are presumed innocent unless and until proven guilty in a court of law.
GYGC, Nevada corporation, began trading publicly on February 7, 2008, and is quoted on the Pink Sheets. GYGC's securities are not registered with the SEC.
GYGC purports to be a development stage company involved in the exploration for gold and minerals. According to an issuer information and disclosure statement that GYGC filed on April 18, 2008, with Pink Sheets, GYGC conducted no operations during the fiscal years ended December 31, 2007, and December 3 1, 2006, and has never generated revenue.
The SEC's Complaint alleged that the Defendants:
who are all characterized as "stock promoters," engaged in a fraudulent scheme to manipulate the market for GYGC by bribing registered representatives ("RRs") to purchase GYGC common stock in accounts over which the RRs had trading discretion.
The Complaint alleges that between April and August, 2008, Individual Arepresented himself to Defendants Grossman, Cohen, and Schmidt as a person who could move stock. More to the point, Individual A claimed to have ties to a group of RRs with discretion over the accounts of wealthy customers.
On April 17, 2008, Grossman, Cohen, and Schmidt allegedly offered to pay a 30% kickback to Individual A in exchange for his help in putting away some $2-3 million of GYGC common stock. Thereafter, on April 25,2008, Defendant Cohen introduced Individual A to Defendant Zanic, who confirmed the group's offer of a 30% kickback for purchases of $3 million of GYGC common stock. The parties apparently shook on it.
As far as this alleged schemes go, if you believe the allegations, this deal is much pretty cut and dried. You got your gold company. You got a start-up venture with no history of operations for two years and no revenue - hey, minor details, right? Add into that mix the lovely nation of Guyana - the land of Jim Jones and Kool-Aid. Also, you have an alleged school of stock promoters circling in the waters, and they propose to work with middlemen Individual A, who, for a fee, is ready to reach out and touch any number of RRs who, also for a fee, are all too happy to work their phones (and sometimes work over their pliable customers) to drum up orders to sell the garbage for which they are going to get a nice wad of cash.
Except, in this particular case, one of the sharks swimming in the waters wasn't exactly a stock promoter. Think of Individual A as a killer whale. You see, Individual A was an FBI agent. Oops!
The Complaint alleges that Zancic then agreed to do a test transaction with Individual A, one for about $75,000 in GYGC purchases. So much for honor among alleged thieves, I guess. Apparently the stock promoters weren't quite sure - they wanted to see if Individual A could really move some paper and decided upon a dry run, so to speak.
During May 1-5, 2008, Defendant Zanic allegedly instructed Individual Ato submit orders to buy GYGC stock, and gave the undercover FBI agent detailed instructions about the size, price and timing of those orders. Further, Zancic allegedly told the agent which market makers to contact for execution. According to the allegations, Zanic issued these instruction so as to ensure that Individual As purchase orders were matched with Zanic's sell orders at prices Zanic predetermined. Too bad that Zanic didn't know that Individual A was an undercover FBI agent.
SIDE BAR: Sometimes customers complain that their broker recommended some stock to them at $5 - you know the patter, it's going to double or triple in a few weeks, - and the thing plummets to a buck or less. When the customers call to sell their shares, they can't seem to get the broker on the phone, or he's in a meeting, or he will call them back. Of course, it's part of a stall. If the customer persists and threatens, sometimes the broker will try to convince some other pigeon that this stock selling for under a dollar is going to double or triple in weeks and use that order to buy into the stock as a way to cross the complaining customer's order to sell. Such "No Sell" policies and crossed/matched orders are the stuff of decades of lawsuits and regulatory actions.
The Complaint alleges that from May 1 to 5, 2008, Individual A caused the purchase of approximately 115,000 GYGC shares worth about $72,000; and, accordingly, the Defendants paid him $14,000, which the SEC characterizes as bribes.
On May 6, 2008, Zanic allegedly wired a partial downpayment of the promised kickback in the amount of only $7,480 to Individual A- who complained about being shortchanged, which prompted the payment of an additional $6,300 from Zanic on July 17th. Defendant Zanic promised to wire the remaining balance.
On August 11,2008, Zanic purportedly offered another 30% kickback to Individual A for further GYGC purchases, but the agent did not fulfill his end of that bargain.
The Defendants are charged with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus pre-judgment interest, civil penalties, and a judgment prohibiting Defendants from participating in any offering of penny stock.
On November 30, 2011, a final judgment by consent was entered against Defendant Glenn Grossman, permanently barring him from participating in penny stock offerings and permanently enjoining him from future violations of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.