May 2, 2012
On May 2, 2012, the Securities and Exchange Commission ("SEC") charged Kevin Sepe of Miami, FL, with masterminding schemes involving microcap companies Recycle Tech and HydroGenetics.
The Recycle Tech scheme involved a promotional campaign to pump the price and volume of the purported home container building company's stock in the wake of the Haiti earthquake. According to the SEC's complaint filed in federal court in Miami, Sepe and Aventura, FL-based attorney Ronny Halperin evaded registration requirements by converting backdated and fabricated promissory notes into unrestricted stock of Recycle Tech, quoted on the Pink Sheets. With help from Recycle Tech's CEO and president Ryan Gonzalez, they conducted a pump-and-dump scheme from January to March 2010 by enlisting the help of promoters Anthony Thompson and Jay Fung, who touted Recycle Tech in their newsletters. David Rees, a Utah-based attorney, became involved in the scheme when he drafted an improper legal opinion letter authorizing the issuance of unrestricted Recycle Tech shares.
The SEC alleges that the participants collectively made over $1 million in illegal profits through the scheme, which touted that Recycle Tech signed a binding letter of intent to build up to 50 container homes in Haiti following the earthquake. However, Recycle Tech failed to disclose to investors that it had no funds, no finished container homes, and minimal operations. Allegedly, Sepe orchestrated, coordinated, and funded the scheme and sold Recycle Tech stock along with Halperin and Rees without any exemption from registering those securities with the SEC. Gonzalez, who lives in Miami, allegedly made the scheme possible by incorporating a sham private company, turning the public shell of that company into Recycle Tech through a reverse merger, and signing various fraudulent documents to authorize the issuance of Recycle Tech securities. Gonzalez also drafted and issued false press releases used to hype Recycle Tech stock. Through their firms OTC Solutions LLC and Pudong LLC, Thompson and Fung touted Recycle Tech in their newsletters without disclosing that they were selling shares or adequately disclosing the compensation they received for their touts.
According to a second SEC's complaint filed in Miami, Sepe and Halperin schemed with Miami-based attorney Melissa Rice and others to illegally issue and liquidate 90 million unregistered shares of HydroGenetics from April 2008 until at least June 2009. Sepe allegedly headed a group that purchased convertible debt of a South Florida publicly-held company. He then formed HydroGenetics and parsed out portions of the convertible debt to friends, family, and others who converted the debt to stock that they then sold publicly. Purportedly, Sepe sold HydroGenetics stock without any exemption from registration.
Halperin was the HydroGenetics CEO and a director. He executed corporate resolutions to help issue millions of shares of HydroGenetics stock, including 11 million shares to his daughter who he told to sell it and funnel a portion of the illegal proceeds back to him. Rice assisted Sepe in converting convertible debt to unrestricted HydroGenetics shares, and wrote four opinion letters improperly opining that the Rule 144 safe harbor was applicable and the debt could be converted to unrestricted HydroGenetics shares. Rice also sold her shares of HydroGenetics stock.
The HydroGenetics scheme took millions of unregistered shares of the company - purportedly in the business of acquiring emerging alternative energy companies - and improperly converted its debt into free-trading shares that were dumped on the investing public. The SEC alleges that three other Miami residents also received illegal profits in the HydroGenetics scheme: Luz Rodriguez, who worked as an office administrator and assistant to Sepe; Howard Ettelman, a provider of accounting services to various companies owned by Sepe and Rice; andSeth Eber, a self-employed jeweler who was on the list of individuals that Sepe provided Rice to assign shares. The SEC further alleges that Charles Hansen III of Lighthouse Point, Fla., succeeded Halperin as HydroGenetics CEO in April 2009 and signed five corporate resolutions authorizing HydroGenetics to illegally issue stock that Rice then used along with her opinion letter to facilitate the scheme.
Without admitting or denying the allegations Sepe, Halperin, Rees, Rice, Ettelman, and Hansen settled the SEC's charges:
- Sepe agreed to disgorgement of $1,416,466.16, prejudgment interest of $126,761.86, and penalties of $185,000 as well as a permanent bar from participating in an offer or sale of penny stocks.
- Halperin agreed to disgorgement of $427,609.95, prejudgment interest of $33,595.33, and a penalty of $100,000 as well as a permanent penny stock bar and a five-year officer and director bar. He also agreed to surrender 1.97 million shares of HydroGenetics stock.
- Rees agreed to disgorgement of $5,982, prejudgment interest of $406.25, and a penalty of $7,500 as well as a one-year prohibition from providing professional legal services connected to the offer or sale of securities.
- Rice agreed to disgorgement of $422,445, prejudgment interest of $39,239.18, and a penalty of $60,000 as well as a five-year penny stock bar and three-year prohibition from providing professional legal services connected to the offer or sale of securities.
- Ettelman agreed to disgorgement of $32,667, prejudgment interest of $3,093.27, and a penalty of $25,000 as well as a five-year penny stock bar and the surrender of 300,000 shares of HydroGenetics stock.
- Hansen agreed to a $37,500 penalty.
Two companies - Charter Consulting Group (owned and controlled by Sepe) and West Coast Investments Enterprises (owned by Rice) - were named as relief defendants in the SEC's complaints because they received a portion of the illegal trading profits in the schemes. They each settled the case, with Charter agreeing to disgorgement of $150,000 and prejudgment interest of $9,125 and West Coast agreeing to disgorgement of $125,000 and prejudgment interest of $11,262.71.
Separately, the SEC issued orders to suspend trading in the securities of Recycle Tech and HydroGenetics and to institute administrative proceedings against each company to determine whether the registration of their securities should be revoked or suspended based on their failure to file required periodic reports.
The SEC also instituted separate settled administrative proceedings against HydroGenetics in which the company, without admitting or denying the findings, consented to an order requiring it to cease and desist from committing or causing violations of the registration provisions of the federal securities laws.