Pennystock Kickback Scheme Gets In Last Kicks at SEC

November 13, 2015

In recent years, the Federal Bureau of Investigation has used undercover operatives to penetrate the ranks of unscrupulous issuers and "stock promoters" who try to foist pennystocks upon an unsuspecting public. Sometimes the fraud is clever but, more often than not, it's little more than the old Pump-And-Dump. As explained in this BrokeAndBroker.com Blog, three individuals ensnared in a pennystock sting found their way onto the federal criminal and the Securities and Exchange Commission administrative dockets.

Cases In Point

On November 9, 2015, in anticipation a Securities and Exchange Commission ("SEC") Order Instituting Administrative And Cease-And-Desist Proceedings ("OIP"), without admitting or denying the findings, Respondents Hadi Aboukhater and Shaileish Shah submitted separate Offers of Settlement, which the SEC accepted, and, accordingly, the Respondents were ordered to Cease-And-Desist from further federal securities law violations. Both settling Respondents agreed to pennystock Bars and Respondent Shaileish Shah also agreed to a Bar for five years from acting as an officer or director of a registered issuer or one subject to specified filing obligations.

In the third referenced November 9, 2015, OIP, Respondent Sandip Shah opted not to settle the pending charges and his case had been noticed for a hearing date. Sandip Shah is presumed innocent unless and until proven guilty beyond a preponderance of the evidence.

Going to the Source

What, if any, common thread exists among these three Respondents? For one thing, the OIPs were filed with consecutive SEC File Numbers, which is one hell of a hint that the actions are related:
Consider these "Summary" and subsequent sections from the Aboukhater and Shaileish Shah OIPs:

Aboukhater:

These proceedings arise out of a fraudulent scheme in which insiders of publicly-traded penny stock companies paid kickbacks to a purported hedge fund manager, who was in fact an undercover agent with the Federal Bureau of Investigation ("Fund Manager"), in exchange for the Fund Manager's purchase of restricted stock of the penny stock companies on behalf of his purported hedge fund ("the Fund"), which did not actually exist.

Respondent 

1. Aboukhater, age 44, a resident of Haymarket, Virginia, was in the business of assisting public companies in finding sources of funding. Many of the publicly traded companies Aboukhater assisted were penny stock companies whose common stock was publicly quoted on OTC Link. During the period January 2011 through May 10, 2011, Aboukhater participated in offerings of at least six penny stocks. On February 27, 2014, Aboukhater was charged by criminal information with one count of wire fraud, and he pleaded guilty to that charge on March 25, 2014 in U.S. v. Aboukhater, 14-CR-10057-DJC (D. Mass.). On January 26, 2015, the Court ordered Aboukhater to serve two years' probation, pay a fine of $10,000 and a special assessment of $100, and forfeit $12,425. 

Shaileish Shah:

These proceedings arise out of a fraudulent scheme in which insiders of publicly traded penny stock companies paid secret kickbacks to a purported corrupt hedge fund manager, who was in fact an undercover agent with the Federal Bureau of Investigation ("Fund Manager"), in exchange for the Fund Manager's purchase of restricted stock of the penny stock companies on behalf of his purported hedge fund ("the Fund"), which did not actually exist. 

Respondent 

1. Respondent, age 49, a resident of Chino, California, was the President and Chief Executive Officer ("CEO") of SOHM, Inc. ("SOHM"), a publicly traded company that manufactures and distributes generic pharmaceuticals in emerging markets in Asia, Africa, and Latin America. Shah was also the President and CEO of Costas, Inc. ("Costas"), a publicly traded company that provided digital media consulting and other services. Respondent participated in offerings of SOHM and Costas stock, which are penny stocks. Respondent was charged by criminal information with two counts each of mail fraud and wire fraud on May 8, 2014 and pleaded guilty to all counts on July 18, 2014 in U.S. v. Shah, 14-CR-10136-RGS (D. Mass.). On June 23, 2015, Shah was sentenced to 18 months' probation and, on June 25, 2015, was ordered to forfeit $37,500

Finally, consider this paragraph in Sandip Shah's OIP:

1. Respondent, age 41, is a resident of Chino, California. He was in the business of promoting penny stocks and assisting public companies in finding sources of funding. Respondent participated in offerings of the common stock of SOHM, Inc. ("SOHM"), Costas, Inc. ("Costas"), and a third company ("Company A"), each of which is a penny stock. During the relevant period from at least March 10, 2011 through at least May 12, 2011, Respondent was a consultant to Company A. On May 8, 2014, Respondent was indicted on nine counts of wire fraud in U.S. v. Shah, 14-CR-10135- NMG (D. Mass.). On May 15, 2015, a jury found him guilty of nine counts of wire fraud. On August 25, 2015, he was ordered to forfeit $40,000 and, on September 11, 2015, was sentenced to 27 months' imprisonment to be followed by 2 years' supervised release, and was ordered to pay a $9,000 fine. 

Bill Singer's Comment

If you are an industry professional or a serious investor, you really need to take the time to read each of the above OIPs, which set forth in a compelling manner the manner in which the Feds laid and ultimately sprung the trap.  This is an effective and fair use of prosecutorial resources that is well matched by the outcomes in sentencing and settlement. Compliments all around!

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