On May 26, 2010, a federal grand jury in the Northern District of Texas returned an Indictment under seal (unsealed May 27th) charging Blake Williams, then 27, of Dallas, TX, and Derek Lopez, then 43, of Torrance, CA, each with one count of conspiracy to commit securities fraud and seven counts of securities fraud.
Williams and Lopez traded stock in their own names as well as through TBeck Capital and other companies (Lopez used the name "Da Big Kahuna" as an alter ego trading name). Williams allegedly received cash payments and Lopez received free-trading stock and cash payments in return for their assistance in the manipulation.
The Indictment alleged that from June 2006 through December 2008, Williams, Lopez and their co-conspirators engaged in a scheme to manipulate the price and volume of stocks traded in the over-the-counter market. In furtherance of the conspiracy, companies owned and controlled by a co-conspirator purportedly obtained control of large positions of free-trading stock in various publicly-traded companies. Thereafter, Williams, Lopez and others coordinated trades with each other in order to create the false appearance that there were multiple unrelated entities buying and selling the stock. As a result of this conspiracy, the Indictment alleged an impression was fostered in the market that multiple unrelated entities were buying and selling the stock - helping to artificially inflate the stock's price, thus permitting the defendants and their co-conspirators to execute sales at the manipulated, higher prices.
If convicted, the defendants faced:
In a separate action, on May 27, 2010, the Securities and Exchange Commission ("SEC") filed a Complaintagainst Williams and Lopez, and numerous entities that they controlled, alleging that they committed securities fraud by manipulating the markets of numerous microcap stocks from 2006 to 2008. U.S. Securities And Exchange Commission V. Blake G. Williams, Tbeck Capital, Inc., Warren Street Investments, Inc., Victoria Financial Consultants, LLC, BGW Enterprises, Inc., Emerging Resources, Inc., Valek Investments, Inc., Derek Lopez, And Da Big Kahuna, LLC (10-CV-1068, N.D. Tex., May 27, 2010; SEC Litigation Release No. 21539, May 27, 2010).
NOTE: The charges in the SEC Complaint are merely allegations and the defendants are presumed innocent unless and until proven guilty in a court of law.
Largely mirroring the allegations in the Indictment,the SEC Complaint alleged that the defendants sold stock in unregistered offerings and that their subsequent manipulation led to artificially high prices and volume, which allowed the defendants and others to sell their holdings for substantial gains. TheComplaint also alleged that Williams acted as an unregistered broker-dealer when he solicited purchases of stock and traded on behalf of investors who bought stock from him.
Williams, using five entities that he controlled, and Lopez, using the entity Da Big Kahuna, LLC, were alleged to have engaged in a number of manipulative practices, including:
The SEC sought injunctions, penny stock bars, disgorgement, and penalties from the defendants, in addition to an officer and director bar against Williams because he served as an officer of several of the microcap issuers.
The SEC Complaint is a superb effort and I urge all serious public investors and industry professionals to read this case in order to better understand the nature of the elements of the cited market manipulation technique of "layering orders" or "laddering," i.e., entering orders at or near the best bid and ask prices with the intent to stabilize or increase share prices. In this case, the SEC alleged that defendants placed buy orders for stock at prices immediately below the "inside," or highest, bid price posted by the market makers.
SIDE BAR: Here's an example of what you might see on the Bid-side in a ladder:
HIGHEST POSTED MARKET MAKER BID: $1.50
MANIPULATIVE BID SUPPORT LAYERS: $1.45, $1.40, and $1.35.
Manipulators use the above example of a ladder of supporting bids to absorb sell orders and serve as a cushion against any selling pressure. In theory, these layers of orders are intended to deflect natural market forces. Manipulators typically place their supporting bids through different brokerage firms with the hope that market participants viewing Level II trading screens will be mislead into believing that there is wider (or widespread) market support at the Bid. For such layering or laddering to work, it is critical that the manipulators control the "float" of freely-tradeable shares.
As part of the scheme to distribute shares in unregistered offerings, the defendants and others in the instant case ensured that the majority of shares without restrictive legends were controlled by the group. By locking up these unrestricted shares, the conspirators are better able to sell their own holdings without competing with shares from other would-be sellers.
A hallmark of this alleged form of market manipulation is the need to coordinate trading in order to assure the highest prices for the manipulated shares being dumped on an unsuspecting public. In addition to "understandings" among the fraudsters to sell their shares at times of higher volume and to refrain from sales in thin markets, conspirators mask their activities through multiple brokerage firms and multiple brokerage accounts. In the case of registered industry professionals (such as traders and stockbrokers) who are part of such a conspiracy, such individuals will open and use trading accounts at firms other than their own ("away accounts"), or will utilize accounts that they control in the names of family or friends. The subterfuge of using different brokerage firms and multiple customer accounts is to give the false impression of increased market interest and depth, and to hide the true identities of the manipulators.
The SEC Case
On February 3, 2011, a final judgment by default in the SEC case was entered against Williams, permanently enjoining him from future violations of certain federal securities laws; permanently prohibiting him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act; ordering him to disgorge $2,028,168 in illegally obtained profits, plus prejudgment interest in the amount of $245,754.79; and ordering him to pay a $130,000 civil money penalty.
On June 3, 2011, a judgment was entered by consent in the SEC case against Lopez, permanently enjoining him from future violations of certain federal securities laws.
On September 8, 2011, and March 21, 2012, respectively, the SEC barred Williams and Lopez.
The Criminal Case
On August 23, 2012, Williams and Lopez pleaded guilty to one count of conspiracy to commit securities fraud and one count of security fraud.
On February 27, 2013, Williams, 30, and Lopez, 46, were sentenced, respectively, to 32 and 24 months in prison plus two years of supervised release. Further, Williams was ordered to forfeit $125,000; Lopez was ordered to forfeit $72,442.