Undercover FBI Pennystock Sting

September 9, 2015

At times, Wall Street can be a treacherous place. Normally, we'd be talking about the challenges facing investors; today, however, we're talking about the dangers with which the bad guys have to deal. Obviously, we ain't gonna be shedding a lot of tears here. In fact, you may even come away with a smile and a fist pump when you read about a recent case in which a defendant unknowingly dealt with an FBI undercover agent and a cooperating witness. That click you just heard was someone stepping on a hidden landmine.

Case In Point

On February 27, 2014, the U.S. Attorney's Office for the District of Massachusetts announced that seven defendants had been charged as a result of a Federal Bureau of Investigation sting involving kickbacks in the microcap stock sector. "FBI Undercover Operation Nets Seven Defendants In Securities Kickback Scheme" (Press Release, U.S. Department of Justice, February 27, 2014). Among those named as defendants was Gerard Haryman, 70, Lake Worth, Fla., a consultant for and an investor in the publicly-traded pennystock A Clean Slate Inc., which purportedly purportedly provided financial services and specialized in debt relief and financial recovery services. Although A Clean Slate's securities had been registered with the SEC, on April 13, 2012, the company terminating its securities registration pursuant to a filing of a Form 15-12G . The company's securities were publicly quoted on the OTC Link under the symbol "DRWN," and subsequently contained a warning that the company may not be making material information publicly available.

SIDE BAR: http://www.otcmarkets.com/stock/DRWN/quote

Five Counts

On March 21, 2014, Haryman was charged in an Information with two counts each of mail fraud and wire fraud and one count of conspiracy to commit securities fraud.  If convicted, Haryman faced up to 20 years in prison plus three years of supervised release, and $250,000 on each count. U.S. v. Haryman (Information, D. Mass., 14-CR-10077-RGS, March 21, 2014).

I'll Be Watching You

As set forth in the Information, Haryman was undone by an undercover FBI agent, who pretended to represent a major investment fund (which was wholly fictitious). To make matters worse, Haryman was also dealing with a pennystock promoter and funding finder who became an unnamed cooperating witness.

The cooperating witness arranged for Haryman and A Clean Slate's President/CEO to meet with the undercover FBI agent. Gee, how thoughtful! Sometime around September 28, 2011, the meeting (which was recorded) occurred and a discussion transpired during which it was proposed that the fund representative (the FBI undercover agent) would arranged for an investment in A Clean Slate in exchange for a 50% kickback. Haryman and the CEO agreed to a kickback proposal that called for payoffs to be sent to several companies under the fund representative's control pursuant to sham consulting agreements - the contemplated consulting services would never be provided but simply served as the cover for the kickbacks.

16 Will Get Ya 8; 32 Will Get Ya 16

By October 5, 2011, $16,000 had been wired from the fictitious fund to A Clean Slate's bank account as the first tranche of funding. In response to the investment, Haryman and the CEO allegedly wired $8,000 to a corporate bank account of one of the fund representative's nominee companies. The Information details another $32,000 investment, further wires pursuant to the kickback scheme, issuance of stock certificates, and the generation of knowingly bogus consulting services invoices.

 Pleading Out

On May 2, 2014, Haryman pleaded guilty to all counts.

 On November 13, 2014, Haryman was sentenced to 1 day in prison and 3 years' supervised release. Also, he was ordered to pay $24,000 in restitution and a $500 special assessment. Additionally, on November 21, 2014, Haryman was ordered to forfeit $24,000.

 The SEC Gets In Its Licks

On June 1, 2015, the Securities and Exchange Commission filed an Order Instituting Administrative and Cease-And-Desist Proceedings and Notice of Hearing (the "OIP") against Gerard Haryman. In the Matter of Gerard Haryman, Respondent (OIP, '34 Act Release No. 75080; Admin. Proc. File No. 3-16564/ June 1, 2015). The OIP alleged that Haryman's conduct constituted a willful violation of Section 10(b) of the Exchange Act and Rule 10b-5(a) thereunder.

In response to the OIP, Haryman submitted an Offer of Settlement, which the SEC accepted. In the Matter of Gerard Haryman, Respondent (Order Making Findings and Imposing Remedial Sanctions and a Cease-And-Desist Order, '34 Act Release No. 75802; Admin. Proc. File No. 3-16564/ September 1, 2015).

In accordance with the terms of the settlement, the SEC imposed a Cease-And Desist pertaining to future violations of the applicable federal law and rule; and barred Haryman from participating in any offering of a penny stock, including acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.

Bill Singer's Comment

A round of applause for all involved in busting up this scam.  It's comforting to know that the FBI is taking an affirmative role in ferreting out Wall Street fraud rather than waiting for the crimes to cross over its threshold. This case -- and others like it -- should serve as a warning to those seeking to runs similar schemes on an unsuspecting investing public. That nice guy offering to paper the Street with your crap may just be an FBI agent. That pleasant woman who is arranging all the meetings for you may just be looking for a "Get Out of Jail" card from some prosecutor.  

Every move you make
Every vow you break
Every smile you fake
Every claim you stake
I'll be watching you

Okay, sure, for all the earnest enforcement, Haryman only got sentenced to one lousy day in jail and forced to pay a relatively puny five-figures but can you imagine how his legal fees added up! Oh, and don't forget that the he was barred by the SEC. Yeah, I see your point, not a big bang necessarily for the enforcement buck but, hey, at least it's something.  

SIDE BAR: For more background on Haryman, READ: "EXCLUSIVE - Palm Beach Businessman Gerard Haryman Sentenced to One Day in Prison, Three Years Probation in Fraud!" (Gossip Extra, November 13, 2014).