Da Big Kahuna Indicted For Securities Fraud

The Federal Criminal Case

A federal grand jury returned an indictment under seal on May 26, 2010, charging Blake Williams, 27, of Dallas, and Derek Lopez, 43, of Torrance, Calif., with one count of conspiracy to commit securities fraud and seven counts of securities fraud.  The charges, filed in U.S. District Court for the Northern District of Texas/Dallas Division, were unsealed on May 27, 2010, and Williams and Lopez were arrested. http://www.justice.gov/opa/pr/2010/May/10-crm-626.html

NOTE: THE DEFENDANTS ARE PRESUMED INNOCENT UNLESS AND UNTIL PROVEN GUILTY.  ALL CHARGES ARE MERELY ALLEGATIONS AT THIS TIME.

According to the indictment,

• Williams was a securities broker-dealer and employee of TBeck Capital Inc., a purported investment banking and securities trading firm in Grapevine, Texas;
• Lopez was a securities broker-dealer who provided services to TBeck Capital;
• 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. 

The indictment alleges that companies owned and controlled by a co-conspirator obtained control of large positions of free-trading stock in various publicly-traded companies. Williams, Lopez and others allegedly would then coordinate trades with each other and with their co-conspirators to create the false appearance that there was greater investor interest in the stock. Williams and Lopez allegedly traded stock in their own names as well as through TBeck Capital and other companies to keep the stock price artificially inflated.  These alleged actions allowed the defendants and their co-conspirators to then sell that stock at an artificially high price. 

Lopez allegedly traded in his own name, as well as in the name "Da Big Kahuna," to disguise his trades.  Williams allegedly traded in his own name and in the name of several companies to make it appear that there were multiple unrelated entities buying and selling the stock. According to the indictment, Williams allegedly received cash payments and Lopez received free-trading stock and cash payments in return for their assistance in manipulating the stock prices of companies in which TBeck Capital owned and controlled large positions of free-trading stock.

If convicted on the conspiracy charge, the defendants face

• a maximum penalty of five years in prison;
• a $250,000 fine, or twice the gross gain or loss, whichever is greater.

If convicted on the securities fraud charges, each carries

• a maximum penalty of 20 years in prison; and
• a $5 million fine.

See, http://www.justice.gov/opa/pr/2010/May/10-crm-626.html

The SEC Case

In a separate action, on May 27, 2010, The Securities and Exchange Commission (SEC) filed a complaint against 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 (SEC Litigation Release No. 21539 / May 27, 2010 // Civil Action No. 3:10-CV-1068 (N.D. Tex. May 27, 2010)) http://sec.gov/litigation/complaints/2010/comp21539.pdf 

NOTE: THE DEFENDANTS ARE PRESUMED INNOCENT UNLESS AND UNTIL PROVEN GUILTY.  ALL CHARGES ARE MERELY ALLEGATIONS AT THIS TIME.

The SEC alleges 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. The complaint also alleges 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.

The SEC's complaint alleges that Williams, using five entities that he controlled, and Lopez, using the entity Da Big Kahuna, LLC, engaged in a number of manipulative practices, including:

• engaging in "bid support" by placing orders for shares at prices below the inside (highest) bid to absorb sell orders and create an artificial floor for the stocks;

• trading in multiple accounts through multiple brokers to give the false impression that there was greater demand for the stocks than truly existed;

• coordinating trading among a group of individuals for the purpose of maintaining stock prices; and

• obtaining securities in unlawful, unregistered offerings and then selling the securities to investors and into the markets in similarly unregistered and unlawful transactions.

The SEC seeks 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.

See,  http://sec.gov/litigation/complaints/2010/comp21539.pdf

Bill Singer's Comment:  The SEC Staff did a superb job setting forth the allegations in its Complaint.  I urge all serious public investors and industry professionals to read this case in order to better understand the nature of market manipulation.

As presented here, the alleged manipulators utilized the technique of "layering orders," i.e., entering orders at or near the best bid and ask prices with the intent to stabilize or increase share prices. This is also referred to a "laddering."  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.

For example:

HIGHEST POSTED MARKET MAKER BID: $1.50;

MANIPULATIVE BID SUPPORT LAYERS: $1.45, $1.40, and $1.35. 

Manipulators use this 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," i.e., the freely-tradable shares. In this case, the SEC alleges that as part of the scheme to distribute shares in unregistered offerings, the defendants and others 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.

Finally, 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 will often cloak 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.

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Not Much in the Way of Progress: Pequot, Samberg and Martha Stewart

http://www.huffingtonpost.com/bill-singer/not-much-in-the-name-of-p_b_595739.html

So tell me, if Stewart's trading took place in December 2001 and Pequot/Samberg's trading took place eight months earlier in April 2001 -- why was Stewart at trial by 2004 but Pequot/Samberg's case is first resolving in 2010? And given that the fact patterns seem quite similar, why didn't Stewart just get to write out a fat settlement check instead of going to jail? Ain't progress grand?

READ BILL SINGER'S HUFFINGTON POST ARTICLE AT:

http://www.huffingtonpost.com/bill-singer/not-much-in-the-name-of-p_b_595739.html

• Derek Lopez
• Blake Williams
• TBeck
• Da Big Kahuna
• Bill Singer
• BrokeAndBroker
• Securities Fraud
• SEC