Editorial: Thoughts for your penny stock

“Pink Sheets” aren’t nearly as much fun as they sound, at least in the world of penny stock investing. Mid-August saw the U.S. Federal Bureau of Investigation and the Royal Canadian Mounted Police team up to make seven arrests in New York, Arizona, New Jersey, Florida, California and Ontario in what the FBI calls “one of the largest international penny stock frauds and advanced fee schemes in history.”

Nine defendants have been indicted on 24 counts of securities fraud, wire fraud and impersonation of Internal Revenue Service employees in connection with the sale of securities and conspiracy.

The American defendants are: Gary Kershner, 72, of Tucson; Joseph Manfredonia, 45, of New Jersey; Cort Poyner, 22, of Boca Raton; Songkram Roy Sahachaisere, 43, of Los Angeles; and William Seals, 51, of Fallbrook, Calif.

The Canadian defendants are: Sandy Winick, 55, in Bangkok; Gregory Curry, 63, in Bangkok; Kolt Curry, 38, in Ontario; and Gregory Ellis, 46, in Ontario. As you might guess, it’s the pair in Bangkok who are still on the run.

The FBI says the arrests stem from “one of the largest international penny stock investigations ever conducted” by the U.S. Department of Justice and the FBI, and there was assistance from other law enforcement agencies in the U.S., as well as Canada, England, Thailand and China, using wiretaps in the U.S. and undercover agents in foreign countries.

The FBI alleges the defendants masterminded securities fraud and advance fee schemes that victimized investors in 35 nations and generated more than US$140 million through various brokerage and bank accounts under their control.

More specifically, the defendants are alleged to have first “engaged in an international pump-and-dump scheme during which they fraudulently pumped up the share price of worthless penny stocks and then dumped billions of shares of those stocks by unloading them on unsuspecting victim investors” across the globe.

The scheme made use of controlling interests of “huge quantities of worthless stock in 11 public companies” that were thinly traded, had minimal assets and non-existent business operations. The pumping effort apparently included “distributing false press releases, announcing non-existent business ventures, posting false information on social media sites, and bribing stock promoters and brokers,” and using throwaway phones and overseas call centres to avoid detection in the U.S.

Secondly, the defendants are alleged to have operated boiler rooms in at least four countries that “induced investors in penny stocks, including many of the same victims from the pump and dump scheme, to pay advance fees that the defendants promised would enable the victim-investors to sell their penny stocks and recover losses that they incurred. In reality, the defendants simply stole the fees without providing any services, fraudulently extracting millions of additional dollars from their victims.” This end of the business apparently involved the creation of fake trading companies, law firms, victims groups and lawsuits, and even the posing of people as “helpful” IRS employees. (No real IRS employees were involved, though.)

This is a commendable take down of an elaborate white collar criminal enterprise.

If you’d bear with us, the one nitpick we’d make is the FBI characterizing the dubious securities as simply “penny stocks” and not pointing out to the general public that these were stocks churned in over-the-counter trading in the U.S., in a service run either by New York City-based OTC Markets Group (i.e. where almost 10,000 companies are theoretically tradable on the Pink Sheets), the OTC Bulletin Board, or some other “grey market.”

As we all know in this business, there is a world of difference between U.S. OTC stocks, which have little oversight and are very prone to market manipulation, and stocks that are actually trading for pennies on an established, highly regulated stock exchange like the TSX Venture Exchange.

In fact, there are incredible bargains to be had right now in totally legitimate mining juniors trading for under 10¢ in Canada, and to lump these opportunities with OTC trash would be a shame, and hopefully something mining investors won’t be tempted to do.