Two Penny Stock Schemes
One current area of focus for Commission enforcement is penny stocks. There is nothing new about this focus. From the earliest days of the Division, penny stocks have been a central concern. Repeated actions have been brought based on the manipulation of the shares of these companies. Typically, the manipulations are straight forward pump and dump schemes in which the manipulator gains control of an issuer, engages in actions such as wash sales and matched orders and/or injects false statements and information into the markets to boost the price and then sells his or her shares into the rising market.
The penny stock manipulation case filed this week centered on two different types of schemes. The results were the same however: the manipulators made money, the share prices were manipulated, and the markets were harmed. SEC v. Gamdy, Civil Action No. 4:21-cv-03672 (S.D.Tx. Filed November 9, 2021.
The action names as defendants: Robert Gandy, a securities law recidivist and the founder of Defendant Silverback Promotions, LLC; Clarence Fitchett, the founder of Defendant CF3 Enterprises, LLC; Kathy Givens-Gandy, the wife of Defendant Gandy; and Billy Chang, a Texas licensed Pharmacist. The action centers on two schemes involving penny stocks Quantum Medical Transport, Inc. and Macau Capital Investments, Inc. The schemes were implemented in 2017 and 2018.
The first centered on the use and abuse of Securities Act Section 3(a)(10). That section permits a firm to issue unrestricted shares to pay for a bona fide debt if the payment is approved at a fairness hearing by a court. This Section was used to defraud investors. The scheme began with the creation of fictitious debt for Quantum and Macau Capital. Debts of those firms were then sold to third parties. CF3 subsequently filed lawsuits in a Florida court on the debts. The court eventually approved the proposed settlements based on the issuance of shares issued by Quantum and Macau Capital. The transfer agent issued the shares based on the fraudulent judgments. The shares had a value of $7 million.
The second scheme centered on creating fraudulent, convertible promissory notes. Here Defendants Gandy and Fitchett fabricated the notes for Quantum and Macau Capital that were at the center of the scheme. Defendants Chang and Givens-Gandy then sold the notes to third parities who exercised the option in each note, to obtain the shares. Those shares were then into the market. The sale of the notes generated about $100,000. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25260 (November 9, 2021).