SEC Charges Four in Elaborate Microcap Stock Fraud

Fake debt instruments allegedly used to reap $25 million in ill-gotten gains.

 The SEC has charged four people and related businesses for their roles in two microcap frauds and unlawful securities offerings that resulted in illegal gains of more than $25 million.

According to the SEC’s complaint, microcap stock financier Magna Group acquired fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc., and then converted those notes into shares of Lustros common stock.  The defendants then sold the shares to unsuspecting retail investors, who were unaware that the shares were fraudulently acquired and were being sold illegally. 

Magna Group was founded and owned by Joshua Sason, one of the four individuals named as defendants in the charges.

“Magna Group and its co-defendants used fake debt instruments to unlawfully obtain shares in microcap companies, which they then dumped on unsuspecting retail investors,” said Sanjay Wadhwa, senior associate director of the SEC’s New York regional office

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

The complaint says that the sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public, and alleges that Marc Manuel, Magna Group’s former head of research and due diligence, personally negotiated and executed the illegal transactions.

The complaint also alleges that Magna Equities II, which was also owned by Sason and Manuel, purchased another fake promissory note from Pallas Holdings. Magna Equities II and the note’s issuer, NewLead Holdings Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement. The charges allege Sason and Magna Equities II falsely swore to the court that the fake promissory note was an authentic debt of NewLead in order to obtain approval of the settlement. Kautilya “Tony” Sharma, and Perian Salviola, who controlled Pallas Holdings, are also alleged to have participated in the scheme.

Sason and Manuel allegedly knew, “or were at least reckless in not knowing,” that the promissory notes were fraudulent, said the complaint.

After obtaining the shares, the Magna Entities made the stock available to the public, including retail investors, who were unaware that new shares were flooding the market as a result of transactions that violated the federal securities laws. The securities were not registered with the SEC, and the shares could not be legally sold pursuant to any exemption from the registration requirements of the securities laws.

Sharma, Salviola, and Pallas allegedly participated in the fraudulent scheme to acquire unrestricted stock of NewLead, and “netted $6 million in profits, a portion of which they kicked back to NewLead.”

The complaint also accuses Pallas of acting as an underwriter for a primary offering of NewLead stock, which NewLead attempted to disguise as an asset sale transaction.

“Pallas purported to sell NewLead overvalued mining assets in exchange for convertible debt, which it then converted to stock and liquidated for proceeds of more than $20 million,” said the complaint. “Pallas then wired a portion of these proceeds back to NewLead, disguised as a new loan to the company and secured by the very same mining assets Pallas had purported to sell NewLead previously. Pallas thereafter foreclosed on the mining assets, unwinding the transaction.”

This lawsuit seeks an injunction prohibiting the defendants from engaging in similar violations of the federal securities laws, penny stock bars against Sason, Manuel, Sharma, and Salviola, and disgorgement of millions of dollars in profits from the illegal transactions.

Related Articles

SEC Charges Audit Firm in Failure to Detect Unpaid Taxes

SEC Charges Floyd Mayweather, DJ Khaled for Unlawfully Touting ICOs

SEC Charges Audit Firm in Failure to Detect Unpaid Taxes



Tags: , , , , , ,