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July 14, 2014 at 12:40 PM
On Friday I laid out a schematic explanation of how to operate a pump and dump scam, because that seemed like news some people could use. At about the same time, the Securities and Exchange Commission was publishing its own handbook of pump-and-dumping, in the form of a civil complaint against five guys involved with a stock called Amogear. (They were also charged criminally.)
The Amogear scheme, according to the SEC, started out brightly: Amogear’s controlling shareholder “owned or otherwise controlled all but a few thousand shares of Amogear’s purportedly unrestricted stock,” which is important if you want to pump and dump without outside interference.1 He engaged some stock promoters, Gabe Nix and Christopher Putnam, to pump that stock. “Nix was the owner of the GMM, a promotional firm that owned and operated a number of websites that tout penny stocks, and Putnam was a Senior Account Executive at GMM.”
The company didn’t do much, which to you and me might be an obstacle, but to them was more of an opportunity to paint on a blank canvas:
Nix and Putnam also were told, and understood, that Amogear had no operations. When Nix asked, “[Y]ou know, what’s the plan for the actual company,” Putnam stated, “[W]ho gives a f*** about the actual company,” and the [controlling shareholder]2 referred to a cardboard box in the corner of the office where they were meeting and said, “[T]hat’s it [the company] right now.”
Meanwhile, the controlling shareholder also engaged Mike Affa and Andrew Affa, cousins who live in New Jersey and Long Island respectively,3 as well as a guy named Mitch Brown, to do some manipulative trading in the stock. They laid out the plan:
Andrew Affa, Brown, Mike Affa and the [controlling shareholder] then discussed performing arranged trades to increase Amogear’s stock price before the touting campaign began. The trades they discussed were to be rigged trades between participants in the scheme to manipulate Amogear’s stock price in which the participants would trade with and among accounts they controlled to create the appearance of a false market, with inflated prices, for Amogear stock. Brown and the [shareholder], with Andrew Affa present, discussed the “cross trades” and the plan to follow the trades with false touting, or “media.”
Mitch Brown allegedly had strong preferences about exactly how you do the fake trading: “Every other penny, so you do the 10, you do the 12, you do the 14, you do the 16, all the way to 20 … 5 prints …” I don’t know why you have to do every other penny; I would have thought that throwing in a few odd-numbered trades would make it look more naturalistic. But then I am not an expert on penny stock manipulation, and the SEC at least thinks Mitch Brown is.
So they did some fake trades to take the price from 10 cents to 12 cents, and then they launched the media campaign on websites including “TheStockScout.com, PennyStockPlayers.net, PennyStockCircle.com, PennyStockPros.net, 123StockAlerts.com, and StockMarketQuote.us.”4 Since the company had no actual business, they made one up:
Amogear is focused on providing sports and training apparel for the world-wide mixed martial arts (MMA) audience as well as for other custom athletic sports fans. Amogear is working to design and develop sports apparel prototypes for MMA, boxing, as well as other custom athletic consumers. AMOG’s prototypes are further developed into a product line and are classified into three categories – training, competition, and lifestyle. The company is focused on marketing and distributing their product line in order to build brand recognition within the MMA and boxing sports apparel industries.
Amogear could quickly become a force to be reckoned with in the MMA industry!
I feel like, if I were describing an imaginary company, I could probably do better than “this company sells T-shirts to martial arts fans,” but, again, I am not the expert. Perhaps this pitch was exquisitely tailored to the audience of TheStockScout.com et al.
But we’ll never know, because “On or about February 10, 2014, before the defendants’ touting campaign could artificially increase the price and trading volume of Amogear’s shares as intended, the Commission issued an order pursuant to Section 12(k) of the Exchange Act, 15 U.S.C. § 78l(k), suspending trading in Amogear stock.”
Because, while the pump-and-dump scheme was almost a textbook effort, there were a few small flaws. The main one:
Unknown to the defendants, meeting and interacting with them in the scheme to manipulate the stock price and trading of, and to pump and dump, the publicly traded stock of Amogear was an individual cooperating with federal law enforcement authorities (the “CI”) as well as undercover agents of the Federal Bureau of Investigation (the “FBI”).
In fact the controlling shareholder was the CI, a veteran stock manipulator cooperating with the FBI in the hopes of getting his sentence reduced.5 And the “chief executive officer,” such as he was, of Amogear, who met with the conspirators a couple of times, was actually an undercover FBI agent.6
So the main lesson here is, if you want to run a pump-and-dump scam, the FBI is not a great partner.7 That or “just don’t run a pump-and-dump scam,” I guess, take your pick. There are other lessons, though. One is how strangely close this all was to being legal. From the SEC complaint:
On all of these websites it was falsely stated in disclaimers that those promoting and touting the Amogear stock on the websites expected to be compensated in cash in connection with their promotion of Amogear. In reality, all compensation would be from the proceeds from the sale of Amogear stock. All of GMM’s websites stated in disclaimers: “[website name] is owned and operated by Global Marketing Media LLC. Global Marketing Media, LLC expects to receive up to one hundred thousand dollars cash compensation for a one week marketing and promotional effort on AMOG.”
In fact, the confidential informant told the promoters that they’d get 5 percent of Amogear’s stock, with the aim of selling at 20 cents: “I think it’d be an opportunity for you guys to make 150, 200 thousand dollars over the course of a couple weeks’ time.” So the disclaimers understated the amount, and misstated the form, of the expected compensation, but they weren’t that far off: The promoters readily admitted on their websites that they were expecting to be paid six figures for a week of work touting Amogear. If they’d just gotten a check for $100,000, instead of some stock, that would have been fine.8 One, isn’t that a little odd? But, two, why would you buy a stock promoted that way? Like, that pitch — “they’re gonna make some clothes some day” — combined with that disclaimer — “we’re getting $100,000 to advertise this stock for a week” — combine to make a pretty strong signal of “never buy this, this is a fraud.”
But I guess that doesn’t prevent it from working. One model of penny-stock touting schemes is that the victims don’t buy because they think the company will be the next Apple: They buy because they think the scheme will continue a little longer and they’ll be able to flip their stock to a greater fool. (That’s why they subscribe to newsletters, to get penny-stock tips before those tips go out to other suckers.) So the goal of the scam is to scam aspiring scammers. The FBI just took that approach one step further.
1. One of the defendants, Mike Affa, on learning that “there’s 2,000 shares against us,” allegedly said “2,000, this is as clean of a deal as you can get, obviously.” The worry of course is that if you pump the stock and someone else dumps it, then you’ve done all your work for nothing. You want to be the only seller.
2. This bracket is mine; the rest are the SEC’s. Also note that Nix was Putnam’s boss? Rude.
3. I know.
