SEC, FINRA Enforcement: Newswire Hackers to Pay $30M

Three Charged in Stock Manipulation Scheme

Edward Withrow III, the executive chairman of medical diagnostics company Endeavor Power Corp., and two others were charged by the SEC with conducting a pump-and-dump scheme that was unsuccessful after the SEC suspended trading in the company’s securities before secretly controlled shares could be dumped on unsuspecting investors.

According to the agency, Withrow became chairman of the new board of directors at Endeavor Power in late 2012 after a penny stock company he controlled merged with another controlled by Marco Babini, a Canadian citizen. Withrow and Babini schemed with Samuel Brown, a stock promoter in Idaho, to use Endeavor Power as a means to execute their pump-and-dump scheme.

Withrow and Babini used a Swiss trustee and foreign accounts to hide the fact that they controlled approximately 40 million shares of Endeavor Power stock, which they planned to dump into the market after hiring others to send email blasts touting the company. Before promoting the stock, Babini and Brown manipulated trades to increase or “walk up” Endeavor Power’s share price from 7 cents to 25 cents. Once the touting campaign was underway, Babini tried to lure more investors by double-reporting his trades so that the demand reported to the public would be exaggerated. But before most of those shares could be sold into the market, the SEC suspended trading on March 8, 2013, over concerns about the accuracy of the company’s public filings and press releases.

The SEC seeks a final judgment ordering Withrow, Babini, and Brown to pay disgorgement of ill-gotten gains plus prejudgment interest and penalties, as well as permanent injunctive relief, penny stock bars against all three men, and an officer-and-director bar against Withrow.

In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced criminal charges against Withrow and Babini. Brown previously pleaded guilty to charges that included making false statements to the SEC during its investigation.

Firm Fined Over Reps’ Outside Activities

Merrimac Corporate Securities Inc. of Altamonte Springs, Florida, was fined $100,000 and was required by FINRA to engage an independent consultant to review its policies, systems and procedures (written and otherwise), and training relating to outside business activities and private securities transactions, and adopt and implement the independent consultant’s recommendations.

The National Adjudicatory Council affirmed the sanctions following the firm’s appeal of an Office of Hearing Officers decision, in which the firm argued that it lacked the ability to pay the stipulated fine.

The sanctions were based on findings that the firm failed to establish, maintain and enforce reasonable written supervisory procedures, and failed to reasonably supervise the outside business activities and private securities transactions of two registered representatives who have since been barred from the industry.

According to FINRA, the representatives operated a company and sold investments away from the firm. They also solicited individuals to invest in their company, and raised $4 million from those investors.

The representatives arranged for investors, many of whom were firm customers, to hold investments in their company away from the firm’s clearing firm with nonbroker-dealer custodians. One representative also solicited investments in a second outside business, of which he was an owner.

The firm failed to adequately implement its procedures regarding participation in outside businesses and private securities transactions, and failed to implement reasonable procedures regarding the use of outside custodians. In addition, the firm failed to follow up on “red flags” and adequately inquire into the representatives’ outside business activities and involvement in private securities transactions despite personal knowledge about both.