The SEC charged several CEOs, their companies, and 2 penny stock promoters with microcap stock fraud.  The schemes were detected by the FBI, which conducted an undercover operation.  The U.S. Attorney’s Office announced parallel criminal charges against the same individuals named in the SEC’s civil lawsuits.

Allegations in SEC Complaint.   According to the SEC, most of the schemes involved kickbacks to a purportedly corrupt pension fund trustee in exchange for having the fund buy stock in microcap companies.  Another scheme involved a bribe that was to be paid to a purportedly corrupt broker who agreed to buy microcap shares on behalf of investors with discretionary accounts.  A third scheme involved a stock promoter who created a website to tout a penny stock company through a volley of e-mail blasts and who posted phony testimonials from fake investors.  Unbeknownst to the insiders and promoters, the counterparties to their illegal transactions were undercover FBI agents or confidential sources participating in an undercover operation. 

The latest charges follow a series of cases filed in October and December 2010, in which the SEC sued more than a dozen companies and penny stock promoters with similar stock manipulation schemes.  The following peopl;e were named in the SEC complaints: 

• Douglas Newton, of Rancho Mirage, CA, the CEO of Real American Brands, n/k/a Real American Capital Corp.  He paid kickbacks to a purported employee pension fund trustee to buy more than 6.2 million shares of restricted Real American Brands stock.  Newton attempted to conceal the kickbacks by entering into a consulting agreement with a phony company that the trustee fabricated to receive the kickbacks. However, the corrupt trustee was a fictitious person, the trustee’s business associate who helped arrange the deal was an undercover FBI agent, and the phony consulting company was actually created by the FBI.
• Donald Klein, of Frisco, TX, President and CEO of KCM Holdings Corp., engaged in 2 restricted stock transactions and 1 market transaction involving KCM Holdings’ stock.  Klein and the company paid kickbacks to an undercover FBI agent who portrayed himself as a business associate of a corrupt trustee of an employee pension fund, in exchange for the fund’s purchase of 2.5 million shares of restricted KCM Holdings stock.  Klein attempted to conceal the kickbacks through a consulting agreement with a phony company that would receive the kickbacks. In another scheme, Klein bribed a purported corrupt stockbroker (actually an undercover FBI agent) to purchase KCM Holdings stock in the open market for brokerage clients with discretionary accounts.
• Thomas Schroepfer a/k/a Thomas Schroepfer Baetsen, of Las Vegas, NV, president and CEO of SmokeFree Innotec, and Charles Fuentes, of Dana Point, CA, a promoter of SmokeFree’s stock, paid kickbacks to an undercover FBI agent, posing as the business associate of a corrupt employee pension fund trustee, in exchange for the fund’s purchase of 400,000 shares of restricted SmokeFree stock. Schroepfer attempted to conceal the kickbacks through a consulting agreement with a phony company created to receive the kickbacks. In addition, SmokeFree issued shares of its stock to a cooperating witness for acting as a middleman in the scheme.
• Brian Gibson, of Coconut Creek, FL, created a now-defunct website, Roaringpennystocks.com, to promote shares of Xtreme Motorsports International, Inc., as part of a planned pump-and-dump scheme. Gibson touted Xtreme Motorsports by blasting a series of e-mails to potential investors and posted false testimonials on the site from purported investors raving about their success in following the website’s stock picks.

SEC Miami Office Staff.   Investigation by Trisha Sindler, Michelle Bougdanos, Chedly Dumornay.  Litigation to be handled by James Carlson.  [SEC PR 11-138, 6/30/11]