"A novel, but illegal, business plan"

Gendarme Capital Corporation and 2 executives were charged with carrying out an illegal stock distribution scheme;  a Greenwich, NY lawyer allegedly issued false legal opinion letters.  The SEC alleges that Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws.

Through its two principals - CEO Ezat Rahimi of Elk Grove, CA, VP Ian Lamphere of Lawrenceville, VT - Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.

Marc Fagel, Director of the SEC's SF Regional Office:  "Gendarme and its executives created a novel, but illegal, business plan to make an end-run around these investor protection laws, supposedly buying billions of shares of penny stock for investment purposes but instead turning around and dumping those shares into the market."  SEC staffers Jeremy Pendrey and Robert Leach were credited with conducting the investigation. 

    Details in the Case.   Gendarme allegedly began entering into agreements with penny stock issuers in early 2008.  The agreements gave Gendarme the right to purchase discounted stock - 30% to 50% below market price.  To avoid registration and disclosure obligations, Gendarme is alleged to have falsely represented to issuers the purchases were for "investment purposes, only."  However, Gendarme quickly dumped most of these shares on the public markets through unregistered stock distributions.

The SEC also alleges that Gendarme's outside attorney, Cassandra Armento of Greenwich, NY, violated securities laws by issuing more than 50 false legal opinion letters in support of Gendarme's activities.   Armento repeatedly informed stock transfer agents that Gendarme was not an "underwriter" and thus had no intent to sell the stock.  Thus, shares could be obtained by Gendarme without trading restrictions.  It's alleged, however, that Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.

The SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and an order barring them from participating in an offering of penny stock.  The SEC seeks injunctive relief and monetary penalties against Armento.   [SEC Release 11-1, 1/6]