BROKERS ACCUSED OF HELPING TO SELL PENNY STOCKS UNLAWFULLY

The sale of penny stocks are often looked upon as controversial way to raise capital. Many investors will not purchase stocks that sell for under $10.00 for fear the company may not have the financial ability to survive. However, sometimes a stock may be undervalued by the market and becomes a really good value at really low prices.

Of course anyone with a copy machine can print off stock certificates and anyone with a computer can set up bogus securities to sell to the public. Most people remember all the anecdotal stories of Internet companies being formed and then raising capital on the basis of just an idea with no real business behind the issued securities. This type of behaviour is something the SEC is mandated to investigate.

Because companies who engage in security sales are required to make sure that bogus the securities they sell are legitimate; the SEC brought the following action against Leeb Brokerage Services:


"Washington, D.C., April 27, 2010 — The Securities and Exchange Commission today announced administrative proceedings against five securities professionals accused of facilitating unlawful sales of penny stocks to investors and failing to act as "gatekeepers" as required under the federal securities laws.

The SEC's Division of Enforcement alleges that three registered representatives and two supervisors at Leeb Brokerage Services allowed customers to routinely deliver large blocks of privately obtained shares of penny stocks into their accounts at the firm. The customers would then sell them to the public in transactions that were not registered with the SEC under the securities laws. The accused securities professionals allowed these sales without sufficiently investigating whether they were facilitating illegal underwriting, and they also caused the firm's failure to file Suspicious Activity Reports (SARs) as required under the Bank Secrecy Act to report potential misconduct by their customers.

-"Firms whose customers repeatedly bring in large blocks of microcap securities for sale to the public have an obligation to ensure they are not facilitating wrongdoing," said George S. Canellos, Director of the SEC's New York Regional Office. "Securities professionals who turn a blind eye to suspicious customer conduct are not fulfilling their duties as gatekeepers and risk violating the securities laws themselves."

The SEC's Division of Enforcement alleges that Leeb registered representatives Ronald Bloomfield, John Earl Martin, Sr., and Victor Labi failed to conduct a reasonable inquiry before allowing the public sales of the large blocks of penny stocks in violation of the registration provisions of the federal securities laws. The Enforcement Division further alleges that the firm's president Eugene Miller and its chief compliance officer Robert Gorgia failed to reasonably supervise the conduct of these representatives. All five individuals are accused of aiding and abetting the firm's failure to file SARs. These events occurred between 2005 and 2007. Leeb is no longer in business.

According to the Commission's order instituting administrative proceedings, the Leeb representatives ignored obvious red flags indicating that their customers were violating securities laws by engaging in illegal distributions of securities through their Leeb accounts. One group of customer accounts was affiliated with an individual who had previously been involved in a pump-and-dump scheme, and with a stock promoter who routinely received shares in compensation for promotional services for penny stock companies. The accounts earned more than $20 million in proceeds while repeatedly depositing privately obtained shares and then selling them to the public, raising the constant specter that Leeb was facilitating "scalping." Another Leeb customer wired more than $30 million in penny stock proceeds to a bank in Liechtenstein, a tax haven.

The SEC's Division of Enforcement alleges that despite these and other suspicious activities of their customers, the accused Leeb representatives and supervisors ignored their obligation to report the possible misconduct to authorities. Such disregard of the firm's reporting requirements under the Bank Secrecy Act enabled Leeb's customer activity, and the commissions it generated, to continue unfettered. And the public was exposed to repeated risk of unlawful distributions of penny stocks.

A hearing will be scheduled before an administrative law judge to determine whether the accused individuals committed the alleged violations and provide them an opportunity to defend the allegations. The hearing also will determine what sanctions, if any, are appropriate in the public interest."

The above was quoted from the SEC official web page. The possibility of fraud is great in an unregulated industry and it is good that there are regulations to help protect the public from being victims of heinous crimes. The unfortunate thing is that too many politicians believe that it is alright that people loose their life savings to fraudsters. These politicians believe that stealing from people is just one very legitimate form of capitalism that should be protected from governmental intervention. This form of capitalism only works if the public is allowed to exact vengeance upon fraudsters the same way vengeance was enacted upon horse thieves in the old west. "Horse Thief Capitalism" only works if you have a "Horse Thief Justice System" otherwise, it is important to have strong aggressive governmental institutions to protect the public from fraud and the fraudsters from "Horse Thief Justice".