Anatomy of an international, $194M ‘pump-and-dump’

On Monday, the SEC announced charges against 16 individuals who allegedly participated in a multiyear scheme to defraud investors by secretly dumping onto the market large quantities of stock.

The SEC’s charges are associated, in part, with parallel criminal actions brought by the DOJ and the Federal Bureau of Investigation, which jointly announced on April 14 the unsealing of three indictments charging 10 individuals for their role in the scheme.

The SEC investigations leading to its charges involved assistance from securities regulators and other law enforcement authorities in more than 20 countries. The scheme involved residents from Canada, the United Kingdom, Bulgaria, Spain, Monaco, Turkey, the Cayman Islands, the Bahamas, and the British Virgin Islands.

The scheme: The SEC’s charges, contained in three separate complaints filed in the U.S. District Court for the Southern District of New York, allege the defendants secretly held large, controlling positions in so-called “penny stocks” issued by microcap companies.

“From 2013 through at least 2018, defendants’ goal was to secretly gain control of thinly traded microcap companies, hire stock promoters to generate demand for their shares, and then profit by selling those shares illegally to unsuspecting investors,” stated one SEC complaint.

In furtherance of their scheme, the defendants concealed their identities from the public, brokers, and regulators, “typically by holding the stock in corporate accounts that served as nominee stockholders,” the complaint stated. Some of the defendants used encrypted text and phone applications to further avoid detection by regulators, the SEC alleged.

“We allege that the defendants in these actions orchestrated some of the most complex microcap stock fraud schemes ever charged by the SEC,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in a press release. “By locating their operations overseas, using encrypted messaging, and operating through a convoluted network of offshore accounts, the defendants hoped to avoid detection of the massive frauds we allege they perpetrated on U.S. markets and investors.”

Second and third SEC complaints: A second SEC complaint alleges eight of the individuals engaged in a fraudulent pump-and-dump scheme involving the stock of at least 17 U.S. issuers.

According to that complaint, from at least 2006 until at least 2020, these individuals formed and acted in four rings “on a serial basis.” Their pump-and-dump scheme followed the same pattern as described in the first complaint.

Following each scheme, the defendants divided most of their profits while reinvesting a portion into their next pump-and-dump scheme, garnering more than $145 million in illicit proceeds, the complaint stated.

The SEC’s complaint further alleged Ronald Bauer, a London-based “recidivist,” was the “primary strategist” for all but two of these pump-and-dump schemes and “oversaw nearly every aspect” of the schemes. The SEC referred to him and his associates as the “Bauer Ring.”

A third SEC complaint alleges that, from early 2016 through late 2018, four individuals participated in a pump-and-dump scheme involving “at least nine microcap issuers,” which, again, followed the same pattern of misconduct.

The SEC is charging all the defendants with violating the antifraud and registration provisions of federal securities laws and is seeking permanent injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties against all the defendants, and penny stock bars against all the individual defendants.

The SEC is also seeking conduct-based injunctions against 11 of the 15 individual defendants and officer and director bars against eight of the individual defendants.