The Securities and Exchange Commission and Department of Justice have separately announced charges against a Swiss asset management firm and several individuals for engaging in a long-running stock manipulation scheme involving numerous U.S. issuers.

On Jan. 2, the SEC announced charges against six individuals and their companies with participating in schemes that allegedly generated more than $35 million of illegal sales of stock in at least 45 microcap companies.

According to one SEC complaint, Steve Bajic, a citizen of Canada and Croatia, and Rajesh Taneja, a Canadian citizen, helped shareholders secretly dump large quantities of microcap stock, coordinating the illegal stock sales with Kenneth Ciapala, a citizen of the U.K. and Switzerland; Anthony Killarney, a U.K. citizen; and Swiss asset management firm Blacklight. The SEC’s complaint also alleges Christopher McKnight, a Canadian citizen, and Aaron Wise, a U.S. citizen, fraudulently transferred, and hid the sources of, funds used to promote several of the microcap stocks.

From a compliance standpoint, what is notable about this case is that the charges were the result of a failed attempt by Bajic and Tanega to circumvent disclosure requirements imposed by securities laws. “Bajic, Taneja, Ciapala and Killarney used various offshore nominee companies to provide a layer of disguise to public-company insiders or control persons, who intended to defraud investors by secretly dumping large quantities of stock—including the securities of a New York-based public company, Blake Insomnia Therapeutics—in circumvention of registration and disclosure requirements imposed by the federal securities laws,” the complaint states.

The complaint added that, “in July 2018, Bajic, Taneja, and the entities they controlled faced elevated compliance scrutiny from their primary brokerage firm in Hong Kong. As a result, Bajic and Taneja worked to move securities from their accounts at that brokerage firm to accounts at other firms.

During this process, Bajic communicated with Killarney via an encrypted communication application. This evidence demonstrated, as described by the complaint, “how they used their own, and each other’s, nominee entities interchangeably as part of a coordinated dump of shares that were, nominally, held by separate entities.”

The complaint also described the complexity of the scheme to circumvent controls. Specifically, this required arranging “multiple disbursements of large sums of money from various bank accounts that were held in the names of their nominee entities to bank accounts of entities that were owned and controlled by their control group clients,” the complaint stated. “The number and size of these disbursements drew the attention of the disbursing banks on several occasions, and the banks sent inquiries to the nominee entities about the purposes of the requested disbursements.”

“Communications between Bajic and Taneja reveal their concern that the nominee entities’ accounts may be ‘shut down’ because of the bank’s compliance concerns, unless Bajic and Taneja could provide adequate justification for the disbursements,” the complaint continued. “Bajic then prepared false invoices to create the appearance that the disbursements were for legitimate business expenses.”

Second SEC complaint

A second SEC complaint alleges Ciapala, founder and principal owner of Blacklight, and his firm facilitated the sale of millions of unregistered shares of EMS Find (EMSF) while the microcap stock’s price was being artificially inflated and dumped into the market. The complaint further alleges Ciapala and Blacklight engaged in manipulative trading of EMSF stock.

The SEC’s complaints charge Bajic, Taneja, Killarney, Ciapala, and their companies with violating the anti-fraud and registration provisions of the federal securities laws and with acting as unregistered broker-dealers. The SEC charged McKnight and Wise with aiding and abetting the fraudulent stock sales. McKnight was also charged with violating an anti-fraud provision of the federal securities laws. The SEC is seeking permanent injunctions, disgorgement of allegedly ill-gotten gains plus interest, penalties, and penny stock bars.

Parallel action

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Ciapala and Blacklight. Ciapala and co-conspirator Ulrik Debo (a/k/a “Molgaard Debo,” a/k/a “Ulrik Molgaard,”), a Danish citizen who resided in Europe, were arrested in the United Kingdom. The U.S. government will be seeking their extradition to the United States, the Justice Department said.

As alleged in the indictment, Blacklight and Ciapala “executed a wide-ranging stock manipulation scheme that spanned from in or about 2013 through December 2019, in which they manipulated the share price and trading volume of the publicly traded shares of multiple companies and laundered the proceeds generated by the scheme.”

They set up various nominee entities to help scheme participants conceal their ownership of public company shares and evade SEC reporting requirements. Blacklight opened bank accounts and brokerage accounts on behalf of these nominee entities and executed trades in accounts held by these nominee entities in furtherance of the stock manipulation scheme.

According to the Justice Department, Debo allegedly furthered the stock manipulation scheme by, among other things:

  • Identifying suitable publicly traded shell companies that could be used in the scheme;
  • Identifying, in certain instances, suitable privately held companies to engage in “reverse merger” transactions with the shell companies;
  • Obtaining financing to purchase all or substantially all the outstanding shares of the issuers;
  • Causing various nominee entities to obtain ownership of the issuer’s shares;
  • Identifying and paying “promoters” that issued exaggerated and, at times, false press releases about the issuers in order to raise the trading price and volume of the issuer’s shares; and
  • Identifying and paying various “trading specialists” who assisted in artificially manipulating the trading volume and price of the issuer’s shares.

The indictment charges Ciapala, Blacklight, and Debo with securities fraud, wire fraud, and money laundering charges.