Boston (June 19, 2020) – The U.S. Securities and Exchange Commission (SEC) filed a complaint against five Canadians and six offshore entities in the district court in Boston in connection with a pump-and-dump microcap scheme. Shane Schmidt, Nelson Gomes, Michael Luckhoo-Bouche, Douglas Roe, and Kelly Warawa are variously accused of violating the antifraud and registration provisions of the federal securities laws relating to microcap frauds. From January 2018 on, they allegedly resurrected defunct companies fraudulently using fictitious identities. Thereafter, they allegedly boosted their stock sales by promotional campaigns – most recently preying on the pandemic panic – and gained more than US$25 million. Schmidt is also facing criminal charges of securities fraud and conspiracy to commit securities fraud.
The U.S. Securities and Exchange Commission (SEC) accused four Canadian men and one woman of conducting a microcap fraud using a pump-and-dump scheme that generated more than US$25 million in a complaint on June 9. The US watchdog charged Nelson Gomes (38) a resident of Bahamas and Hong Kong, Michael Luckhoo-Bouche (31) of Mississauga, Shane Schmidt (52) of Vancouver, Douglas Roe (47) of Vancouver, Kelly Warawa (36) of Vancouver, and six offshore entities with violating the antifraud and registration provisions of the federal securities laws. Schmidt is also facing criminal charges of securities fraud and conspiracy to commit securities fraud.
Pump-and-dump microcap scheme
According to the SEC and the U.S. Attorney’s Office for the District of Massachusetts, the five Canadians allegedly participated in a pump-and-dump microcap swindle that generated US$25 million from illegal sales of multiple microcap company stocks including Sandy Steele Unlimited Inc., WOD Retail Solutions Inc., Bioscience Neutraceuticals, Inc., and Rivex Technology Corp since at least January 2018.
The SEC accuses Gomes of facilitating stock dumps of shares of more than twenty penny stock companies and using foreign trading accounts to hide who controlled them. The stock sales have allegedly generated trading proceeds through brokerage accounts held in the name of two Hong Kong companies benefitting Gomes and Luckhoo-Bouche.
According to the SEC, the stock sales were often artificially inflated by promotional campaigns that also included false and misleading information. In the end, they apparently even preyed on people’s pandemic fears and tried to capitalize on it by making fake promises in their promotional campaigns of producing personal protective equipment.
‘For example, the alleged promotions included claims that Sandy Steele could produce medical quality facemasks and that WOD Retail had automated kiosks for retailers to use in response to the COVID-19 pandemic,’ stated the SEC’s press release.
The case of Sandy Steele Unlimited, Inc.
Sandy Steele Unlimited, Inc. was one of the companies the accused enabled corporate control persons using fake passports, fictitious identities, and bogus lawyer’s letters to conceal their identities, according to the SEC and the U.S. Attorney’s Office for the District of Massachusetts.
In the case of Sandy Steele company, Schmidt purported to be ‘John Scott’ and became the sole director and officer of the 1968 founded Minnesota company. After almost 15 years of closure, he resurrected the company and provided fake change of control documents along with a counterfeit passport bearing Schmidt’s picture and Scott’s name to the stock quotation service OTC (Over The Counter) Markets to facilitate public trading. Thereafter, he established a website saying that the company purported heated garment business, which used false and misleading pictures from other websites of products for sale by other manufacturers.
According to the FBI, the corporate resurrection was completely based on lies. Schmidt allegedly took these steps to enable Sandy Steele’s company stock to trade via OTC Markets, to generate interest in the stock, and to share in the proceeds of stock sales, which he later did, the U.S. Attorney’s Office for the District of Massachusetts said.
By means of the plagiarized websites, email campaigns, and boiler room campaign sales calls, Schmidt is accused of illegally manipulating the stock, which led first to a dramatic increase in Sandy Steele’s stock price, before it later abruptly fell again, what left unsuspecting investors with losses. Its share prices jumped from US$0.05 to US$0.61 during its first the first three months after the launch. The FBI alleges that unsolicited sales calls to elderly people caused the investment increase. A few weeks later in January 2020, the price slid down to $0.02.
After the collapse, the global COVID-19 pandemic was looming and with it came an immense demand for personal protective equipment, which gave Sandy Steele salesmen a new reason why the company’s value would skyrocket. They claimed that the company was retooling to make medical masks, according to the SEC.
The SEC alleges that Schmidt and the other four Canadians used these methods on several different penny stocks and generated more than US$25 million from the illegal sales.
The SEC complaint and criminal charges
The US authorities filed a complaint in the federal district court in Boston against the five Canadians and six offshore entities on June 9. The SEC seeks permanent injunctions, conduct-based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, and penny stock bars. The US watchdog filed an emergency action and obtained an asset freeze against the accused.
The SEC complaint charges Gomes, Luckhoo-Bouche, Roe, Warawa, FFS Capital Limited, and Atlantean Management Corporation with violating the antifraud and registration provisions of the federal securities laws. Paifang Trading Limited, Artefactor Limited, Meadow Asia Limited, and Thyme International Limited have been charged with registration violations. The complaint also charges Canadians Shane Schmidt, Douglas Roe, and Kelly Warawa with fraudulently dumping shares of Sandy Steele.
Schmidt is accused of violations of the antifraud provisions. Additionally, the U.S. Attorney’s Office for the District of Massachusetts laid parallel criminal charges against Schmidt on June 11. He is facing securities fraud and conspiracy to commit securities fraud charges for impersonating the president of a penny stock company and making false and misleading statements about the company’s purported business. Currently, Schmidt is believed to be in Canada.
One of the most common types of investment frauds is the pump-and-dump scheme. The global pandemic, which is creating daily breaking news, helps rogues to build on the hype to convince potential investors of the alleged significant returns they could earn.
Usually, publicly-traded small ‘shell’ companies are used in pump-and-dump schemes. For these microcap stocks, there is little information publicly available, which makes it difficult for investors to verify the information provided by the promoters or the company.
‘Microcap stocks can be particularly vulnerable to manipulative schemes, and investors should be alert to the heightened risks that exist during this national emergency,’ said Paul Levenson, Director of the SEC’s Boston Regional Office in a press release. ‘The SEC will continue to act quickly to protect investors from investment scams, including those seeking to capitalize on the COVID-19 crisis.’
In a pump-and-dump scheme, fraudsters artificially promote and inflate the price of their stock at first. The scammers do this to ‘pump’ up the investment to get more people to buy in and create demand for their stock. This first promotional phase follows the ‘dump’ of the stock, which means that insiders sell their shares before the price crashes. That leads to a substantial payout for the scammers while all remaining investors lose their money.
Pump-and-dump schemes are handled as high-risk investments by fraud experts. This type of investment scam is very likely to occur and will have an immediate impact on someone’s portfolio.
Marina Burghard writes for Canadian Fraud News about fraud-related cases, whistleblower, jurisdiction, identity theft, consumer protection, etc. – essentially about scams and how to protect yourself against this kind of fraudulent criminal behavior. She holds a Master’s degree in Political Science where her interest in criminology grew. Besides fraud, Marina’s scientific interest lies in terrorism, extremism and how to deal with it as a society.