A penny stock fraud scheme that bilked investors in 35 countries out of more than $140 million is raising questions about how authorities can combat such financial scams in the internet age.
Four Canadians carried out the purported fraud with the help of five Americans, the U.S. Department of Justice alleges. One of the Canadians was arrested in Ontario. Another was among six suspects arrested in the U.S., authorities said.
Two other Canadians are being sought in what the department is calling one of the largest international penny stock frauds in history. Authorities say Sandy Winick, 55, remains at large in Thailand and Gregory Curry, 63, has yet to be located.
Paul Davis, a securities lawyer with McMillan in Toronto, said the scale and sophistication of the alleged scam shows how complicated it’s becoming for authorities to combat financial fraud schemes when victims live in many different countries.
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"As the Department of Justice and FBI indictment shows, you need the co-operation of regulatory authorities around the world," he said. "Money’s moving through different accounts, all the way to Lebanon."
The U.S. attorney’s office says a number of law enforcement and other government agencies in Canada, the U.S. and Britain were involved in the investigation, as well as the U.S. embassies in Bangkok and Beijing. Proceeds from the alleged scheme were funnelled through a bank account in Beirut.
According to the indictment filed in court, the defendants used throwaway cellphones and call centres in Thailand and Canada.
Targeting 'citizens of the world'
The penny stocks involved included companies such as Resource Group International, a Wyoming corporation based in Thailand that says it developed a revolutionary fertilizer, and RainEarth Inc., a Nevada corporation based in Beijing that says it is in the mineral exploration business and developing a specialized fibre, according to prosecutors.
As Loretta Lynch, U.S. attorney for New York, put it: "Where others looked at the globe and saw citizens of the world, Winick and his co-conspirators saw only potential marks."
An investigation used wiretaps and video surveillance to uncover the so-called pump and dump scheme.
'You need the co-operation of regulatory authorities around the world. Money’s moving through different accounts, all the way to Lebanon.' —Paul Davis, securities lawyer
The U.S. Securities and Exchange Commission (SEC) says that such arrangements typically involve artificially inflating the price of a modestly priced stock by issuing "false or misleading statements."
The fraudsters eventually sell off the share of the stock they own, reaping profits. However, once they stop issuing false statements about the value of the stock its price typically falls and other investors suffer losses.
Public education campaigns have been touted as one way to help combat pump-and-dump schemes. But Davis says the international nature of the banking and financial industries today make that a tall order.
"It’s not just educating investors in Toronto or Ontario or Canada, because you can have people in Canada or in the U.S. who are perpetrating fraud around the world. So the education part is difficult."
Alleged fraudsters used social media, emails
Penny stocks are lightly traded and can easily be manipulated through sales pitches to investors and false rumours posted on message boards. Most trade over-the-counter, rather than on major exchanges.
The indictment alleges that the nine people involved in the scheme promoted the stocks through phone calls, artificially inflating their value by promoting them in emails, social media messages and news releases.
Sometimes they would hit their victims a second time, helping them offload the worthless stocks or join lawsuits to reclaim their losses for an advance fee.
Al Rosen, a forensic accountant, says he wasn’t surprised so much by the scale of the alleged fraud, but that Canadian authorities were involved in the investigation.
"We keep on pretending that we’re OK up here, but we’re not. Prosecutions originating in Canada are very few," he told CBC News.
Rosen says he wants to see Canadian officials centralize information about financial scams so that fraudsters can’t operate the same scam across different jurisdictions.
"We’ve had attempts at a national securities commission but not a national prosecutor, so data is not then collected across the provinces," he said. "We’ve seen people start in British Columbia, then pull the same dirty trick in Alberta, then they skip over to Ontario and maybe Quebec. It’s the same characters doing the same thing."