SEC Actions this Week: A Penny for Your Thoughts, Not Your StocksDec16

By Ann C. Logue

Last week and this week, the SEC filed charges concerning penny stocks and microcap companies. Like something hidden in the back of the refrigerator, this market cubbyhole is easy for most market participants to ignore until the stench becomes unbearable. 

On December 10, the SEC charged three Canadian citizens with a pump-and-dump scheme involving stocks listed on OTC Markets. Jay Scott Kirk Lee, Geoffrey Allen Wall, and Benjamin Thompson Kirk were charged with using front companies to promote shares and inflate their value, then moving the profits offshore. They were associates of Frederick Sharp, another Canadian citizen who allegedly operated a platform to enable such schemes. All four are residents of Vancouver and environs. It has long been a mystery to me how such a beautiful and sophisticated city has become North America’s capital of crooked trading.

There were more red flags than that. The SEC charges allege that most of the activity involved a company called NutraNomics (OTC: NNTX), a company incorporated in Nevada, headquartered in Utah, and supposedly engaged in the nutritional supplements business. The stock currently trades at $0.0003 per share and rarely breaks the penny level, yet it hit $1.455 in September of 2013.

On December 15, the SEC announced that Wedbush Securities would pay $1.2 million to settle charges related to the unwinding of a penny stock pump-and-dump scheme mastered by one of its clients, Silverton SA (also known as Wintercap SA). The penny stock involved was that of Environmental Packaging Technologies (EPTI.PK), a pink sheet shell company formerly known as International Metals Streaming Corp. 

Broker-dealers have an obligation to find out the origin of microcap securities before trading them, as well as to file Suspicious Activity Reports when there’s evidence of, well, suspicious activities. Wedbush staffers failed to do so, and the SEC stepped in. The only real surprise is that a macro-firm like Wedbush got caught up, even tangentially, in a microcap scam.