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Eight fraudsters charged for alleged securities fraud

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Introduction to the case

SEC calls it one of “the most complex microcap stock fraud schemes” ever

Eight individuals, among them prominent Vancouver businessman and former CFL player, David Sidoo, are accused by the U.S. Securities and Exchange Commission (SEC) of committing multi-year investment fraud estimated to have generated US$145 million* in dirty money for the fraudsters. 

While no criminal indictments have been handed out to date, the civil complaint alleges that from 2006 to 2020, the group successfully pulled off at least 17 pump-and-dump penny stock transactions, misleading investors while racking up their own profits.

*All amounts expressed in U.S. dollars unless otherwise stated.

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Details of the fraud

Eight individuals are allegedly involved in this fraud case, including residents of Canada, Spain, Monaco, Bulgaria, the Cayman Islands, and the United Kingdom.

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How did the fraudsters commit the crime?

To pull off a pump-and-dump scheme, the alleged fraudsters first gained a controlling interest in the issuer of a penny stock and dispersed it among shell entities to conceal their ownership interest. This, combined with the group’s influence and reputation in the industry, allowed the hyped-up companies’ stock prices to inflate unrealistically.

The SEC says they used “misleading promotional campaigns” to promote the stock and scam investors, knowing full well that the underlying financial statements and current operations would never substantiate the interest they had driven.

Taking advantage of the inflated stock price, they sold their ownership interest in the entity, profiting off their deception and leaving other investors to stomach the impending losses as the price regulated.

The ring used offshore accounts and shell companies to conceal the fact that they were the beneficiary of these sales.

Portions of their profits were used to start the next scheme.

The fraud was likely fuelled by insufficient investigative due diligence on the part of investors, who were largely oblivious to the true valuation and ownership of the much-hyped companies. This allowed the fraudsters to dupe unknowing consumers into investing in a company with poor prospects, eventually leading to a loss for those who invested.

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What was the outcome?

In April 2022, the U.S. Securities and Exchange Commission charged 16 defendants, including the eight Bauer Ring accomplices, for participating in fraudulent penny stock schemes that generated more than $194 million in illicit proceeds. The allegations follow a multi-agency investigation involving more than 20 countries.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said in a press release that the fraudsters orchestrated “some of the most complex microcap stock fraud schemes ever charged by the SEC.”

The Bauer Ring charges include:

  • Conspiracy to commit securities fraud
  • Conspiracy to commit wire fraud
  • Fraud in the offer or sales of securities
  • Fraud in the purchase or sale of securities
  • Unregistered offerings of securities

As the complaint has not yet been settled in court, no financial reparations or sentences have been given at this time. It is believed that, if found guilty, the outcome would include a permanent ban from the U.S. stock market in addition to monetary fines. Many of the charges listed carry a maximum sentence of 20 years in prison.

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How could this have been prevented?

In this case, the reputation, knowledge, and experience of the fraudsters made it difficult for investors to see through their deception. However, no fraud can be perfectly concealed.

Watch for the following red flags to help you spot a pump and dump:

A recent change in ownership of the company being promoted.

  • Reviewing any recent changes in ownership before purchasing stock can help indicate whether a price increase is temporary or unrealistic. Due diligence on current company ownership, as well as background checks on key company individuals, helps ensure there are no hidden connections between the parties and that you’re entrusting your money to directors who have the company’s best interest in mind.

An unexpected rise in stock price.

  • In this case, the fraudsters used misleading advertising tactics to encourage investors to buy stocks. When investigated more deeply, no tangible reasons justified the stock price increase.

An unexpected rise in stock volume.

  • Pump-and-dump scammers will increase the trading volume to attract more investment in the stock and further increase the value. If tangible underlying factors don’t support a price increase, it could signal an investment scam.

Research is key to steering clear of investment fraud. Research conducted by the investor or an independent third party can reveal the true valuation and expected stock price of the business, allowing investors to make informed decisions without being swayed by outside influence.

How can BDO help

Securities fraud isn’t always easy to recognize, but it can devastate an investor’s portfolio if it goes undetected.

We can perform independent business valuations to assess a company’s value and anticipated stock price to help you avoid the pitfalls. Our team can also conduct extensive background checks and investigative due diligence on the companies involved and the individuals behind these entities.

*All amounts expressed in U.S. dollars unless otherwise stated.

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