SEC locates pump & dump alleged mastermind in Ibiza who used a Vancouver lawyer for the alleged scheme

By Christine Duhaime | January 26th, 2020

Biozoom boy found in Ibiza

The alleged mastermind behind the alleged pump and dump securities fraud case involving Biozoom, Francisco Abellan Villena, has been located in Ibiza, the playground for billionaires. Villena is currently incarcerated in Ibiza, perhaps on an extradition warrant from the US. He was located by an investigator in Spain hired at the direction of the SEC.

The SEC was searching for Villena to, among other things, effect service on him with a civil complaint filed in the SDNY in May 2018.

Villena in Las Vegas in a photo with Paris Hilton. This photo is over 10 years old and appears to be merely a night club photo opp (photo from promotionstocksecrets.com)

What was Biozoom?

Biozoom was a German technology company that made a hand held device that allegedly could read a person’s biometric data from their skin to monitor health metrics. Specifically, it was represented to investors as a replacement for blood tests, allegedly capable of detecting the presence of illegal drugs in one’s blood stream non-invasively from your skin surface or measuring blood sugar levels for diabetes, which may be a dubious claim because no such technology exists from a sweep of medical journals today to detect the presence of illegal drugs non-invasively merely from touching a human skin surface.

What’s an empty shell?

Biozoom was acquired as part of an asset sale by what is known as an empty public shell. An empty public shell is a reporting issuer that is non-operational, often with few assets or operations. An empty shell that is a reporting issuer is often re-invented, or pivoted, as something new. In Vancouver, for example, a number of mining companies that are reporting that are no longer viable are often re-invented as a Blockchain or cannabis company. In the US, empty shells that are reporting issuers are disclosed as shells, whether its a blank check shell or not.

RTOing of empty shells

People in Vancouver, sometimes lawyers in the securities law realm, sell or broker the sale of, empty shells that are reporting issuers to clients, sometimes for hundreds of thousands of dollars so that they can be used for a reverse take over (“RTO“). Not all RTOing of empty shells and not all sales of empty shells involve manipulative behaviour or fraud. The reason some people like to use empty shells that are reporting issuers is because its shares are listed for sale, or listable, and thus those who hold lots of such shares can sell them and, if the price magically pumps up, make a killing.

Biozoom’s RTO used complex shells and lax money laundering places

And that is what the SEC alleges four people behind Biozoom did, namely they backed Biozoom into an empty shell called Entertainment Art, Inc. that allegedly sold leather goods in Las Vegas, renamed the shell Biozoom Inc., and using a complex web of shell entities and lawyers in offshore tax evasion and known lax money laundering places like the BVI, Switzerland, Panama, Argentina, Belize and Vancouver, allegedly cooked up a scheme to issue, aggressively pump and then dump millions of shares of Biozoom to innocent investors to the tune of US$34 million.

One of the four persons charged by the SEC and alleged to have assisted with the scheme was a Vancouver lawyer named Faiyaz Dean, who the Vancouver Sun reported was, at some point, connected to another Vancouver securities lawyer named Penny Green of Bacchus Law. Seven years ago, the SEC started its investigation into Dean after the shares of Biozoom went from US$1 to US$4.

Empty shell companies are a problem for capital markets because, inter alia, as the SEC has noted, they are a breeding ground for pump and dumps and attract fraudulent behaviour. In other words, they are a high risk service and professional activity for lawyers and accountants, and also high risk for financial crime.

The accountant who flipped $6 million worth of shells

Speaking of accountants, an accountant named Jeffrey Lamson laid the groundwork for the alleged activities of Dean and Villena.

For six years, Lamson helped create a fiction of corporate viability for 22 empty shells that were reporting issuers. He was said to have recruited people to pretend to be officers and directors of the shells, and on occasion, to pretend to be the shareholders of the shells. This speaks to the ongoing concern expressed by US law enforcement and US Senators of the difficulty in attempting to ascertain from a minute book, who the true shareholders are behind the list of legal shareholders of an entity.

In order to obfuscate the true shareholders, Lamson likely controlled minute book records which he used to reflect other control persons by making inaccurate corporate records filings in the minute books. Doing this type of thing makes it impossible for investigators to know who ever was, or is, a shareholder or a director of an entity. The movie “The Laundromat” based on the Panama Papers with its ties to a Vancouver-lawyer-turned-incorporator, tells the story of a law firm that allegedly changed corporate records and back-dated them. Lamson ran what the SEC called an assembly line of shells with fraud at every juncture.

In order to keep the empty shells alive, the SEC says that Lamson filed false disclosure documents alleging that the shells were pursuing businesses when they were not. Not only that, the SEC says he forged signatures on documents for fake consultants who were paid fake consultants fees for doing no work. Lamson was keeping the shells alive to flip them to law firms and others or so that they could be brokered for hefty commissions. And flip them he did, for a whopping US$6 million. One of those he allegedly flipped to a lawyer for a hefty commission was Entertainment Art, Inc., the shell in which Dean became involved.

In 2015, Lamson was the subject of a complaint by the SEC in respect of his shell flipping activities, was permanently barred from securities activities in the US and ordered to disgorge profits from his conduct. He is serving time in jail.

The lawyer as alleged shell hunter and shell broker

Dean, the lawyer from Vancouver, was also the subject of a separate complaint by the SEC in respect of the Biozoom matter in which they allege that he, inter alia, orchestrated sham transactions and caused to be hired escrow agents to document the sham transactions as well as provided fabricated documents and false information to get the shell’s shares traded, including by false closing opinions. The SEC also alleges he was part of the acquisition of the shell that went on to sell listed shares and caused to be issued shares that violated the share restriction rules (e.g., in respect of legends). Violating the legend rules allows shares to trade when they are not free trading, at maximum pump. The whole reason there are legends to restrict trading is to protect against dumping.

Dean, as some securities lawyers do, allegedly acted as the shell broker – he sold the shell for US$430,000 and allegedly benefitted from a commission of US$105,000.

Dean has also been indicted in Arizona for wire fraud, making false statements for US securities law purposes (in particular, preparing a closing opinion with material false information) and money laundering.

The law says Dean wasn’t providing legal services

Dean’s case has an interesting aspect to it. When a lawyer becomes a business partner with a client, which happened here, the parties cease to be in the same position and a whole set of protective rights owed to the client arising from the lawyer-client relationship go out the window. And not only that, if the relationship with the lawyer was abused, knowingly or unwittingly, to commit unlawful conduct or to attempt to commit unlawful conduct or in furtherance thereof, including securities fraud, the lawyer-client relationship is gone ab initio, meaning that no duties or rights attach to the client that otherwise would. That’s because since 1833, if not earlier, Courts have held that lawyers cannot be used in furtherance of unlawful or attempted unlawful conduct and if they are, or there is such an attempt, no client gets to derive any benefit that otherwise they could derive from a lawyer-client relationship.

The law can best be summarized as follows: in order for the lawyer-client relationship to take root which gives rise to duties owed to the client by the lawyer, there must be two elements: (a) professional confidence; and (b) professional employment. If the client has or had an unlawful intent in obtaining advice or services from the lawyer, one of those elements is absent. The client either conspired with the lawyer to be unlawful or deceived the lawyer. In both cases, there is no lawyer-client relationship that was ever created.

In the first scenario, if the client hid the unlawful intent, the Courts have held that the lawyer’s advice or services were obtained by fraud, meaning the client defrauded the lawyer as to his or her unlawful purpose when he or she sought advice. The Courts have held, very specifically that, when a fraud is perpetrated on the lawyer by the client to obtain advice and the lawyer is deceived, there is no lawyer-client relationship because professional confidence was absent all along. Advice obtained by fraud perpetrated by the client is not protected and a lawyer deceived as to the true intentions of a client, is set free from the constraints of the lawyer-client relationship for all purposes. As Courts have held, if this were not the law, the result would be that a man intending to commit murder might obtain legal advice for the purpose of enabling himself to do so with impunity, and the lawyer whose advice was sought would not be at liberty to give information against his client to stop his criminal purpose which would have monstrous consequences on the rule of law. It makes sense – a client cannot lie to the lawyer about a file and use (more like abuse) the profession and then be able to benefit from his or her own deception. The lawyer and the rule of law, if that were allowed, would be doubly harmed.

In the second scenario, if the client’s unlawful intent was disclosed to the lawyer, the client is not consulting the lawyer qua lawyer as a member of the legal profession because it cannot be the lawyer’s business to further unlawful conduct. In this case, there is no professional employment of the lawyer by the client and therefore, there is no lawyer-client relationship. Courts have held that the protection of communications by lawyers in furtherance of an unlawful purpose by the client is injurious to the interests of justice and the administration of justice and does not come within the scope of professional employment. 

In Dean’s case, he will have to take a position eventually that indicates whether his services were obtained under the first scenario or the second scenario.

Two other lawyers pitched in to help with the scheme and one flipped shells for $5.6 million

Dean isn’t the only lawyer who was pursued by the SEC in connection with Biozoom. Lawyer David Lubin was barred from practicing before the SEC over fraud he committed in connection with the Biozoom shell and James Schneider was convicted of 33 counts of fraud and money laundering in Florida for writing false closing opinions in furtherance of the pump and dump, which generated proceeds of crime, securities fraud being the predicate offence. Schneider created and flipped 20 shell companies for US$5.6 million and used his law firm trust account to receive payment for the shells. Schneider is alleged to be evading civil forfeiture.

What did Biozoom boy do?

So what did Francisco Abellan Villena do in respect of Biozoom? He is alleged to have masterminded and controlled the scheme. Among other things, he allegedly located Dean for these specific services, paid him to acquire not one but two shells, the second to hold shares of Biozoom in the names of people from Argentina, and is alleged to have instructed a range of professionals to undertake the scheme, to have dumped shares when the price was artificially high, and to have made a windfall from dumping those shares. He also allegedly placed another Canadian in charge of his Argentine company – he had a preference it seems, for using Canadians, wittingly or unwittingly, for his plan.

Villena unknown location (photo from promotionstocksecrets.com)

Now that Villena has been located in Ibiza, he will be removed to the US in due course for the SEC proceedings. Villena had a previous case involving securities manipulation here.

As for Dean, he moved into Blockchain and somehow is connected to a reporting issuer called Evolution Blockchain Group Inc., which was a revived dead mining company. The SEC stepped in immediately after the reporting issuer issued a news release that it was getting into the already high-fraud area of digital currencies and was ICO’ing and immediately halted it, saying it was questionable as to accuracy. This may be the news release that was of concern.

Hopefully, US law enforcement shuts down the practice of selling shells and shelf companies

On a go forward basis, US law enforcement has said that they intend to focus on professional money launderers which includes the circle of professional services that include the sale or brokering the sale of, shell and shelf companies that are used to back into an RTO with the issuance of closing opinions that contain representations that are false and concludes with the unlawful pumping and dumping of shares on the public markets. And indeed they are – in October, another lawyer that acted for a Canadian reporting issuer settled in the US over writing closing opinions with materially false information and selling shells for RTOs for US$200,000 each.

The BC Securities Commission has tried to clean up the ecosystem since 2008

You may be wondering why it appears that many paths lead to Canada when it comes to the whole circle of services that involve unlawful pump and dumps – it has to do with the culture of how little mining companies were created and historically financed in Vancouver. The British Columbia Securities Commission here commented on the disproportionate role of British Columbia “players” in the US OTC markets who engage in abusive securities law practices and noted that such activities “damage the reputation of the province’s capital markets and harm the interests of legitimate issuers.”

That was twelve years ago, in 2008 and it has not abated, but the BC Securities Commission can only regulate its own ecosystem – it has no control over and cannot stop the activities of others in the capital markets whose members keep that circle of fraud spinning.

Villena is listed in the Paradise Papers here. And a co-indicted person, Guillermo Federico Ciupiak, is in the Paradise Papers here.

On a positive note and this is pretty cool – victims of the Argentinian aspect of the securities fraud claim of Biozoom can consult this website to file a claim for a refund.

If this sounds like a good Netflix, it would be.

Update: 2020-02-03: The US Department of Justice filed a Notice of Intent to Introduce Evidence of Other Acts in federal court in the criminal matter, notifying the parties of its intention to introduce evidence that Villena and Dean, and other defendants, were involved in a similar alleged fraudulent pump and dump scheme of Ocean Electric Inc., orchestrated allegedly by Villena and Dean, involving some of the same nominee shareholders as Biozoom, to get listed on a more senior exchange.

Update: 2020-02-11: A co-defendant in the Arizona criminal case, James Panther, and the Department of Justice filed a joint motion to postpone pretrial deadlines because they are negotiating a disposition that would eliminate the need for a trial, likely meaning Panther is pleading guilty and will cooperate in the trial as against other defendants including Dean.

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