Dead company revived
This story is a little wild. You know those true crime cases you hear about where a person steals the identity of a dead person from a gravestone, and then gets fake ID in the name of the dead person to commit fraud?
Well, a Vancouver man named Shane Kenneth Schmidt is alleged to have taken that scheme one step further.
Schmidt took the identity of a company called Sandy Steele Unlimited Inc. that had been dead for twelve years, brought it back to life with a slew of fake legal documents, and proceeded to be involved in a pump and dump scheme of its shares on the market, with four other Canadians, according to the US Securities and Exchange Commission (the “SEC“).
On June 9, 2020, the SEC filed a complaint (the “Complaint“) in the District Court of Massachusetts against Schmidt and four Canadians who they say were involved in securities fraud – Michael Luckhoo, Douglas Roe, Kelly-Ann Warawa and Nelson Gomes (the “Canadian Five“), as well as several corporate entities, one of which is Canadian. In a separate action, the US Government filed a criminal complaint against Schmidt, which includes many of the facts alleged in the Complaint.
Here is what each is alleged to have done.
(1) Allegations Michael Luckhoo
The first of the Canadian Five is Michael Luckhoo, aka Michael Luckhoo-Bouche (“Luckhoo“).
Luckhoo lives in the Toronto area according to the SEC, namely in Mississauga. According to the SEC, Luckhoo coordinated with a Canadian man named Nelson Gomes and several others to dump the shares of several companies that had been illegally pumped, and also acted as a nominee director to effect the scheme. One of the companies the SEC says Luckhoo fraudulently manipulated the trading of, in concert with others, was Sandy Steele Unlimited Inc.
In all, the SEC alleges that Luckhoo and Gomes generated more than US$25 million in illegal trades of shares. Luckhoo acted, in part, says the SEC, through a Hong Kong company called Paifang Trading Ltd. and he and Gomes used three different Mexican foreign nationals to act as purported beneficial owners of other entities as part of the scheme.
Luckhoo and the defendant Gomes are listed as the directors of a Canadian numbered company based in Mississauga.
The SEC also alleges that when Covid-19 struck, Luckhoo, together with Gomes and their colleagues, used penny stock email marketing and boiler room call centre services to promote Sandy Steele Unlimited Inc.’s shares based on an untrue alleged ability to produce covid-19 PPE, representing inter alia, that its shares would increase 200%.
After Sandy Steele Unlimited Inc.’s shares were pumped, the SEC says that they were dumped.
US$25 million in trades
And while Luckhoo and Gomes are alleged to have generated US$25 million in illegal trades, including of Sandy Steele Unlimited Inc., others were not so lucky.
The FBI says that an 87-year-old man from Massachusetts believed the representations made in the pumping campaigns and lost his investment in Sandy Steele Unlimited Inc.
Temporary suspension orders
In order to stop Luckhoo and Gomes, the SEC says it was forced to issue an order on April 3, 2020, suspending the trading of Sandy Steel Unlimited Inc., and of other issuers in which Luckhoo and Gomes were by then principally dumping. We wrote about the SEC and BCSC halt and crease trade orders, respectively, over Sandy Steele Unlimited Inc. here.
Luckhoo is alleged by the SEC, among other violations, to have fraudulently sold securities and to have offered to sell unregistered securities.
(2) Allegations against Shane Schmidt
The case against Vancouver’s Shane Schmidt involves allegations that can only be described as next-level fraud.
Schmidt is the only Canadian Five criminally charged by the US Government. The charges against him are conspiracy to commit securities fraud and securities fraud.
The following alleged facts are based on an affidavit sworn by an FBI agent who was involved in the investigation in Canada.
The FBI says that in Vancouver, Schmidt created a fake identity as “John Scott”, and using that fake identity, created a fake passport in that name with his likeness.
In December 2018, the US Government alleges that he then used his John Scott persona to bring back to life Sandy Steele Unlimited Inc., which had ceased to exist as a corporate entity in 2006.
Fake change of control
In order to bring Sandy Steele Unlimited Inc. back to life, according to the FBI affidavit, he created change of control documents, including resignation forms dated in October 2017. They were fake, alleges the US Government, and in order to give effect to the rebirth of Sandy Steele Unlimited Inc., the signature of the former director and officer, a woman named Sandy Steele, was forged. Those documents were notarized in Vancouver, Canada; whether a real notary performed notarial services or a fake notarial event occurred, is not known.
Fake notarized documents
The FBI agent deposed that Schmidt, acting under the alias John Scott, filed the notarized corporate documents with the state corporate registrar to revive Sandy Steele Unlimited Inc.
Schmidt then registered a domain for it.
The real Sandy Steele says she was unaware of any of this. She informed the FBI that she did not resign, transfer control of the company, register a domain for the corporate entity and had no knowledge of John Scott.
The FBI deposed that Schmidt under the alias John Scott then caused Sandy Steele Unlimited Inc. to be revived on the OTC Markets in December 2018.
Fake financial statements
In March 2019, the FBI deposed that Schmidt under the alias John Scott then caused to be created fake financial statements for Sandy Steele Unlimited Inc. for a period of three years and published those financial statements as well as other disclosure documents on the OTC Markets platform for investors. It identified what the FBI deposed was the non-existent John Scott as the president, sole officer and director of Sandy Steele Unlimited Inc.
Fake promissory note
According to the SEC Complaint, Schmidt is alleged to have created a fake promissory note dated in 2016, for US$12,000 payable to an entity called Arctex Capital Inc. The alleged fake promissory note contained a clause for the right to exercise a conversion into shares at the election of the holder.
Ms. Steele informed the FBI that Sandy Steele Unlimited Inc. did not borrow US$12,000 from a company called Arctex Capital Inc., did not receive US$12,000 from it and did not execute the promissory note.
In January 2018, a month after Schmidt revived Sandy Steele Unlimited Inc., the SEC alleges that Arctex Capital Inc. assigned what it says is the fake promissory note to the four defendant companies.
Fake bank cheque
Subsequently, the SEC alleges that a US lawyer was asked to draft securities law opinions that affected the legending of the promissory note shares (so they could trade) and the lawyer agreed provided, among other things, that there was proof of the US$12,000 loan to Sandy Steele Unlimited Inc. The SEC alleges that a copy of a bank cheque for US$12,000 payable to Sandy Steele Unlimited Inc. dated in 2016, was provided to the lawyer, who issued four securities law opinions that the US Government says were incorrect and which contained false statements. The FBI deposed that it consulted with the relevant bank and no record exists of that cheque. One of the Canadian Five, Kelly-Ann Warawa, is alleged by the SEC to have paid the lawyer for the opinions.
The SEC says that the transfer agent was then able to issue unlegended shares of Sandy Steele Unlimited Inc. to the four corporate defendants.
According to the SEC, Schmidt then caused 40 million shares to be issued to himself so that the four corporate defendants would, in essence, be under the radar as control persons. Over-issuing shares to one shareholder for which no consideration is given, increases the issued and outstanding capital, resulting in a dilution of the other shareholders to bring them below the reporting threshold.
Fake business online
Then, the SEC says that Schmidt populated the Sandy Steele Unlimited Inc. website with fictitious information. That website claimed that the company manufactured clothing and had a battery division that supplied product to Russia.
Once the website was live, the SEC alleges that one or more of the defendants caused the shares of Sandy Steele Unlimited Inc. to be pumped based on material misrepresentations to artificially inflate the share price. When Covid-19 hit, the issuer allegedly represented that it could provide PPE at the “facilities” of the company, of which the SEC says there were none. During that time, the entity that the SEC alleges that Luckhoo controlled, namely Paifang, allegedly received some of the shares from two of the corporate defendants that the SEC alleges benefitted from the promissory note arrangement.
As part of its investigation, the SEC and FBI undertook IP tracing and each describes in filings, the tracing the IP of Schmidt, tying his IP address to log-ins he made to access his bank account, brokerage accounts, the OTC Markets, the domain registrar, his Facebook account and his email account. They also traced his partner’s IP address – both are 220.127.116.11 (Telus) and 18.104.22.168. Although neither the Complaint not the affidavit filed in support of the criminal case mention it, it is now normal for investigations to involve significant IP investigations work of prospective defendants. Often, IP investigations can produce more compelling and reliable evidence than traditional methods, particularly for geolocating.
(3) Allegations against Kelly-Ann Warawa
The third defendant among the Canadian Five is Vancouver’s Kelly-Ann Warawa.
The SEC alleges that, in the past, four of the defendants – Schmidt, Warawa, Gomes and Roe – used a company called Wintercap S.A., which according to a different SEC complaint, was allegedly used by a person named Roger Knox to provide what can best be described as obfuscation services to insiders and control persons of issuers to enable them to secretly dump large blocks of pumped shares. Wintercap S.A. was sued by the SEC in connection with a US$165 million fraud scheme. Some assets connected to that case may be in British Columbia.
In the current Complaint, the SEC alleges that Warawa was part of the overall scheme and among other things, the SEC alleges that she acted as the bank authorized person for one of the four entities that the SEC alleges acquired shares from the promissory note scheme, paid the lawyer for the four opinions in respect of unlegended shares and paid for the Sandy Steele Unlimited Inc. website.
(4) Allegations against Douglas Roe
The fourth Canadian, Vancouver resident Douglas Roe, is, according to the SEC, an officer and sole director of one of the four entities that the SEC alleges benefitted from the fake promissory note scheme, acquiring shares of Sandy Steele Unlimited Inc. for no consideration.
The SEC alleges that he, together with Warawa, sold shares of Sandy Steele Unlimited Inc. that they knew were restricted, and further than the two of them dumped those shares on unsuspecting investors.
But if the allegations are accurate, the alleged wrongful conduct is deeper because those shares were allegedly illegitimate shares, issued without the requisite corporate authority because Sandy Steele was allegedly fraudulently revived as a corporate entity according to the SEC. Share certificate fraud is not much different that cheque fraud – a main difference is that the clearing of the financial instrument takes place through the capital markets, not a financial institution.
Roe brushed up against the SEC in 2016, in connection with a company called Blue Mountain Eco Tours Inc. over registration statements that the SEC says were untrue. He was served at a golf course in California. In 2018, he settled with the SEC.
In that settlement, he consented to US jurisdiction over him in respect of securities law, and was permanently enjoined from violating certain provisions of the US Securities Act. Interestingly, the injunction as to securities violations is also binding on any lawyers of Roe and other persons in concert with him, which appear relevant in respect of the allegations in the Complaint. Roe was also prohibited from participating in an offering of any penny stocks.
(5) Allegations against Nelson Gomes
The allegations against Nelson Gomes somewhat mirror those as against Luckhoo to a large extent. The essence of the complaint is that Gomes and a number of persons and entities, as well as three Mexican foreign nationals who acted as purported beneficial owners of several entities involved, were a “group” and the group undertook various conduct which amounted to a pump and dump scheme and violated several provisions of securities laws. Gomes is in the Bahamas.
In all, Gomes is alleged to have been involved in the pump and dump of the shares of more than twenty penny stock companies for proceeds of US$25 million allegedly using brokerage accounts that he or Luckhoo allegedly controlled. The SEC alleges that Gomes dominated the market position in respect of those entities and used that position to trade shares and that the email marketing campaigns came from a single email marketing account associated with the group. The SEC says that those email marketing campaigns contained false and misleading information.
Like Warawa, Roe, Luckhoo and Schmidt, the SEC alleges that Gomes traded shares that were restricted from trading.
Restraint of assets
On June 6, 2020, the SEC obtained a temporary restraining order freezing the assets of the Canadian Five and the four corporate defendants because of the likelihood that they may dissipate and conceal assets.
The order was issued as against the defendants, their lawyers, employees and such, and obliges them, among other things, to retain funds and assets of the defendants and prevent the withdrawal, sale, conversion, payment, transfer or disposal of those assets and funds.
Assets of the one or more of the defendants that are frozen that have been identified include those at TD Bank, RBC Royal Bank, Scotiabank, HSBC Bank, National Bank, Tangerine Bank, DBS Bank, Standard Chartered Bank, Citibank, Satabank PLC in Canada, US, Cayman Island, Malta, Hong Kong and the Isle of Man.
One of more of the defendants appear to have moved assets using Bitcoin and other digital currencies because assets at Binance and Okex Exchange were ordered restrained.
The effect of the temporary freezing order on the defendants is that they cannot pay for counsel, even Canadian, without the consent of the SEC to vary the order because all lawyers are prohibited from not complying with a Court order.
All of the statements in the pleadings filed in Massachusetts against the defendants are allegations. Statements from the FBI are different – they are affidavit evidence in the criminal proceeding against Schmidt.
It would not be surprising to see additional action commenced against the defendants Roe and Warawa if only because the allegations as against all the defendants, if true, seem to suggest acts undertaken as part of an enterprise that were sophisticated and organized and which took time and planning to operationalize, and the allegations against Roe may be inconsistent with the terms of his settlement with the SEC. If Roe breached the terms of the settlement, it’s an open question as to whether the SEC will reactivate that claim against him.
Update June 22, 2020. According to an article in Stockwatch, the SEC filed a motion for a preliminary injunction against Luckhoo and Gomes seeking to prevent them from transactions or carrying out any business that would operate as a fraud or deceit, and to prohibit them from disposing of shares of certain issuers.
With respect to the assets already subject to a freeze in the accounts of lawyers, accountants, brokers and banks and digital currency exchanges related to Luckhoo and Gomes, in Canada and elsewhere, while the freeze remains in place, the SEC motion would extend the terms of the freeze of assets. The earlier asset freeze has the effect of preventing any of the defendants from hiring, engaging or paying for lawyers or to use any funds in trust previously paid to a lawyer or law firm, including in Canada without the consent of the SEC or a Court order and this motion would extend the term of the consequences of the initial freeze order.