Understanding round-tripping in the capital markets

By Christine Duhaime | August 6th, 2022

Part 1

Part 1: SEC files rare round-tripping enforcement action against Canadian issuer

We tend to think of round-tripping as tax evasion round-tripping tied to FDI, where investments are routed through a no tax jurisdiction before being reimported into the economy of origin as FDI. Mauritius comes to mind, because billions of dollars are round-tripped there every year, from India and emerging nations of Africa. The FATF has cautioned Mauritius about this type of activity.

But before there was sophisticated tax-evasion round-tripping, local capital markets had their own version of round-tripping, with new public companies inflating sales or revenues, to increase valuations to sell stock and dump it on unsuspecting investors. Round-tripping is as old as the capital markets themselves but for some reason, in the last 50 years, it has rarely been prosecuted.

That is until recently when the Securities and Exchange Commission (“SEC“) filed a handful of enforcement actions specifically addressing round-tripping, some involving Canadians.

Round-tripping is frequent and yet so infrequently addressed in the law, that we’ve decided to cover it in a 3 part series.

In Part 1, here, we discuss what round-tripping is and a recent SEC enforcement action. In Part 2, we’ll put a human face to our discussion of round-tripping with a deep dive into the world’s most famous round-tripping case involving a mysterious man from Asia named Hady Hartanto. In Part 3, we’ll get to know Hady Hartanto a little better through some of his history in Asia, and we’ll explore whether he has ties to Vancouver’s capital markets.

What is round-tripping?

Round-tripping is a scheme involving financial transactions of public companies. It literally means money that went around and ended up at the same place (it went around in a circle), but deceptively, so that it appears to those not-in-the know that new money came in, when the same money re-enters an issuer. A round-trip involves several financial transactions, and combined, we use the term round-tripping.

Round-tripping happens frequently enough with little issuers – they do it to inflate their sales and revenues artificially to deceive banks, investors and analysts. Issuers may also round-trip to obtain a loan from a financial institution, and insiders sometimes take money from an issuer and circle it around to acquire securities using the issuer’s own money (instead of their own).

In terms of money laundering, round-tripping usually goes hand-in-hand with trade-based money laundering. To round-trip to deceive, the issuer has to fabricate invoices and sales to move the money, and that part of round-tripping is trade-based money laundering. The underlying crime is fraud (fraudulent financial statements, false documentation to obtain credit, etc.), and the proceeds are proceeds of crime, and thus the financial transactions are laundered funds.

SEC case involving round-tripping

In June, the SEC filed a claim against Mark Korb (“Korb“), the CFO of a Canadian issuer called Petroteq Energy Inc. (“Petroteq”), listed on the TSXV, OTC and Frankfurt exchanges. The CEO of Petroteq was Aleksandr Blyumkin (“Blyumkin”). 

Korb was charged by the SEC with multiple failures to disclose material information to investors, including executive compensation, related party transactions and mining rights.  

Failures to Disclose Related Party Transactions

In 2013, business associates of Blyumkin began buying shares of Petroteq, accumulating 8.96% of Petroteq’s shares and as a result of owning that amount of securities, became its control person (the “Control Group”).

That Control Group acquired mining rights from third parties on certain federal land leases in Utah for $275,000 and then flipped the mining rights to Petroteq for $23.8 million, meaning that the issuer’s own control person entered into a non-arms length deal and made over $23 million. Petroteq filed a Form 10-K, that was certified, which failed to disclose that the transaction was a related party transaction with its control person, and that the Control Group had an interest in the transaction.

Money From Acquisition of Mining Rights Round-Tripped

Petroteq acquired the mining rights in two transactions from the Control Group.  In the first transaction, Petroteq acquired a 50% interest from Vendor A for $10.8 million, satisfied with a $1.8 million cash payment and the remainder in Petroteq shares. It then acquired the remaining 50% interest from Vendor B for $13 million, satisfied with payments in cash and Petroteq shares. 

Most of the $1.8 million cash that Petroteq paid to Vendor A for mining rights was returned (round-tripped) to Petroteq and to Blyumkin. Blyumkin directed that $1.4 million paid by Petroteq be wired to two companies in the Control Group.  These two companies then wired $1.39 million back to Petroteq to buy its shares. The result was that the same money came in, went out and came back in. Issuers cannot round-trip in this manner.

There is a lot more to the civil case against Korb than round-tripping., which can be read here, and it is highly recommended for Vancouver CFO and auditors.

Criminal round-tripping

Round-tripping can be dealt with criminally as well.

In USA v. Vitaly Fargesen and Igor Palatnik (involving the cannabis issuer Canadian CanaFarma), two CanaFarma control persons raised money from investors on false statements, lied about having cannabis facilities and created bogus deals to round-trip money around to create fake revenue for the issuer. They were hoping that by round-tripping using fake deals for technology, the stock price would increase and because they were the control persons, their stock holdings would be more valuable and they could cash out.

The auditor signed off on round trip transactions but likely was not aware of round-tripping risks or how to detect them.

YouTube Channel of SAExploration

In another case, USA v. Whiteley, the CFO of SAExploration, a well-known public oil and gas company round-tripped $12 million through several companies to create the illusion of having sales on the books in order to qualify for a corporate loan. In doing so, he certified to false financial statements which were filed with the SEC. The CFO pled guilty to securities and wire fraud and at his plea hearing, stated that he understood that he faced a 90 year jail sentence.

Stay tuned for Part 2, where we put a human face on our discussion of round-tripping with a deep dive into the world’s most famous round-tripping case involving a mysterious man from Asia named Hady Hartanto.

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BVI Premier arrested for conspiracy to import cocaine for Mexican cartel and money laundering

By Christine Duhaime | April 29th, 2022

BVI – a global money laundering safe haven

The Premier of the British Virgin Islands, Andrew Alturo Fahie, and BVI port authority head Oleanvine Maynard (“Maynard“), were arrested on drug trafficking and money laundering charges in Miami yesterday, shortly after looking at $700,000 in cash in a private jet that was earmarked for them.

The cash, they were told, was a payment from the Sinaloa cartel in Mexico for facilitating the movement of cocaine and money through the BIV.

Alas, that wasn’t true – they were looking at bags of cash that were never going to come to them because they were the target of a US investigation to root out corruption in foreign government tied to drug trafficking and money laundering.

The case was a DEA undercover operation involving the BVI.

In an affidavit, a DEA agent says that persons who said they are members of the Lebanese terrorist organization Hezbollah, met a DEA undercover agent in Tortola and gave him Maynard’s name as a BVI government official who could help with drug importations and money laundering.

The DEA undercover agent was posing as a “fixer” for the Sinaloa, seeking a transshipment point for cocaine from Colombia. The Hezbollah told the DEA undercover agent that he “owned” Maynard and that BVI government officials would need to be paid to help with drug transshipments.

The son of Maynard, Kadeem Maynard, was also arrested. He acted as the contact person between the Hezbollah and the DEA undercover agent, and later for access to his mother. At the first meeting, Kadeem Maynard informed the undercover agent that he had been trafficking drugs for 20 years.

With respect to money laundering, at that first meeting Maynard told the DEA undercover agent that “we set up shell companies” for banking to get the proceeds of crime into the BVI. Her son owns a real estate company in Florida and Maynard offered his company bank accounts to launder money in the US.

Maynard told the agent that BVI Premier Fahie was “a little crook sometimes” and “not always straight.”

Oleanvine Maynard (Source: Government of BVI)

The undercover agent eventually met BVI’s Premier Fahie through Maynard, and they reached an agreement for drug trafficking protection in exchange for a cut of the drug proceeds. Part of the arrangement involved providing Fahie with seizures of bad drugs and money in the BVI so that Fahie would avoid suspicion and it would appear to the world as if he was combatting drug trafficking and money laundering in the BVI, when of course he was not.

Fahie said he wanted $500,000 upfront and he would handle the ports and airports. He also asked for an advance of $83,000 to pay a man from Senegal who had “fixed” some political issues for him in the past.

Andrew Fahie, Premier of BVI (Source: Government of BVI)

When he was being arrested, Fahie asked: “Why am I getting arrested? I don’t have any money or drugs.”

People say the most prophetic things to undercover law enforcement officers – take Fahie, for example. Almost like he was foreshadowing, at the beginning of the relationship, he told the undercover agent that he hoped the agent was not law enforcement because it took him 20 years to become Premier and he didn’t want to lose it all in 20 minutes being caught in a drug trafficking operation. He knew, in his gut, that the agent was law enforcement and in the end, many weeks later, he did lose it all – in 20 minutes. Maybe even in two.

Next steps

The defendants are charged with conspiring to import more than five kilos of cocaine into the US and conspiring to commit money laundering, and will be prosecuted in Miami.

The DEA issued a statement about the arrest, noting the agency’s “resolve to hold corrupt members of government responsible for using their positions of power to provide a safe haven for drug traffickers and money launderers in exchange for their own financial and political gain.”

AML Risks

The BVI has a population of only 29,000 and yet it has 400,000 shell companies and other private companies (with bank accounts attached to them). It is a known money laundering safe haven for politically exposed persons, criminal organizations and oligarchs. In the chart, below, we describe the money laundering and narco-trafficking risks for each Caribbean nation, including the BVI (on page 2).

If you look at Cayman Islands (page 3 of the document below), while it has similar shell, banking and money laundering risks as the BVI, the ratio of the population to shell companies is significantly less, as is the number of shells. That’s because while the Cayman Islands is a money laundering haven, it does not have the narco-trafficking transshipment footprint that the BVI has.

Checklist of AML Risks for each Caribbean Nation

If you’re wondering about the Hezbollah and whether they really are chilling in Tortola, setting up shells and moving dirty money and drugs, we don’t know from the DEA whether in this case, it really was Hezbollah operatives or Lebanese nationals just claiming to be the Hezbollah, who made the connection for the DEA to alleged corrupt BVI government officials.

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Vancouver full-patch member of Hells Angels part of a group that controlled eight public companies

By Christine Duhaime | April 28th, 2022

The Securities and Exchange Commission (“SEC“) filed two more cases in New York over Easter, targeting actors in the Canadian capital markets. The cases are for alleged pump and dump schemes. One of the two latest cases by the SEC charges Courtney Vasseur, a full-patch member of the Hells Angels in Vancouver, with securities fraud and alleges that he was part of a group that controlled eight public companies.

In total, five cases were filed or unsealed around Easter charging a group of mostly Canadians with securities fraud brought by the SEC and/or the US government. The defendants in the first set of actions are David Sidoo, Ronald Bauer, Craig Auringer, Adam Kambeitz, Alon Friedlander, Massimiliano Pozzoni, Daniel Mark Ferris, Petar Dmitrov Mihaylov, Chris Lehner (“Lehner“), Julius Csurgo (“Csurgo“), Anthony Korculanic, Dominic Calabrigo (“Calabrigo“), Hasan Sario (“Sario“) and Courtney Vasseur (“Vasseur“). 

All five cases are tied to the US$1 billion securities fraud case in Vancouver, SEC v. Frederick Sharp, Avtar Dhillon et. al., which is a series of actions brought by the SEC and the US government. That case alleges that for at least a decade, Vancouver’s Frederick Sharp (“Sharp”) and his associates (the “Sharp Group”) ran a factory of fraud in Vancouver offering securities fraud services, with a tight circle of gate-keepers, facilitators and “corrupt intermediaries”, who together, allegedly defrauded the capital markets and investors of US$1 billion. The money and the securities of many little public companies was laundered and integrated through the Vancouver financial system. 

First Case

The first newest case by the SEC charged defendants Dean Shah (“Shah“), Csurgo, Henry Clarke and a corporate entity owned by Csurgo in Toronto, Canada, called Antevorta Capital Partners Ltd. (“Antevorta“). Henry Clarke is tied to Shah in the corporate sense in Malta.

Antevorta Capital Partners website

In this case, the SEC alleges that Shah and Clarke were clients of the Sharp Group, and used his services to acquire and conceal control of several public companies to run pump and dumps to defraud investors. Part of the manner in which this was accomplished was using multiple private companies to act as nominee shareholders. 

According to the SEC, Sharp sold shelf companies to clients as part of the alleged obfuscation services. In order to communicate secretly, Sharp established an encrypted communication service with devices called X phones, that he used with clients to run the operation and, according to the FBI, assist clients commit fraud without law enforcement visibility. The SEC alleges that Shah and Clarke used the X phone service. 

Because the beneficial owners of the stocks involved were concealed behind private companies, the SEC alleges that the defendants were able to pump stocks and dump them on innocent investors at inflated prices. Investors were unaware that stocks they were buying were allegedly derived from fraud and from a secret control group. 

The SEC says that one of the pump and dump schemes conducted by the defendants was of Zenosense Inc. (“Zenosense”), and the fraud was carried out in several phases. 

The SEC says that Shah and Clarke acquired Zerosense from Sharp, and came to control most of its issued and outstanding shares. When they became the controller of the issuer, and therefore its affiliate, they hid that fact from the market, and failed to make the requisite disclosure filings. 

The SEC says that when new shares were being issued, Clarke asked Sharp if the certificates should be mailed to shareholders. 

Sharp is alleged to have replied: “Nooo. Never.” 

The SEC says that Sharp told Clarke that the share certificates should be sent to a lawyer who would forward them to Sharp. Clarke replied that he was working with a “straight” lawyer, which he stated was concerning. Sharp told Clarke to find a lawyer who would be willing to take the certificates from the transfer agent and send them to Sharp. 

According to the SEC, Sharp informed Clarke that the purpose of layering securities[1] was to insulate Sharp in the event of an investigation by the SEC because, according to Sharp, the SEC would not bother the lawyer. 

The SEC alleges that a lawyer in Canada working for one or more of the defendants deposited money wired from a bogus financial entity into their law firm trust account. That lawyer then wired the money to another law firm. The SEC says that in some instances, no legal services were rendered in connection with the movement of such money in and out of law firm trust accounts. 

Once Shah and Clark had secret control of Zerosense, they allegedly incorporated a shell in Belize through Sharp to act as the hidden payor for promotions of the stock, then pumped the stock and sold it when the price became artificially high, unjustly becoming enriched in an amount equal to US$2.3 million. 

A few years later, they allegedly undertook a second pump and dump of Zerosense. This time, Shah and Clarke allegedly partnered with Csurgo in Toronto and his company, Antevorta, to gain control of 90% of Zenosense’s issued and outstanding shares.

The SEC alleges that some of the defendants prepared fake stock purchase agreements purporting to evidence the purchase by Antevorta of the stock of one or more of the issuers for alleged consideration. One such agreement was with a company named Total Investment Holdings Ltd. The two pages of that agreement, below, show, for example, that there is not even a seller of the shares identified, as well as inconsistencies in respect of the parties to the contract and the use of a corporate seal.

For comparison purposes, except for the fictitious party names, the two pages, below, are from a real stock purchase agreement.

Total Investment Holdings Ltd. is a shareholder of a public company in Vancouver named Green 2 Blue Energy Corp., now G2 Technologies Corp.

The SEC alleges that Csurgo also acquired Zenosense shares from Sharp, and also executed a fake stock purchase agreement purporting to evidence an alleged payment for such shares when no consideration was paid for those shares. The Csurgo alleged fake stock purchase agreement was allegedly sent to broker-dealers to defeat their compliance processes. 

The SEC alleges that the Zerosense stock was pumped with Shah, Clarke and Csurgo selling over 6.3 million shares and earning proceeds of US$7.9 million. According to the SEC, they conducted a third pump and dump of Zenosense, earning US$3.2 million.

The SEC alleges that the same pattern of activity took place in respect of Drone Guarder Inc., Envoy Group Corp. and EnviroTechnologies International Inc., whereby one or more defendant amassed secret control of the stock of issuers for no consideration, orchestrated promotional activity, and engaged in manipulative trading to condition the market ahead of a pump and dump, subsequent to which shares were then dumped on innocent investors and everyone in the chain was unjustly enriched thereby.

Csurgo posted a video on YouTube on how stock manipulation works.

Second Case

In the second case, the defendants are Calabrigo, Lehner, Sario and Vasseur and they face similar allegations of securities fraud.

Vasseur is a full-patch member of the Hells Angels in Vancouver. Although a member of transnational organized crime, Vasseur was allegedly able to infiltrate the capital markets and with one or more of the defendants, allegedly controlled eight public companies.

The SEC says that for a three year period, some or all of the defendants manipulated the stock of at least nine public companies, including Zenosense, Blake Therapeutics Inc., Bingo Nation Inc., Drone Guarder Inc., Horizon Minerals Corp., I-Wellness Marketing Group Inc., Oroplata Resources Inc., Preston Corp. and Vilacto Bioscience Inc. and earned US$39 million in unlawful proceeds. 

The SEC alleges that they obtained the majority of the shares of these companies from Sharp associates or from the conversions of purported debt for shares, and held such shares in various nominee and shell companies which enabled them to conceal their control of the public companies. The SEC says that they were Sharp clients and part of the Sharp circle.

The SEC alleges that Vasseur helped draft promotional emails sent to investors for at least two of the companies. In one such promotional email, investors were promised returns of 15,000%. 

With another company called Bingo Nation, the defendants alleged that the company supplied gambling kiosks to gaming venues in the US which would generate US$30 million per week in revenues which promised to turn a US$2,000 investment into US$26,880 for investors.

The SEC suspended trading of the shares of Bingo Nation, and the SEC says that the company’s officers lied and denied knowledge about the pumping of its stock. 

The SEC says that the defendants used a boiler room to help promote the stock of issuers they controlled. Vasseur, Lehner and Sario allegedly worked with Luis Carrillo. In August 2021, he was charged criminally and civilly in connection with alleged securities fraud as part of the Sharp cases and was allegedly part of the Sharp circle.

When the stock prices were elevated, the SEC says that one of more of the defendants liquidated stock of the issuers. 

In order to move the proceeds around without running into questions by anti-money laundering professionals, the SEC says that the defendants used fake invoices and fake consulting agreements to wire funds.[2]

In these cases collectively, the SEC alleges that the defendants are responsible for pulling off a US$194 million securities fraud scheme.

There may be more cases coming down the pipe against Vancouver capital markets actors tied to the Sharp circle. But this set of cases, in particular, is important because of the threat posed to the capital markets arising from the fact that transnational organized crime allegedly infiltrated the capital markets through Vancouver and were able to allegedly control, with others, eight public companies.

In terms of liability for gate-keepers providing services for criminality to enter the capital markets, the YBM Magnex case in Canada reminds us that the costs can be high – in that case, the insurers of auditors, brokers, book-runners, underwriters and lawyers had to pay $185 million to investors for facilitating Russian organized crime figures to raise money and launder it using the capital markets of Canada. Almost everyone has ignored the YBM Magnex case for over two decades but have recently come to pay it more heed as a result of new interest in the provenance of dirty money held by Russian oligarchs.

[1] Layering is a money laundering term and it involves obscuring criminal origin and as far as possible, to distance money or securities and the beneficial owners from their sources and to make it difficult for an investigator to trace the securities or funds back to that source. Layering may be done in part through repeated transfers in different locations and may involve the use of a variety of transactions and the use of corporate structures as cover. 

[2] This is called trade-based money laundering, whereby fake documentation including invoices, or documentation that changes the amount or value of goods, services or securities, is created to launder money and often to defraud customs agencies. Although infrequently explored, TBML can be a material component of cross-border securities fraud and is prevalent in Vancouver, Canada.

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SEC charges several Canadians, including David Sidoo, with securities fraud over alleged pump and dump fraud ring that generated $145 million in proceeds of crime

By Christine Duhaime | April 15th, 2022

The Securities and Exchange Commission (“SEC“) today filed a complaint in the Southern District of New York, charging eight defendants, half of whom are from Vancouver, with alleged securities fraud that allegedly generated US$145 million in proceeds of crime.

In a parallel criminal proceeding over the same alleged scheme, the US government filed three indictments against ten defendants, four of which are the defendants in the SEC action and one of whom is a full-patch member of the Hells Angels in British Columbia.

The SEC Case

In the SEC case, the defendants are David Sidoo, Ronald Bauer, Craig Auringer, Adam Kambeitz, Alon Friedlander, Massimiliano Pozzoni, Daniel Mark Ferris and Petar Dmitrov Mihaylov. Mihaylov’s nick name is “Petar the Bulgarian”.

Among the public companies they are alleged to have used for securities fraud, is a British Columbia microcap public company named American Helium Inc.

Bauer runs a VC firm and is alleged by the SEC to be the ring leader of the stock scheme.

Ronald Bauer on the right in blue (Source: Behance)

Sidoo lives in Vancouver and used to be a stockbroker. He was convicted in the US of participating in the College Admissions Scandal. He paid $200,000 for someone else to ghost-write the SAT exams for his two children so that they could get into elite US universities.

The indictment against Sidoo in the College Admissions Scandal case alleged that he planned to pay again for a ghost exam writer to take the LSAT for his son in Vancouver to get into law school but the plan wasn’t put into place when a fake ID ordered from China was of low quality.

Sidoo entered into a deal to plead guilty to lesser charges and serve three months in jail in connection with the US charges and was released in December 2020. He was in the news afterwards in connection with a Covid-19 party at his $35 million Vancouver mansion, where some attendees overdosed on illegal drugs (they were attended to by BC emergency personnel).

At sentencing for the College Admissions Scandal case, Sidoo said he hoped people would not judge him. His lawyer told the judge at sentencing that Sidoo made one mistake which was, he represented to the court, inconsistent with “his entire personal life story.” In an interview here after his release from jail, Sidoo stated that everyone makes mistakes but “you move on from it.”

Sidoo receiving some sort of order from the Government of Canada (Source: Twitter)

According to a plain reading of the SEC complaint, and assuming the allegations are true, he did not move on from it, and the fraud committed under the College Admissions Scandal clearly was not inconsistent with his entire personal life story.

The SEC says that, with the other defendants, Sidoo participated in an illegal pump and dump scheme that started in 2006 that involved, for the group, at least 17 public companies. The SEC alleges the defendants controlled stock which was not disclosed, paid for misleading promotions of the stock of several public companies to lure innocent investors to invest and then sold their inflated stock and funneled the proceeds to themselves through offshore entities to obfuscate the transactions. Innocent investors were left holding the bag of much depreciated stocks.

The defendant Craig Auringer is a Vancouver native, whom the SEC says, ran the promotions for the alleged pump and dump schemes. He used to hang out in the Vancouver Yaletown club scene, and dated one of the women from the TV show “Real Housewives of Vancouver.”

Mary Zilba
Craig Auringer with one of the Real Housewives of Vancouver (Source: Flickr)

Two of the defendants are recidivists – Bauer (see here) and Mihaylov, thus it seems likely that to denunciate and deter, they and Sidoo will face maximum penalties if convicted.

For over two years, we’ve been tracking and data-basing certain stock promoters, lawyers, auditors, finders fee recipients, and hidden control persons operating in British Columbia’s capital markets – we know from network analysis of our database that some of the persons and entities connected to this SEC complaint were in the Vancouver Blockchain, then ICO space, with two microcap public companies that went bust after raising tens of millions of dollars, and the exact same people are presently raising money from investors in the NFT space.

Not surprisingly, this is another hidden control person case. For decades, Vancouver capital markets players have ignored the rules against secret control persons hidden behind microcap public companies, regardless of how often the SEC or US government takes enforcement or criminal action against the Vancouver capital markets ecosystem. In a 34-year-old case that we dug up (here), Vancouver’s Madam Justice Southin, who was an iconic judge, warned Vancouver capital markets players against using whom she called “monkeys” (facilitators) to commit securities fraud by not disclosing control persons to investors.

Criminal Indictments and Hells Angels

At the same time, the US Attorney for the Southern District of New York, and Michael Driscoll, the Assistant Director-in-Charge of the New York Office of the FBI, announced parallel criminal proceedings in connection with an alleged US$100 million securities fraud scheme involving similar conduct described in the SEC complaint but against ten defendants, including Bauer, Auringer, Ferris and Mihaylov (but not the other four).

The other defendants in the criminal actions are Chris Lehner, a/k/a “Santa”, a Canadian, Julius Csurgo, a/k/a Gyula Karoly Csurgo, a Hungarian national, Anthony Korculanic, a Croatian national, Dominic Calabrigo, a Canadian, Hasan Sario, a Turkish national, and Courtney Vasseur, a Canadian who goes by the name “Arctic Shark”. The US government says that they sought the assistance of Guernsey and Crypus, among others, for intel and evidence – those two jurisdictions are interesting because they are the preferred jurisdictions of Russian, Ukrainian and other Eastern European members of organized crime for corporate entities. They are favored because like British Columbia, their incorporation structures are designed to be impenetrable to law enforcement, preventing the ascertainment of the identity of legal shareholders of companies.

According to the Combined Forces Special Enforcement Unit in British Columbia (see here), “Arctic Shark” is a full-patch Hells Angels, who belongs to the Nomads chapter, with previous charges for drug trafficking.

Hells Angels member Courtney Vasseur (Source: CFSEU and Vancouver Sun)

Bauer, Lehner, Vasseur, Csurgo, Korculanic, Mihaylov and Calabrigo were arrested in different countries, which is quite a coordination achievement by law enforcement agencies who have to move at the exact same time to arrest alleged securities fraudsters so that no one target makes a phone call to inform the others. Three others remain at large.

The indictments for the criminal charges include money laundering and are somewhat vague as to all the companies involved and other participants, which usually means that information is being withheld because it ties into ongoing investigations. The indictment for “Arctic Shark” is here.

How a known member of a translational criminal organization (the Hells Angels) was able to infiltrate the capital markets in British Columbia, instruct local solicitors, participate in the creation of disclosure material with solicitors, and have bank accounts to receive proceeds of the alleged securities fraud is something no doubt all of Vancouver is waiting to learn from the US Department of Justice once Vasseur is extradited.

Some of the information that is disclosed in the criminal indictments, especially the alleged use of Swiss platforms, as well as the alleged Hells Angels connection, seems to suggest that it ties into the global Frederick Sharp, Avtar Dhillon et. al. prong of cases (our slow burn summary of those allegations here). Not just that, we believe that Csurgo was a client of the Frederick Sharp group, which is another tie to that case.

The Frederick Sharp, Avtar Dhillon et. al. prong of cases include a US$1 billion set of allegations by the SEC that Vancouver capital markets players set up what can be described as a factory of fraud in downtown Vancouver which offered specialized services – those specialized services were allegedly securities fraud services involving a circle of gate-keepers and facilitators who allegedly, among other things: helped harvest and acquire shell and shelf companies; helped secret control persons hide their control of the stock of microcap public companies; helped complete RTOs; helped advise on, write and disseminate press releases and other disclosure material containing false information about microcap public companies to cause the stock price to jack up; helped create false central securities registers that falsely reflected the names of shareholders; created false legal opinions so that securities could be free-trading and which contained false information about control persons; promoted the stock to innocent investors; sold the stock at artificially high prices to enrich members of the alleged organized fraud scheme; used offshore brokerage and bank accounts to hide the movement of the proceeds of securities fraud; and then layered, and integrated all the proceeds – US$1 billion of it – right back into Vancouver through the gate-keepers and facilitators.

Where did the proceeds end up? Chances are high, if the allegations are true, that it was integrated into the financial system for the purchase of mansions, luxury cars, private schools, fancy watches, fast boats and trips on private jets because, after all, it’s Vancouver.

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Two famous global brands sue over NFTs

By Christine Duhaime | March 27th, 2022

As NFTs become more mainstream, so too are lawsuits involving NFTs – two lawsuits observers in the NFT space are watching closely are by two global brands – Hermès Paris and Miramax Film’s Pulp Fiction

Hermès NFT Lawsuit

At the beginning of the year, the famous French luxury brand Hermès Paris filed a complaint in New York against a California artist who created Metaverse NFTs that are digital knock-offs of the Hermès Birkin bag. 

The NFTs are called MetaBirkins.

The Hermès complaint alleges that the digital bags infringe on the Hermès trademark and harm its global brand. 

The MetaBerkins NFTs were created as a collection of 100 digital purses shaped like a Hermès Birkin bag with some of its features, that are each identical except they each have a layer overlaid on top with a different combination of digital faux fur and different colours. 

They were listed for sale on the NFT platform OpenSea and sold for between 5 to 25 Eth each (US$15,000 to US$80,000). As of December 2021, the project had revenues of 200 Eth from sales of the MetaBirkins. By January 2022, revenues surpassed US$1 million. 

Instagram account promoting the sale of MetaBirkins NFTs (Source: Instagram)

A Hermès Birkin bag in the real world starts at about US$10,000 and can go up to US$300,000 on the secondary market (private re-sales).

Except in France, in order to be eligible to buy a Birkin bag from Hermès, a person must be an existing customer of Hermès and have spent an amount in the past equal to the price of a Birkin bag.

An image of a real Birkin bag (Source: Hermès complaint)

According to the complaint, although OpenSea listed the NFTs for sale which used the Hermès and Birkin names, it later agreed to de-list them after lawyers acting for Hermès demanded they be removed. 

Hermès alleges that the artist then created a Discord channel to sell the MetaBirkins NFTs after OpenSea removed the collection from its platform. 

When the Discord channel was launched, Hermès filed an amended complaint on March 2, 2022, partly to include the move to Discord, presumably because it meant that the sale of MetaBirkins NFTs was continuing, and if a Court were to find that there was an infringement, then damages also continued. 

The complaint alleges that the artist is ripping off Hermès’ brand to “get rich quick” through NFTs, and that the use of the Hermès brand will confuse consumers and lead the public to believe that the MetaBerkins NFT project is associated with Hermès. 

Hermès is seeking an injunction to stop sales of the MetaBirkins NFTs, and an order that all the NFTs minted be destroyed, and for custody and control of the project website, as well as damages for expropriating its intellectual property. 

The artist who created the MetaBirkins NFT collection stated on Instagram that the Hermès lawsuit was groundless and that his lawyer informed him that the US First Amendment allows him to make art that depicts Hermès’ Birkin bags in the same way that Andy Warhol was allowed to create paintings depicting a can of Campbell’s soup. Andy Warhol, however, never received consent from Campbell’s for his paintings and while Campbell’s initially contemplated action, it eventually tacitly approved of his use of their logo and his appropriation of their IP, even sending him a box of Campbell’s soup.

The Hermès case is being touted as the first Metaverse infringement case but it isn’t really about the Metaverse except tangentially – the MetaBirkins could be sold and used in the Metaverse and to that extent, it appears to be the first case of a lawsuit by a global brand suing over (among other things), the use of its trademark prospectively in the Metaverse, and in that respect, could be said to be in unchartered legal territory. 

Pulp Fiction Lawsuit

In November 2021, a somewhat similar lawsuit involving IP and NFTs was filed by the iconic film brand Miramax LLC against film director Quentin Tarantino over “secret” NFTs that Tarantino said he was creating of scenes from the Miramax film Pulp Fiction.

That lawsuit, however, is not Metaverse-related and is a copyright infringement case. 

Secret Pulp Fiction NFTs (Source: YouTube)

Miramax says that it sent Tarantino a cease and desist letter when it found out about the proposed NFT project, subsequent to which Tarantino allegedly stepped up efforts to market the “secret” NFTs, and announced that OpenSea was going to list them for sale. 

Miramax alleges that Tarantino created a website and used the likenesses of Pulp Fiction actors John Travolta, Samuel Jackson and Uma Thurman on the Tarantino NFT website to promote the NFTs. 

It also alleges that a Twitter account was created for the Tarantino NFTs, which contained a Tweet with a GIF from another Miramax film, Kill Bill: Vol 2. That Twitter account appears to now be empty. 

The defendants, including Tarantino, filed a response in which they state that each secret NFT is merely a scan, saved in a digital format, of a page of a typed portion of the screenplay for Pulp Fiction, which are minted as NFTs, and such photos of photocopied pages of the typed screenplay are not the intellectual property of Miramax. 

Tarantino says (in the YouTube link above) that the typed-up pages of the Pulp Fiction screenplay were created by a typist and the physical screenplay has remained unopened for over two decades and includes some of his doodles and drawings on some pages. And that physical copy of the screenplay created in 1993, Tarantino seems to be arguing, remained his property and was not sold or assigned to Miramax. It’s an interesting point because this was before word processing software existed and was widely used, so if Miramax did not acquire all the rights to the screenplay, what did they get? And wearing a 1993 lens, if the agreements do not expressly include all copies and pages of the screenplay, could it not be implied that they are included?

One of the Tarantino NFTs sold for over US$1.1 million in January 2022.

Pulp Fiction dancing scene (Source: Twitter)

The plaintiffs in both lawsuits are seeking the destruction of all allegedly infringing minted NFTs which means that if one or both are successful, the buyers of those NFTs will be holding worthless NFTs.

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China grappling with HFT activities run by foreign firms in its capital markets

By Christine Duhaime | March 26th, 2022

China’s influential newspaper Caixin, recently investigated the renewed use of high-frequency trading (HFT) in China’s futures market, operated by foreign companies that, it reports, are incorporated under fictitious corporate purposes.

According to Caixin, some HFT firms are ostensibly registered to engage in the trading of physical goods in China, when in reality they are engaged in HFT activities in China’s markets, and exiting the proceeds from China to other countries.

In China, unlike western countries, the incorporation process involves, among other things, selecting the type of business activities the company intends to engage in and pursuant to which it is approved for registration and operation.

Deliberately selecting a wrong set of business activities to do business in China during the incorporation phase is done to keep a company’s real activities off the regulatory radar.

There is no parallel in the west except that is it similar to the practice in the Bitcoin space among digital currency exchanges and online gambling companies of mischaracterizing their activities to be erroneously merchant-coded as a low-risk activity by credit card processors and banks.

In 2019, the profits to HFT firms operating in China were estimated to be 5 billion yuan, or US$725 million, and 60% of that exited China to foreign HFT firms.

As Caixin explains, foreign firms have been barred from trading in China’s commodity futures market for a long time. In 2018, the crude oil market was opened to registered foreign firms and in November 2021, commodity futures were opened to foreign firms but only under the Qualified Foreign Institutional Investor program and its yuan-denominated program.

The Good Morning Shanghai program on November 2, 2015, discussed the Yishidun HFT investigation by LE in China (Source: Government of Shanghai)

The well-known case of Yishidun International Trading Co. 张家港保税区伊世顿国际贸易有限公司 shows that foreign firms have been engaging in HFT activities in China since at least 2014.

Yishidun is a Chinese registered company owned by two Russian nationals, who controlled the company through two Hong Kong entities, Quantstellation Investment Management (HK) Limited and Vulkan Capital Advisers Limited. It developed HFT software and managed HF trades.

According to Caixin, it traded 3.77 million futures contracts on two major stock indexes in China – the CSI 300 Index and CSI 500 Index – and made profits of 389 million yuan in just over two months during China’s stock market tumble that began on June 12, 2015, and resulted in US$5 trillion being wiped out of the market.

In 2016, Yishidun was prosecuted for market manipulation and the Court determined that it illegally connected its HFT software and technology system to the systems of the China Financial Futures Exchange. It did that through a registered broker in China.

Yishidun was fined 300 million yuan (US$43.9 million) and ordered to disgorge 389 million yuan in proceeds of crime from illegal gains from HFT activities. Three people in China were charged and convicted of criminal offences involving securities market manipulation, and sentenced to terms of incarceration.

The two Russian nationals allegedly departed from Hong Kong to avoid arrest in the case.

Caixin reported that Yishidun invested US$700,000 and did a capital raise in China of 3 million yuan, and made a profit of 2 billion yuan.

Shanghai No. 1 Intermediate People’s Court, Yishidun International Trading Co. hearing (Source: Government of China, Shanghai No. 1 Intermediate People’s Court)

The prosecution caused a chill in respect of the deployment by foreign firms of HFT in China’s markets. But apparently not for long. Fast forward to 2022, and Caixin reports that several foreign firms once again have a strong presence in the HFT space in China, including one called Hudson River Trading in the US and another in Russia called AIM Tech. Most, however, are based in the US, according to the Caixin investigation.

One of the issues faced by Yishidun was the problem of converting and exiting its profits out of China under the currency control rules because the proceeds from the trading activity was neither a capital nor a current account qualified category for conversion or exiting by that firm.

Except for the US$50,000 annual amount permitted by SAFE to be converted and exited by Chinese nationals pursuant to the current account rules, any conversion and exiting of currency must be approved and foreign firms engaging in HFT activities do not fit under the set categories determined by SAFE and thus the issue of conversion and exiting still exists at the bank end.

In its periodic reports of money laundering and bank fraud cases using abuses of the current or capital categories to exchange and exit funds, SAFE provides numerous examples of underground banking techniques used and of trade-based money laundering, as mechanisms in which funds are often moved to circumvent the SAFE regulations.

The issue still remains in 2022 from a money laundering and foreign currency conversion and exiting perspective, as it did in 2015 – namely, how is any of the HFT proceeds being converted and exited from China to Russia and the US?

In 2020, China’s Supreme Court cited Yishidun’s conduct as part of seven case studies of securities crime, calling the criminal activities a “new type of manipulation” of the futures market.

It was part of a series of four cases prosecuted in China.

Another was the prosecution of Xu Xiang, who ran a billion dollar hedge fund which was, in essence, the Chinese version of a pump and dump factory, manipulating the stock of many unknown companies. The fund grew 800% in five years.

Until his arrest, Xu was a legend in China because he was a real rags to riches story who turned an investment of 30,000 yuan into 28 billion yuan, with his own sweat and talent. Unfortunately, in the latter years of his fund, the growth was derived from criminal activities and stock market manipulation, and Triads had joined the fund to reap the financial rewards.

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Vancouver fraudster charged in alleged US$58 million boiler room stock scam; related to Frederick Sharp case

By Christine Duhaime | March 18th, 2022

The Securities and Exchange Commission (SEC) has filed another enforcement action related to the Frederick Sharp case, this one involving the operation of a boiler room in Colombia used to solicit investments from investors for little issuers.

The SEC alleges that the defendants ran a call centre boiler room in the cocaine capital of the world, Medellin, Colombia, which generated US$58 million in proceeds of stock fraud. They allegedly hurt elderly victims and other investors in Canada and the US, and using high pressure sales techniques, sold them stock they knew would be worthless because the stock was controlled by hidden control persons, and was being dumped on the market. The defendants allegedly charged a commission of 65% of the proceeds of stock fraud.

The defendants are Canadian residents Francis Jason Dean Biller, Raymond Christopher Dove, Troy Gran-Books and Justin Plaizier, and American Chester Bruce Alvarez.

Biller is a/k/a Frank Biller, who has a criminal record in British Columbia for fraud related to the Eron Mortgage Corporation securities fraud Ponzi scheme in Vancouver. He was permanently banned by the Ontario Securities Commission from serving as an officer or director of an Ontario issuer, and was found by the British Columbia Securities Commission to have engaged in illegal and fraudulent activities. 2,285 investors were defrauded of $240 million in the Eron Mortgage Corporation case.

Biller received a light jail sentence of three years, despite that it was BC’s biggest financial crime case at the time. The Frederick Sharp case, to which this is related, is now the biggest financial crime case in British Columbia and Biller is involved again in a now bigger financial crime case in British Columbia.

Jurists criticized the Biller sentence because it was devoid of deterrence or denunciation, required elements in sentencing, and sent out a clear signal that financial crime pays in Vancouver.

Frederick Sharp is a Vancouver-based “company service provider”, as that term is known under the FATF Recommendations. This enforcement action is a prong of a much larger case against Sharp and his associates in Vancouver which alleges that they orchestrated a US$1 billion stock fraud over a ten year period in Vancouver by running a type of fraud factory, servicing Vancouver capital markets players with the assistance of numerous professional facilitators who laundered securities and money.

In the new Biller enforcement action, the SEC added relief defendants including Lia Patricia Sepulveda Salazar, a/k/a Patricia Biller, who allegedly received over US$3 million from the stock fraud proceeds in accounts in her name and Edward Thomas Clark in British Columbia, who allegedly received US$630,000 from the proceeds in Canada.

In this complaint, the SEC focuses on three little issuers: (a) Oroplata Resources Inc. (“Oroplata”) in the Dominican Republic, now American Battery Metals Corporation, which alleges it is a lithium battery maker; (b) Vancouver-based Garmatex Holdings Ltd. (“Garmatex”), which is now Evolution Blockchain Group, which stated that it released an ICO and ran an online gambling service in Vancouver; and (c) New Jersey-based PureSnax International Inc. (“PureSnax”), now IQST, which allegedly sells FinTech, Blockchain, and electric vehicle services, as well as operates a digital currency exchange. Previously, it allegedly manufactured healthy snacks but reported having no employees or facilities.

The SEC says that Biller and Dove led the boiler room operation. According to the SEC, Biller and Dove promoted two little issuers at a time under a fictitious company name and set up a website for that fake entity. They expropriated the names of professionals and firm names for credibility and legitimacy, which they used during the sales calls. When that so-called “platter” of two issuers was pumped and dumped and became worthless stock, they started all over again with two more under new company names and new expropriated names of professionals.

The SEC says that the Oroplata (now American Battery Metals Corporation) pump and dump involved a situation where the hidden control persons controlled 100% of the issued and outstanding shares, and in the case of Garmatex (now Evolution Blockchain Group), 90% of the issued and outstanding shares were secretly controlled. In the latter, they earned US$7 million in proceeds of fraud for the alleged pump and dump of Garmatex (now Evolution Blockchain Group). One retired investor lost US$2 million buying Garmatex stock.

The defendants are charged with fraud and stock manipulation.

Note: To GenZs, a boiler room is a cool secret EDM concert that takes place in a small location. For anyone older than GenZs, a boiler room is an illegal cold calling sales centre.

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New York lawsuit for $20 million against Deltec Bank and Others, reveals a little about the ICO world

By Christine Duhaime | March 11th, 2022

An interesting civil complaint was filed in the US District Court for the Eastern District of New York on March 10, 2022, which gives a rare window of visibility on the initial coin offering (“ICO“) process. Its a world not too many have knowledge of and which many thought was a thing of the past with the prosecution of one ICO project after another in the US.

The complaint was filed by a company in New York called Dreamr Labs Limited against the bank infamous for banking Bitfinex-Tether – Deltec Bank & Trust Limited in Bahamas. The Bitfinex-Tether bank apparently has a company that provides ICO services, similar to the ICO services once offered by Vancouver’s ICO company Vanbex, called Delchain Limited and it is also a defendant.

Other co-defendants are SFH Suisse Finance Holding SA, DeBruno Macchialli and Richard Iamunno. SFH Suisse Finance Holding SA appears to be a payments processor which provides encrypted messaging services, and offers financial services to send money to anyone by linking debit and credit cards.

Macchialli allegedly runs the Deltec Bank’s ICO advisory firm located in Porte Vedra, Florida. Iamunno is an executive of an investment firm called Atlantic Capital LLC also in Florida, according to the complaint. SFH Suisse Finance Holding SA is apparently directed by a foreign lawyer practicing and residing in Florida. All the parties are in or connected to the US, except the Bitfinex-Tether bank, Deltec Bank & Trust. Deltec Bank & Trust is or was run by someone named Gregory Pepin, who is an executive of a public company in Canada called Braingrid, an agriculture company, recently renamed Tony-G Co-Investment Holdings, and now a mixed crypto news and clothing investment company. The principal regulator appears to be the Ontario Securities Commission.

In the filed complaint, Dreamr is seeking US$20 million in damages for alleged fraud, defamation, breach of contract, fraudulent inducement, conversion and tortious interference. 

According to the complaint, Dreamr hired Delchain to work on its ICO, get it listed and to promote the investment to investors. It’s unclear why they needed someone else to do this work except that the complaint alleged that Dreamr was obliged to open an account at the Deltec Bank and did open such account.

The complaint alleges that it was represented to Dreamr that it would earn US$100 million from its ICO if the ICO was promoted because they (it does not say who) could cause or assist the price to be US$1.00 per ICO unit.

Dreamr says it paid US$80,000 in bank fees and service fees to Delchain and Deltec Bank & Trust Limited. 

Dreamr alleges it entered into an agreement with Suisse Finance Holdings SA for the preparation of investment material for investors of the ICO, as well as to act as what is called a finder, introducing investors to invest in the ICO. It’s unclear if they ultimately acted as a finder, charging finder’s fees for locating investors of the securities.  

Dreamr then allegedly entered into another agreement, this time with Atlantic International Capital LLC, for services that the complaint allege involved fast tracking the approval for accounts. It is unclear what this service is – there is no such thing in the banking, crypto or securities world. The only way to fast track an account approval if it involves financial services is to circumvent AML processes.

Dreamr says it paid Bittrex, the digital currency exchange, US$140,000 to have its ICO listed.

Then things got weird when the ICO was ready for launch.

Apparently, when the ICO tokens were created and issued but not yet listed, Dreamr allowed the Deltec people (the bank and its US ICO advisory arm) to hold its property in trust by custodying the ICO units. Why they did that is unclear. There are firms regulated as trust companies by US state financial regulators and insured to custody crypto assets in the US.

When the ICO was listed and was ready to be pumped out to the market by those hired to promote it, Macchialli allegedly caused the Dream ICO to be stopped for alleged due diligence concerns.

Dreamr says it was having concerns in respect of SFH Suisse Finance Holding SA and on September 1, 2021, it allegedly sent a confidential email to Macchialli and Iamunno in respect of SFH Suisse Finance Holding SA. It alleges that they forwarded their client’s confidential email without the knowledge or consent of the client, to SFH Suisse Finance Holding SA. The client, Dreamr, only found out about the breach of confidentiality in February 2022.

Dreamr alleges that although the Dream ICO was listed and was being bought by investors, the crypto assets held in trust for Dreamr in the custody of the Deltec Bank and the Deltec Bank ICO advisory company in Florida, were not being returned to the client – in effect, (the complaint does not use these words) it appears that the bank and its US ICO advisory branch imposed a mareva injunction over the client’s crypto assets, preventing the client access, with no juridical reason if the allegations are true. Considering the firm was US based and the assets were US assets belonging to a US firm, it seems surprising that a bank would mareva without obtaining a mareva injunction from a court of law.

As at November 17, 2021, the Dream ICO was US$0.12 per unit equal to US$21,793,346 million based on the issued and outstanding ICO units. 

Dreamr alleges that during the Deltec-generated mareva injunction period, all the defendants allegedly sold Dream ICO units, and profited thereby. The complaint has some significant gaps and it is unknown whether the complaint is alleging that the defendants transacted in Dream ICO units that were held in trust and liquidated some or part of the client’s property, or whether they were issued ICO units as insiders in consideration for services rendered, which often happens with ICOs, and sold their insider ICO units on the market. It is possible they actually bought some of the ICO units and were selling those.

The concept of issuing tokens to insiders for no consideration and without disclosure, and subsequent insider trading was a topic first raised in 2016, in Canada with the issuance of Ether by Ethereum. It wasn’t resolved then, and as a result, most ICOs then followed the Ether model of issuing substantial portions of the issued and outstanding ICO units to insiders for no consideration, and allowing the insiders to cash out without a hold period. We do not know if this ICO involved any insider issuances.

By November 20, 2021, Dreamr alleges that a new reason was provided by Macchialli at Delchain for the hold (mareva injunction) over the client’s financial assets, which was that they allegedly received a letter from a third party which alleged fraud in connection with the Dream ICO. Delchain and Deltec Bank & Trust Limited allegedly refused to provide the alleged letter that they had allegedly received to their client, asserting that it was “confidential.” 

Eventually, they released the client’s property back to the client but by then Dreamr says the price per ICO had dropped 50%. They also allegedly disclosed to their client that the author of the alleged letter allegedly claiming fraud on the part of Dreamr was the other advisor on the ICO project – SFH Suisse Finance Holding SA, and ergo not even a third party.

The defendants have not filed a response yet.

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Vancouver capital markets: amended SEC complaint reveals shady underground capital markets money laundering ecosystem

By Christine Duhaime | March 2nd, 2022

The biggest money laundering case in Canadian history, only it isn’t taking place in Canada

The US Securities and Exchange Commission (“SEC”) filed a proposed amended complaint on February 3, 2022, in the US District Court of Massachusetts in case of SEC v. Frederick Sharp, Avtar Dhillon, Zhiying Chen, Courtney Kelln, Michael Veldhuis, Paul Sexton, Jackson Friesen, William Kaitz and Graham Taylor. It’s 91 pages so this is a slow burn, and there are many moving parts. The complaint was amended because Zhiying Chen and Graham Taylor sought further particulars from the SEC. The amended complaint is mere allegations that have not been proven in any court of law.

The case involves allegations that the defendants conducted securities fraud of over US$1 billion in Vancouver, making it the biggest money laundering case in Canadian history. It’s also the largest microcap pump and dump fraud case ever brought to court in the US so it’s a very important case in both countries, with many eyes all over the world on it. The US government says there are thousands of victims. And, I was told, the Canadian Crown, namely the prosecution service, determined that most of the victims are American, which perhaps answers the question of personal jurisdiction of the US government over the defendants. Even if it did not, the correspondent banking system means every defendant conducted financial transactions on and through the US financial system for transactions alleged to have occurred in the amended complaint.

Although the amended complaint does not say so, there are different prongs to this case and this amended complaint is only one such prong. There is a prong involving actions against lawyers; there is a financial services and underground banking prong; and there is a prong against the users of these alleged dark or underground services, whether they be issuers or undisclosed control persons.  

The complaint sets out how a very sophisticated multi-layer structure was allegedly put in place with tentacles in high-risk jurisdictions, to allegedly commit securities fraud and launder the money back through layers of corporate vehicles to avoid detection, where facilitators included Vancouver and foreign corporate law firms[1], an underground payment processor with operations in various countries including Canada, and a fake asset manager.  The US government says the underground payment processor served no economic purpose, other than to deceive banks and launder money back to control persons [in Vancouver].

Surprisingly, other than Vancouver, which was the starting point and often the ending point of the laundering that was allegedly going on, it all took place in a tiny little village in Finhaut, Switzerland.

Or did it?

Did scammers simply pick an obscure little village and expropriate someone’s address in that village to hoodwink the capital markets into believing a massive international asset management corporation was headquartered in Switzerland?

While there is no money laundering prosecution in this prong of proceedings, the SEC has characterized the multi-party, multi-case scheme as a coordinated money laundering operation and one defendant in one prong has been convicted of money laundering for moving the proceeds of crime attached to this alleged securities fraud scheme. 

One thing the allegations make clear, irrespective of who the bad actors may prove to be, is that the three stages of money laundering were consciously deployed in the scheme – for both money and securities – they were placed; they were layered; they were integrated. 

The case with these defendants has four legal proceedings – some criminal and some civil. The diagram below (click to enlarge) shows the proceedings, the parties and the allegations of each (and in the case of the SEC, generally and not specifically as against each defendant). 

Our Summary of Proceedings

Let’s dig into the new complaint first, then let’s look at tiny little Finhaut, Switzerland.

Criminal Complaint – Dhillon

The criminal complaint against Vancouver’s Avtar Singh Dhillon (“Dhillon”), alleges that Dhillon committed securities fraud, conspiracy and obstructed an official proceeding and an SEC proceeding by lying.

Dhillon allegedly secretly controlled shares of public companies that he was in control of as a director or officer, and sold them after pump and dumps in violation of securities laws. The complaint is based on affidavit evidence of an FBI agent. 

Avtar Singh Dhillon, 2017 (Source: Instagram)

The FBI agent deposed that Dhillon worked with lawyers at a law firm in furtherance of the criminal conduct, who didn’t just work to take in the proceeds from illicit stock sales, they set up and managed companies for Dhillon for the express purpose of engaging in securities fraud of little issuers he controlled. Dhillon named one of his companies “Walk on Water.” 

The FBI agent deposed that shares of issuers were issued to Dhillon for which no consideration was paid and to cover it up, in respect of one issuer, the Dhillon lawyer and the CEO of the issuer, on the instructions of Dhillon, created and back-dated a share purchase agreement a year later.[2] The Dhillon lawyer then allegedly lied and created other fake documents to move shares secretly held by Dhillon beneficially. When questioned under oath about his shareholdings, the FBI says that Dhillon lied.  

One example provided in an FBI affidavit was the alleged acquisition of shares of Arch through Walk on Water which the FBI says were sold by Dhillon to investors right after they became free-trading, from April to July 2016, allegedly generating proceeds of US$1.3 million to Dhillon. During this time, Dhillon was a director of the issuer, and chairman of its directors.

Arch Therapeutics Inc. stock price February 2016 to July 2016 (Source: Pitchbook)

An FBI affidavit filed in support of the criminal complaint against Dhillon describes how Dhillon’s lawyer allegedly assisted to integrate the proceeds of stock fraud back into the financial system by writing cheques for third parties, including allegedly the spouse of Dhillon, and to a medical treatment centre for his daughter.

The lawyer provided his records to the FBI – he had to – advice in furtherance of a crime (or alleged crime that constitutes more than mere allegations for which there exists tangible evidence) is not legal advice and privilege never attached, and if it did, if there was a pre-criminal phase of advice, then it was waived the moment the intention or the act became imbued with criminality, irrespective of if the lawyer was duped.

Criminal Complaint – Sharp et. al.

In the criminal complaint against Frederick Sharp (“Sharp”), Luis Carrillo (“Carrillo”), Michael Veldhuis (“Veldhuis”) and Courtney Kelln[3] (“Kelln”), the defendants are accused of securities fraud and conspiracy for having provided pump and dump activities as a service to defraud the capital markets. Part of the alleged services involved consolidating control of shares of little issuers by funnelling such shares into several corporate vehicles they allegedly controlled to conceal beneficial ownership. 

It is alleged that the corporate vehicles, such as Trius Holdings Limited, Morris Capital Inc., Varese Capital Inc., Santos Torres LLC, and more, used to obfuscate were mostly controlled by Sharp, who charged fees for obfuscation services in Vancouver. Sharp, the FBI agent deposed, also caused the fake asset manager to set up other corporate vehicles for Sharp’s clients. Because the corporate vehicles were designed to be dark, the shareholders and officers/directors on paper were mere nominees. 

The FBI says that each corporate vehicle had its own (what we call “disposable”) email address that Sharp Group people created and logged into to send and receive emails, meaning that it was Sharp (or his team) behind the communications pretending it was not Sharp. They used, according to the FBI, “protonmail.com” or “yourmail.bz”. If you follow what’s being alleged here and on this point, it seems that the picture being painted is that Sharp Group people were in Vancouver and were allegedly logging into email accounts of these nominee companies, apparently pretending they were who-knows-who and far away in tiny Finhaut, Switzerland, giving instructions on the acquisition, transfer and disposition of various shares of various little issuers to third parties, and on occasion, to law firms or other parties a mere block away.

To carry out the fraud, the FBI agent says that two lines of communication were used by some defendants– one through email to give the illusion of being legit; the other on encrypted communications where they discussed the alleged criminal conduct, including sharing in the proceeds of alleged illegal stock trades. 

Carrillo was a defendant in another SEC proceeding in 2013, involving stock fraud activities in Vancouver, Canada, that involved the proceeds funnelled into a law firm trust account and disbursed. A co-defendant in that proceeding was Benjamin Thompson Kirk, believed to be in the Hope / Kelowna area of British Columbia, who was charged again in September 2021, with securities fraud and is alleged to be a client of the Sharp Group. This is important simply because the entities that are nominees were already on the red flag radar in Vancouver because of earlier enforcement actions.

Carrillo was allegedly in charge of a boiler room in the world’s cocaine capital, Medellín, Colombia, which cold called investors to lure them into buying stock of Evolution Blockchain Group, and its predecessor entity. That issuer, the alleged global Blockchain tech company, was headquartered above a little quilting store on Granville Island, Vancouver. Proceeds, the FBI says, from the boiler room-generated sales of stock to innocent investors, were moved to a number of Sharp nominees, including Santos Torres LLC.

Carrillo allegedly used the proceeds he obtained on luxury and personal items including expensive watches, to pay personal law firm legal bills, for luxury cars, to pay for services rendered by his girlfriend (US$40,000), to pay for a luxury 10-day ski vacation in Switzerland (US$84,000) for he and his family and for Vancouver residents Raymond Dove, the Vancouver convicted fraudster Frank Biller from the Eron Mortgage scandal, and their families, and for high end dental work in Switzerland. 

If you follow what is going on here on the latter point, what the FBI affidavit and SEC filings are saying about Vancouver is that people previously kicked out of the capital markets jumped right back into the capital markets and did so using hidden control persons and entities so they would not be discovered, and they not only defrauded the capital markets and investors again, for a second time, but went on fancy exotic vacations and bought a fancy Porsche using the proceeds of fraud paid for by innocent investors. Meanwhile, the first set of investors from previous frauds they were involved in remain uncompensated.

Civil Complaint – Sharp Group

On the civil side, the SEC amended complaint similarly alleges that Sharp provided services in Vancouver to secret control persons of little issuers to help them hide their control so that they could engage in pump and dump activities. One service he provided was as a company service provider.[4] 

Sharp rented out the use of corporate vehicles and the offshore bank accounts tied to those corporate vehicles, and also provided payment processing and remittance services as well as acted as a lender. He also allegedly provided what he called: “keeping clients out of jail” services (emphasis in the complaint). According to a subsequent complaint in another of the prongs, he also sold shelf companies in Vancouver for $500,000 each.[5]

The Sharp team included Sharp, Kelln and Zhiying Chen (陈志营) (“Chen”) (together, the “Sharp Group”). Sharp, his brother Thomas, and Chen were directors at one time of a corporate entity in Vancouver called Corporate House. Sharp also had a movie career, which included starring in a short film in 2017, about a man accused of a $100 million stock fraud (embedded from YouTube, below), a very Krystian Bala move.

Was he giving us a hint in 2017? Frederick Sharp acting in his own short film about a man accused of a $100 million in stock fraud (Source: Sharp Art Pictures, YouTube)

In order to keep it all secret (and clients out of jail), Sharp allegedly used encrypted phones called X phones, which he allegedly mistakenly believed were not capable of penetration by LE. He also allegedly used an accounting system called “Q”, (after the James Bond movies which feature Q Branch, a WWII quartermaster facility where agents would receive gadgets for underground work).

In the X phone system, Sharp called himself “Bond”. 

The SEC says that, on the encrypted X phones and in other encrypted communications, Sharp insisted that the participants use code names, like it was a James Bond movie. Chen’s code name was “Wires” because she was allegedly the money person – allegedly in charge of remittances, wires and the financial transactional work to move the proceeds for the participants.  

Dhillon subsequently told the SEC that he also used encrypted communications, but we do not know if he used Sharp’s X phones or the app Threema or something else. 

The SEC alleges that both Chen and Kelln fabricated documents and routinely created false invoices[6], loan agreements and subscription agreements for backup in case they were questioned by (financial crime officers at) banks. 

The SEC says that Chen was aware that Sharp clients were laundering money through the Sharp Group. The SEC provided an eye-popping organized crime example of Sharp allegedly communicating with Chen on the X phones about a bank draft to Grand Yachts (in Coal Harbour). The SEC says the exchange was as follows:

Sharp: “Hells Angels gives us cash. We give them a draft to buy a boat. Later, boat is seized, polic[e] investigate, find out Charter House [a Sharp Group administered company] paid for it; visit us and ask why. What will u say?”  

Chen: “Can we lend money to them [Hells Angels]?”

Chen: “Thomas asks them sign loan agreement for us.” 

An FBI agent deposed that on one occasion, Sharp informed Kelln that it is dangerous coming back to Canada (with Sharp records in her possession), but not dangerous in Switzerland, and on another occasion, Veldhuis sent a communication to Kelln after landing in LA that he made it through US customs and was “not in jail. So that’s nice.” 

Civil Complaint – Avtar Singh Dhillon

During the period the allegations occurred, Dhillon was at various times a director and often an officer of three little issuers: (a) Legend Mining, which became Stevia First Corp. (“Stevia”), which became Vitality Biopharma Inc. (“Vitality”), which became Malachite Innovations Inc. after the arrest of Dhillon; (b) Arch Therapeutics Inc. (“Arch”); and (c) OncoSec Medical Inc. (“Onco”). 

Dhillon, his relative Punit Dhillon, and Jim DeMesa, who flowed into other issuers together (Source: Facebook)

Together with a Vancouver naturopathic therapist named Gaetano Morello, Dhillon has worked at an issuer named Contact Gold Corp., and at Inovio Pharmaceuticals Inc., Venturi Ventures Inc., Emerald Health Therapeutics Inc. and Skye Bioscience Inc. According to our review of the securities law disclosure, a small group of the exact same people flowed in and out of these issuers contemporaneously with Dhillon, including two of his nephews, a Maheep Dhillon and a Punit Dhillon, who were placed in positions of senior management of little issuers with no requisite experience, according to securities law disclosure filings. 

The SEC alleges that Dhillon worked with defendants Veldhuis, Paul Sexton (“Sexton”) and Jackson Friesen (“Friesen”) (together, the “ Trio”), and with Graham Taylor (“Taylor”), and they all worked with Sharp and the Sharp Group in furtherance of the alleged scheme. 

According to the SEC, in 2011, Taylor introduced Dhillon to an as-yet unnamed Vancouver lawyer in the microcap issuer space who did an RTO of Stevia, and a stock split, resulting in Dhillon holding 31.5 million shares of Stevia. Prior to that, Dhillon acquired 4.5 million shares of Stevia from Tao Chen (陈涛).[7]

From that point forward, the SEC says that Dhillon failed to file insider reports in respect of his share position, and changes of that position, and failed to disclose beneficial shares he held, as well as failed to disclose deals with the Trio to sell shares for him.

Among the services offered by the Sharp Group, the Trio and Taylor were, the SEC alleges, obfuscation services of the identity of shareholders. The obfuscation would be necessary if the allegations are true, to defraud investors (the public) and the capital markets and to provide darkness (lack of visibility) to regulators and exchanges, and a lack of visibility over the movement of funds and its provenance. 

The SEC says that several corporate vehicles were used as the tools of obfuscation and to move the illicit proceeds therefrom, including but not limited to, Morris Capital Inc., Trius Holdings Limited, Santos Torres LLC, Caledonia Partners, Peaceful Lion Holdings and if that is proven to be the case, they can only be characterized as criminal enterprises. Again though, the SEC complaint is merely a set of allegations.

Fraud Round One

The SEC alleges that Sharp Group administered entities Morris Capital Inc. and Trius Holdings Limited, among others, were used to receive shares of Stevia. In three months, the Sharp Group administered entities received 19.6 million shares of Stevia and Vitality, in effect becoming fake shareholders because they were mere nominee placeholders. The amount transferred to the Sharp Group was 37% of the issued and outstanding shares of Stevia. 

Once the shares were controlled by the Sharp Group, the SEC alleges that the defendants commenced a pump of the stock for a two month period so that its price would jack up artificially. The stock was then dumped when the price was high. That dump, according to the SEC, generated US$24 million in illicit proceeds. Some of the illicit proceeds were transferred from the Sharp Group to a Swiss bank account held by Taylor and Taylor then gave Dhillon a cut of 60%. Dhillon’s cut was wired to Banque Heritage SA, a private bank in Switzerland in the name of Ortivo Enterprises Corp., a Panama company which the SEC says is controlled by Dhillon. 

Fraud Round Two

The SEC alleges that Dhillon did a second round of a Stevia / Vitality pump and dump, causing the issuance of 1.3 million shares to another corporate nominee controlled by the Sharp Group which divided those shares into two other nominee shareholders. The Trio then worked to sell those shares and hide the identity of the true shareholders and payments, by running the stock trades back up through Sharp Group nominees. 

According to the SEC, Kelln managed some of the paperwork, including using as-yet unnamed lawyers to prepare false closing opinions.[8] 

The SEC says that when the proceeds of the illicit stock sales came in, Sexton and Veldhuis allegedly used the X phones to plan distributing the proceeds among them. On March 6, 2014, Veldhuis sent a message to Friesen in respect of his cut of the proceeds: 

“u r getting 173k today … buy a boat bitch”

“Rich mother fucker”

In August 2014, Veldhuis asked Chen to give him US$124,000 cash from Stevia. He picked up US$120,000 in cash from Sharp’s office in Vancouver – all in $50s. 

Fraud Round Three

The SEC alleges that there was a third round using similar methods in which Dhillon caused to be issued shares in the name of other nominees to hide controlling interests in the issuer and conceal true ownership of the shares. In round three, Sharp directly wired funds to Dhillon’s personal bank account. 

The SEC says that the illicit stock was funneled through two of Dhillon’s relatives, whose identities have not yet been revealed, as well as Dhillon’s accountant. Those people then funneled the stock to various other Sharp administered vehicles, including the repeat vehicles Morris Capital Inc. and Trius Holdings Ltd.

The SEC alleges that Sexton met Dhillon in California in October 2014, and that Sexton informed Veldhuis, using the X phones, that Dhillon wanted to be aggressive and get the Stevia price and volume up. Dillon is also alleged to have said all his “buddies” had $0.42 warrants in Stevia and therefore a financing couldn’t be lower than $0.42 (or the “buddies” wouldn’t be in the money).[9]

Additional transfers of Stevia shares were made in Vancouver involving Morris Capital Inc. and Trius Holdings Limited. Round three continued into December 2016, and the SEC alleges that Sexton and Veldhuis, again using X phones, discussed that Dhillon instructed to keep going with a stock promotion and they only had one million “to chew thru”.

The SEC says that, in respect of paying William Kaitz[10] (“Kaitz”) the promoter, certain of the defendants sought to do so deliberately to violate §17(b). The SEC alleges that Kelln, Chen, Sharp and Veldhuis discussed which Sharp Group entity to use as the fake payor. 

The SEC says that Dhillon sought to further obfuscate his conduct by directing payments from the illicit stock trades be made to third parties to pay expenses of his family. Sexton allegedly did the same and had a mortgage paid this way for land he owns in California. 

The SEC says that Taylor sent invoices to Chen to take care of and she did so using an offshore entity, making entries in the “Q” accounting system. 

In one instance, Chen allegedly had the offshore entity pay Taylor US$10,000 and when that payment was received, a Taylor nominee in Singapore then wired that amount to a Vancouver corporate law firm acting for Veldhuis in another matter. In other words, the proceeds of the alleged stock fraud went a circuitous route from the Sharp Group in Vancouver –> to Switzerland –> to Singapore –> back to a Vancouver law firm trust account for another matter. In effect, if the allegations are true, the receiving Vancouver corporate law firm acted as Taylor’s laundromat, receiving illicit proceeds. We know from the evidence which law firm this is. 

US$10,000 inexplicably goes around the world, from Vancouver to Vancouver landing in a trust account from a third party.

Fraud Round Four

The SEC alleges that Dhillon and his co-conspirators conducted a fourth round of activity secretly selling Stevia stock. In round four, the SEC alleges that the Sharp Group advanced US$4.4 million to buy securities of Vitality and recorded the shares under the same various corporate nominees administered by the Sharp Group. Kelln then paid as-yet unnamed lawyers to write false closing opinions to effect free-trading status of the shares, allowing the shares to be sold to the public. Kelln is then alleged to have structured shareholdings to defeat the 5% disclosure rule writing :

“[the] 5% rule is biting me in the ass.” 

The SEC alleges that illicit sales of Stevia and Vitality stock netted US$45,639,343.

Arch Pump and Dump

The SEC alleges that Dhillon engaged in the same conduct in respect of the issuer Arch and employed the services of the Sharp Group, the Trio and Taylor and they conducted similar activities, placing shares in the names of corporate nominees, including the repeat vehicle Morris Capital Inc. The Trio bought, via private placement, shares of Arch and used an as-yet unnamed law firm trust account to take in the subscription funds for the scheme, the SEC says. Dhillon also secretly subscribed for shares via private placement using his Panama entity, Ortivo, to pay US$250,000 for the subscription. Kaitz is alleged to have promoted this stock and did not disclose the true payor. 

In respect of the proceeds from the illicit stock sales, the SEC says that Chen refunded Dhillon the US$250,000 he paid for his underground private placement, and wired it to Dhillon’s Swiss bank account, as well as US$200,000 to Dhillon’s accountant, who then wired it to a Dhillon controlled company in the US. 

Taylor, the SEC alleges, made payments from illicit stock sales to Dhillon inter alia, by paying $200,000 to a Dhillon creditor and Taylor also had part of his payment from the proceeds of the illicit stock sales ($65,000) wired to the trust account of a different Vancouver law firm, again using a Vancouver law firm trust account as his laundromat, if the allegations are true.

One of the Sharp Group entities used for the circuitous transnational transactions in this round was the repeat vehicle Trius Holdings Limited. 

Avtar Dillon Land / Land Documents

The SEC further alleges that Taylor became aware of the US government’s investigation into the conduct alleged in the SEC complaint – from whom, they did not say. 

In the Spring of 2021, after learning of the investigation, the SEC says that Taylor then caused to be created legal contracts to fraudulently document an alleged agreement between he and Dhillon to buy an interest in land owned by Dhillon. The SEC did not name the Vancouver law firm that created fraudulent land documents for Taylor in respect of the Dhillon land, and did not disclose whether Dhillon participated in the alleged fraud by signing such documents, and the requisite corporate resolutions in respect thereof. 

The SEC further alleges that in addition to being false, the documents were back-dated. The purpose of creating, back-dating and executing the land purchase agreement with Dhillon was, the SEC says, to provide a justification for the payments Taylor made to Dhillon that the SEC says were the proceeds of illicit stock sales. The SEC calculated that the total of the payments to Dhillon as directed by Taylor, was US$7,529,527.

It is probable that the land in question is the land Dhillon owns in Richmond, British Columbia, because of the amount involved and if that is the case, it means that Taylor brought Emerald Health Therapeutics Inc. and Emerald Health Sciences Inc. into the case. But it is only a guess on our part. Both are cannabis companies.

The only property Dhillon appears to own that is worth close to US$7 million in Vancouver, is 32 acres of land in Richmond, and Dhillon’s company Emerald Health Therapeutics Inc., entered into an agreement to pay Dhillon to lease that land for 30 years. According to one of its MD&As, Emerald Health Sciences Inc. also entered into a sub-lease to pay to occupy part of that same Dhillon land.

The Dhillon land under lease for 30-years (Source: Twitter profile of Emerald Health Therapeutics Inc.)

Normally, therefore, for Dhillon to option, lease, sell or assign, he would have needed the written consent of Emerald Heath Therapeutics Inc, as lessor and Emerald Health Sciences Inc., as sub-lessor.

So, if Taylor’s alleged fraudulent land agreement is over any part of this land, it will conflict with the disclosure record of that issuer, including the financial statements of both entities, and would have required the written consent of those two entities.

Emerald Health Therapeutics Inc. wonky stock prices (Source: Pitchbook)

Emerald Health Sciences Inc. has its own legacy criminal ties. It is or perhaps was now, the control person of the issuers Emerald Health Therapeutics Inc. and of Skye Bioscience. According to an article in a business publication, Dhillon co-founded the controlling company with a Vancouver lawyer and with his cousin in Vancouver, Yadvinder Singh Kallu, a major US felon (see news article here ). 

Dhillon’s cousin, Yadvinder Singh Kallu[11] was arrested with another Vancouver man, Diven Karan Nair, by the DEA in 1998, indicted by a US federal jury and then convicted in the US in connection with importing up to 200kgs of highly potent heroin in the US from Pakistan, that originated in Afghanistan, equal to 8 million doses and worth US$84 million at the time. Some of the narcotics were in Pakistan; some had been imported to the US. In that operation, the US government said that they paid undercover DEA agents partially with counterfeit US currency for the drug deal. One can only characterize the use of counterfeit US currency as stealing from their own heroin supplier.

“It’s one of the largest heroin cases we’ve ever prosecuted,” said US Attorney’s spokesman Thom Mrozek, referring to the Yadvinder Singh Kallu et. al. case.

The plan of the Canadian drug traffickers, according to a LE affidavit filed in a US proceeding, was to make an exchange with a Colombian drug cartel with whom they were negotiating, to exchange the heroin for 800 kgs of cocaine, which the DEA said was destined for Vancouver.

Yadvinder Singh Kallu’s colleague, Ranjit Singh Cheema, was also arrested and convicted as part of that US heroin trafficking case. His case is well-known because of an unsuccessful legal battle he pursued for many years in Vancouver to avoid extradition and incarceration in the US. Cheema was one of the original Indo-Canadian gangsters from South Vancouver – he was gunned down in 2012 after he was deported from the US at the end of his prison sentence.

Ranjit Singh Cheema

Yadvinder Singh Kallu, according to provincial government records available online, was business-connected to Dhillon earlier as well – as early as 2011, as the land agent for Dhillon in respect of the land in Richmond, British Columbia.

The news article referred to above, reports that some of the defendants (Dhillon, Taylor, Sexton and Friesen), as well as some of the alleged Sharp Group vehicles allegedly used for obfuscation and laundering – Morris Capital Inc. and Trius Holdings Limited –  are shareholders of Emerald Health Sciences Inc. Santos Torres LLC, another alleged Sharp Group administered entity, appears on that list as receiving shares from Dhillon.

The news article explains how Dhillon made the list of the shareholders of Emerald Health Sciences Inc. public in an affidavit he filed in a proceeding. 

According to the list Dhillon decided to disclose publicly, other names include the wife of US felon Diven Karan Nair (he appears to be now possibly a home builder, here), an entity connected to the alleged co-conspirator lawyer in the US criminal proceeding, and US felon Jared Mitchell (here) and (here).[12]­­ There are many others and in fact there is significantly over 50 shareholders, and by far the majority of its shareholders are American.

An unanswered question that comes to mind for investors, and indeed investors of the other little issuers controlled by Emerald Health Sciences Inc., is whether they had the right to know at the onset, before anyone took their money, that they were investing in a company where the co-founder was a major US felon. Including, knowing that they would be in a Central Securities Register connected to these US felons, and in a beneficial shareholder database with them, forever linked.

Arguably, it isn’t solely the heroin related conviction, or the massive amounts of heroin involved – its the act of having, using and paying with counterfeit US currency, which speaks to a different type of crime, different criminal infrastructure involved, and a different criminal mindset that directly implicates the integrity of financial services and the financial markets.

Even anti-money laundering (“AML”) officers at banks onboarding the enterprise – did they not have a right of disclosure about the identity of beneficial owners so that bank officers could reasonably assess risks and make the decision to bank or not bank Emerald Health Sciences Inc. and the entity it controlled, Emerald Health Therapeutics Inc., or to de-risk them?

And if one looks at the public communications of the BC issuer, and its corporate tweet below, one wonders if the Canadian federal government would have consented to this photo opp related to legalized cannabis when the federal government was telling Canadians that they were protecting the integrity of the sector.

Repping a public BC cannabis company and touring federal government members of Parliament – Yadvinder Singh Kallu, 2nd from the right. Dhillon’s nephew Maheep Dhillon is 6th from the left (Source: Twitter profile Emerald Health Therapeutics Inc.)

Why may the issue of whether investors, banks, lenders, and government agencies had a right of disclosure in respect of US felons Yadvinder Singh Kallu, Diven Karan Nair, and later of Jared Mitchell, be relevant? Because pursuant to YBM Magnex International Inc., the criminal associations of founding shareholders is material information, in a securities law sense, and material information must be disclosed. It is material because, among other things, it is a unique and elevated risk to an investor in respect of that company. One could argue that it’s an even more fundamental risk – namely, a risk to the integrity of the capital markets.

In the case of YBM Magnex, the founding shareholders who were tied to criminality included Semion Mogilevich and Viktor Averin, two of the most well-known leaders of Russian organized crime. Some of YBM Magnex’s directors and officers knew of the criminality from the outset since they were part of Mogilevich’s Russian circle of associates and some did not. However, they all learned of it at some point and with that knowledge, they continued to raise money from investors while failing to disclose the criminality of some of the founding shareholders. The Canadian solicitors continued to represent the company. When it became public by US law enforcement, the company was immediately cease traded and then ceased to exist as a business. According to journalist Bruce Livesey, investors lost $875 million in the primary and secondary markets, while certain directors and insiders pocketed millions of dollars in consulting payments, loans and stock options.

The directors, officers, underwriters, auditors and lawyers of YBM Magnex were sued for losses suffered by investors over a number of issues that were tied to the disclosure of criminality issue. The insurers of two law firms, two accounting firms and five underwriters paid $120 million to settle with shareholders. As for the officers and directors who were sued, they had to pay personally because although they had D&O insurance, coverage was denied because an insurance policy is void ab initio when an insured makes a false representation to obtain insurance that is material to risks being underwritten. Not disclosing the criminality of founding shareholders to the insurer voided the D&O insurance.

What’s not in the Complaint?

What’s not in the amended SEC complaint is all the other details of the other prongs of the whole of the multi-pronged case – in particular, the underground payment processing aspects which, as stated earlier, involve at least one person who has pled guilty to financial crimes. 

According to affidavits filed in other connected prongs, we know that the underground payment processor rented the identity of two Americans to obtain US bank accounts after they had been de-risked by AML officers at various other US banks, and that the owner of the underground payment processor lives in Russia. 

Wait Russia? Yes, Russia.

Evidence from US banks shows that the underground payment processor managed to obtain banking in several countries because it lied to banks about the true nature of the services it was providing. The SEC alleges that the underground payment processor, after moving proceeds from the illegal stock sales all around the world, ultimately parking them in just a few places – one being Vancouver, Canada.

A Tiny Village in Switzerland

One of the more surprising aspects of the case is the role of Finhaut, Switzerland. 

Finhaut is a tiny rural mountain village of 300 people, with one main street called Route du Village (literally, the village street in English). The only few businesses are cafés for tourists. 

Village of Finhaut, Switzerland (Source: Vallée du Trient Tourisme SA)

11 route du Village, Finhaut was the office of the fake asset manager, who also seems to have used that address as the fake registered office for some Sharp Group corporate vehicles, including the alleged Sharp administered entities Trius Holdings Limited and Morris Capital Inc. 

According to a Suisse real estate agency site, 11 route du Village is a residential apartment beside a café, and apparently, a chauffeur and his wife live there.

Kudos to AML officers (and whistle-blowers) because no one, it seems, except officers at the AML intelligence units at US banks, seem to have wondered how a tiny mountain village with no financial commerce to speak of – not even one bank – could have that much brokerage business, moving hundreds of millions of dollars a year through the financial system. 

While the US banks were asking questions of the payment processor, being lied to, and de-risking its accounts, one after the another, the SEC received a tip about a Canadian living in LA, engaged in a pump and dump scheme to defraud investors, using a promoter with a fake corporate address of –  you probably guessed it – Route du Village 11, Finhaut, Switzerland.

The Canadian pump and dump executive was trying to raise money to pay a bribe of US$450,000 to get one of his children into Yale. To save his skin, he gave up Rick Singer, the mastermind behind the US college admissions scandal and the rest, as they say, is history. 

“Operation Varsity Blues” – the college admissions scandal, revealed from a tip about a Canadian pump and dumper (Source: ABC News YouTube)

The college admissions scandal investigation started in Boston, and the Boston office of the SEC, which  was already looking at some of the 50 issuers involved in this case, accelerated its investigation. 

And here we are. 

Avtar Dhillon posted a US$1.5 million bail after his arrest, wears an ankle bracelet, and isn’t talking, having pled the 5th. In December, according to EU company records, he took on an a new role as administrator[13] of the Emerald company VivaCell in Spain, which seems to provide services to other Emerald related companies. He is not allowed to intimidate any witness or obstruct the criminal investigation, or retaliate against any witness or alleged witness, any victim (victims in this case are shareholders / investors) or informants who may have provided evidence against him or others – basically he can do nothing, directly or indirectly, harmful or threatening as against anyone involved in any of his companies or in any way connected to the case, because of the possibility that it violates his bail conditions related to obstruction of justice and lands him in jail with more charges.

And Fred Sharp? No one seems to know where he is; he may simply be chilling in a Vancouver mansion, content in the belief that the services he allegedly sold and warranted as being capable of keeping clients out of jail, will work as intended for his very first client – Fred Sharp.  

And there may be more to come as well because we were told that LE officers say that there is an entire Bitcoin money laundering side to the case in Canada, involving organized crime in Vancouver, the underground payment processor and an OTC Bitcoin dealer in California.

With respect to the proposed amended complaint filed by the SEC, the two parties who fought for further particulars – Chen and Taylor – changed their minds and now don’t want further particulars, and are opposing the motion of the SEC to use the amended complaint even though the SEC gave them exactly what they wished for.

[1] In the case of Vancouver law firms, no doubt they are unwittingly involved – they are acutely aware from their regulator about such risks to trust accounts, and third party payors. 

[2] A red flag for fraud in private company share issuances is back-dated entries in the central securities register (“CSR”) that are made when there are fraudulent or back-dated agreements, as alleged in this case. The CSR is designed to be chronologically entered and certificates are issued chronologically and numerically and behind those issuances are resolutions and bank records to match dates of payments for shares subscribed for. Out of date CSR entries (e.g., an entry in 2020 reflecting a share sale or transfer that allegedly occurred in 2018, two years earlier) means back-dating occurred of multiple corporate records. In such circumstances, one way one can receive comfort that no fraud occurred in an investigation, or in a minute book audit or review to write a closing opinion, is to line up bank records of share subscriptions with the CSR date entries. A case with more than one out-of-date CSR entry is concerning. One cannot imagine a law firm that would touch a CSR, or continue to act where the client is asking for back-dating services. That is the law firm’s red flag to de-risk the client over reputational and legal risks. Back-dating CSR and the supporting documentation of private companies was precisely one of the issues with Mossack Fonseca & Co., the law firm from the Panama Papers, that provided legal services to support criminality, and it is facing a money laundering prosecution over alleged legal services.

[3] Her company, Celtic Consultants LLC, appeared in a 2015 SEC complaint involving Panama’s Verdmont Capital SA, along with a number of entities named in this SEC complaint –  Morris Capital Inc., Gotama Capital Inc. and Peaceful Lion. In that same case, BetterLife Pharma Inc. executive Sergei Stetsenko, signed a letter for the court in support of Verdmont, as a customer. BetterLife and Dhillon’s Emerald Health Therapeutics later crossed-over.

[4] In Vancouver, Canada, company service providers have inexplicably existed for decades that perform capital markets legal activities that are not tolerated elsewhere in the world as unregulated services. The Vancouver model of company service providers incorporate companies, prepare resolutions, prepare corporate maintenance documents, prepare share certificates, maintain and update corporate records and create and prepare deal documents for financings and private placements, and the issuance of securities such as warrants and options, and make regulatory and listing filings. They also draft securities law disclosure documents and are Sedar and Sedi filers. Company service providers exist elsewhere but they merely undertake incorporation, maintenance and R&R functions.

[5] A shelf company is a company that is incorporated, has no activity and its minute book sits on a shelf for many years (hence, a “shelf” and not a “shell”) that is maintained. A shelf company is, by design, a vehicle of deception – it ages like wine so that it can appear to outsiders and people who don’t know what’s going on like it has been a business for a number of years. It costs $600 – $1,000 to create a shelf company and thus one can see the return on investment for creating and selling shelf companies – you pay $600 in costs to incorporate and later sell all of the issued and outstanding shares for $500,000. For tax evasion reasons, some sellers of shelf companies, which are often law firms, often obfuscate the transaction as a “service” and charge “fees” on invoices when they sell a shelf company, instead of treating it as it is, namely a disposition of all of the shares of a corporation by the selling firm. Shelfs are used in capital markets and so are shell companies but they have material differences. Vancouver, Canada, is known as the key place to buy a shelf.

[6] In financial crime parlance, false invoicing, if that is what occurred here, to justify international financial transactions is a form of trade-based money laundering, whereby fake, fabricated, or fraudulent documents are created for international import / export purposes to avoid taxes, duties, currency controls or for international remittances to avoid currency controls or obfuscate the transactors behind transactions. 

[7] It is unknown if Tao Chen is related to Zhiying Chen. Tao Chen stated he owns a company in China named Guangzhou Peace Gift Co. Ltd., and at other times, Peace Gift Co. Ltd., at 2-46 DeZhennan Rd., Suite 403, Guangzhou, Guangdong, China. We searched the corporate databases  in China, and could locate neither entity as registered. Tao Chen resided in the US at 634 13th Street, Manhattan Beach, California.

[8] An opinion in this context is an opinion that a law firm prepares to close a transaction or to opine in respect of restrictive legends and requires significant due diligence to ensure that shares subscribed for and issued are authorized under corporate and securities law and consideration was received, and, if applicable, legends can be removed. A false closing opinion is one where someone did no work and wrote an opinion based on no documentary review – such a person does not know if the statements in the opinion are true or false and does not care or, is one where the documentary investigation was conducted and the person outright lies on the opinion, or the person is incompetent in corporate and securities law matters. The lawyers are unnamed in the complaint but who they are is known in Vancouver.

[9] We don’t yet know who the “buddies” are who were warranted out and if they were in the money as a result of the alleged illegal pumping of stock. Lists of warrant holders and optionees are maintained and updated by securities law firms, and provided to exchanges, but there is little other visibility on options and warrants, which makes this type of securities high risk for fraud in the capital markets when it comes to little issuers. 

[10] Kaitz allegedly has been found inadmissible to enter Canada, according to one defendant.

[11] Yadvinder Singh Kallu is, or was, with an entity named Kannaba Agritech Corp. which, according to corporate records, is located or has an R&R at 409 – 221 West Esplanade in Vancouver.

[12] We downloaded the Dhillon affidavit wherein he disclosed all of the shareholders of Emerald Health Sciences Inc. We first undertook to decloak corporate shareholders and then organized the Dhillon disclosed list by subscription amount, namely who paid the most to invest in Emerald Health Sciences Inc. We removed share transfers and kept only entries of the CSR where the company said that consideration in cash (as opposed to services) was received. For subscriptions in US dollars, we used the exchange rate from the Bank of Canada on the date of the share issuances. In total, Emerald Heath Sciences Inc. received $34,662,811 from subscribers for shares. The apparently rich Roland Gahler, the childhood friend of Dhillon’s partner, the naturopath Gaetano Morello, paid the most as an individual to subscribe for shares – approximately $1,000,000 in cash. Moez Kassam and the Munger Brothers paid the most as corporate subscribers through corporate entities. Cameron Clokie, a dental surgeon in Toronto who was accused of fraud, paid the most using trust vehicles – over $1.5 million in cash for his shares. Another doctor, a botox doctor in Vancouver named Jason Rivers, also subscribed for shares. Offshore, someone in Spain named Maria Rosario Molina Moran paid over $700,000 cash to subscribe for shares; the same Maria Rosario Molina Moran of VivaCell Biotechnology Espana, renamed Emerald Health Biotechnology. The number of home builders who paid to subscribe stands out as odd – a builder of luxury cottages in Muskoka, on the other side of Canada, for example, paid $641,730 in cash for shares. And a builder in Port Moody, and a local electrician subscribed and paid hundreds of thousands of dollars for shares in cash. And even some employees appear to be quite wealthy and subscribed for shares in cash, such as an employee named Riaz Bandali who paid $531,320 in cash, and then paid another large amount later for shares.

[13] A company administrator in the EU has no equivalent in the US or Canada but can be described as a position in a company that has enlarged powers such as a trustee in bankruptcy, only for non-bankrupt companies. Dhillon’s bail conditions say he needed the consent of his supervising agency to take on new employment. This may be new employment because of the enlarged role in a foreign country.

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We’re finally elevating open source intelligence

By Christine Duhaime | October 21st, 2021

The United States military and intelligence community (IC) are both moving towards the elevation of open source intelligence (OSINT) as a mature intelligence discipline equal to traditional intelligence.

The US House of Representatives last month in the National Defense Authorization Act for Fiscal Year 2022, H.R. 4350 (here), directed that the Secretary of Defense and Director of National Intelligence set out a plan to elevate OSINT and treat it on par with information collected from classified means (e.g., human intelligence, signals intelligence and geospatial intelligence).

The so-called non-OSINT derived intelligence is the domain of, among others, the CIA, NSA, NGA in the US and it means that within those agencies, OSINT would be treated equal to information from spies, and other intelligence gathering methods.

The shift recognizes the relevance, reliability (of some), and more timely delivery of OSINT as compared to traditional sources. OSINT has been used and recognized as valuable (e.g., WWII for example, where it was vital) for intelligence gathering but the nexus of the Internet, Big Data and social media has de facto elevated its importance but OSINT has remained a discipline that was also overlooked and underestimated, and considered useful for mere background information (e.g., as “information” as opposed to “intelligence”) that was unclassified.

The use of OSINT by intelligence agencies and law enforcement agencies carries different risks such as source bias and deception; intellectual property infringement; deconfliction concerns; operational security; and technology risks but it also means that the IC can staff intelligence positions for OSINT with little to no clearance requirements and save time and enormous clearance costs building OSINT capabilities for national security.

The Covid-19 pandemic was the catalyst (as well as Bitcoin bad actors and risks) that has prompted some of the shift to pay more heed to OSINT.

That’s because the goal of intelligence agencies is to defend the lives of Americans (and of Canadians in the case of Canada), and so we should have been alive to the threats of Covid-19. As a whole, we failed to sufficiently look at threats of pandemics and supply chains.

The emergence of Covid-19 and its potential threat appeared first on social media from China in early January 2020 and it was not treated with the importance it should have been because it was not classified intel. When Covid-19 news and stories hit Chinese social media, people connected to China in Canada learned of it first and were much more aware from watching what was going on in Wuhan on social media, compared to the general population or it seems, the federal government as a whole.

This gap (not treating OSINT as important as traditional intelligence) arose because of the idea in the IC that classified information is more valuable – Covid-19 shows us that it is not necessarily the case. The intelligence world is changing and OSINT is expected to become as important as classified information in the years to come in the decision-making process.

Interested in starting OSINT searching? We use several Startme collections, including with one.

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