In 1988, Madam Justice Southin, as she then was, was judging a massive pump and dump case involving microcap issuers that was orchestrated in Vancouver, United Services Funds (Trustee of) v. Lazzell  B.C.J. No. 743, 28 B.C.L.R. (2d) 26.
Although 33 years old, the case should be required reading for capital markets participants for an understanding of the unique typologies of the architecture of pump and dump schemes carried out in British Columbia.
Some issuers in British Columbia have no interest in getting a business going
In the reasons for decision, Madam Justice Southin describes British Columbia promoters as follows, writing (paraphrased):
‘There is a world of difference between the practice of persons promoting a company in which they invest their own money and which they truly intend to make into a successful business and the practice of persons promoting stock as it appears to be carried on by some people in British Columbia. Some promoters have no interest in getting a business going. Their only interest is running up the price of the stock and unloading it on others.’
And so there you have it.
In 1988 and continuing to today, in Vancouver, the game may not always be about running a successful business in the capital markets for some people – it’s about earning revenues from pumping stocks and dumping them on innocent investors.
In this case, Madam Justice Southin quoted a song about the Vancouver capital markets called “Howe Street” that she appears to have heard in a Vancouver theatre about an investor who invested on a tip from a Vancouver stock promoter and got “screwed” when the promoter skipped town.
You may be wondering how they do it – how have they done it for decades?
9 not-so-easy steps to perpetrate securities fraud
Madam Justice Southin describes in the reasons for decision of the case, how such frauds on the market are perpetrated in nine not-so-easy steps:
Control persons operate behind the scenes who call the shots – they never appear on the documents for securities law disclosure purposes so that a securities regulator doesn’t necessarily know that they are involved;
Using beneficial ownership structures and aliases, the control persons obtain control of the issued and outstanding shares;
Appoint what Madam Justice Southin termed a “tame board of directors”, whom she called “monkeys”;
Issue press releases and periodic required disclosure documentation to give the impression of corporate success as well as file material information (or as Madam Justice noted, not file material information that ought to be filed);
Line up a brokerage house “related in spirit to the monkeys”, she wrote, to feed stock through, without questions being asked;
Use a jurisdiction with an under-funded agency with oversight over brokers that lacks resources to detect unusual dealings on the market;
Use Toronto secret undisclosed powerful promoters in the mix whose names never appear in print, who handle or cause to be handled, all of the administrative work for a group of microcap issuers such promoters are promoting;
For some of the issuers, line up mining claims on certain properties which she noted, as is usual with such companies, won’t amount to anything; and
The control persons, as undisclosed insiders, pay to have the stock promoted and cash out when it is high, never filing as insiders.
Liability on other directors of issuers for hidden insiders
In United Services Funds, the defendants were found liable for, among other things, acting as undisclosed insiders. Madam Justice Southin noted that under the Securities Act of British Columbia, the “law considers that investors have a right to know who has control and who is an insider…which are material matters.” (See from paragraph 5 onwards in this article in respect of the role of transparency and disclosure in securities law for issuers, enacted to replace caveat emptor in the public company realm).
She went on to discuss the liability of all directors of issuers in British Columbia who acquiesce in respect of such conduct.
She held that while not every director of every issuer in British Columbia who knows that the material provisions of the Securities Act are being breached by the issuer and/or another person (in this case, a hidden person ostensibly unconnected to the issuer), are themselves guilty of an offense, if their silence in respect of statutory breaches is an act of assistance or their silence in respect of the stock price shooting up for no legit reason tied to a breach of the Criminal Code of Canada is of assistance, such directors may be liable for losses in pump and dump schemes.
In the United Services Funds case, the directors were indeed held liable for losses suffered by investors by the wrongful conduct of the hidden undisclosed insiders and control persons. Their silence was a breach of their duties as directors under the corporate legislation and their silence assisted wrongful conduct to continue.
In essence, where she got to as a matter of the law of acquiescence, was that a breach of corporate law by the on-paper directors led to the not-on-paper hidden control persons being able to commit securities law offenses and enabled Criminal Code violations, and ergo, those on-paper directors were liable for the conduct of the not-on-paper hidden control persons.
Dusting off key 33-year-old case
While United Services Funds remains the law in British Columbia in respect of the liability in the capital markets of directors of microcap issuers who acquiesce or remain silent in the face of market manipulation and hidden control persons, the case seems to have remained buried in the law books.
It might be a good time to dust it off and use it because this is one of the most important cases in securities fraud litigation in Canada.
The case is valuable not just in respect of understanding the unique typologies of the architecture of pump and dump schemes carried out in British Columbia to this day, but also for acquiescence law applied to hold directors of issuers in British Columbia accountable to investors who suffer losses tied to material breaches of the Securities Act, who invest in microcap companies believing that they are investing in a viable enterprise.
Be a real director or be a monkey and get ready to pay
If there is a take-away from this case, it may well be that the message from the Supreme Court of British Columbia is that a person can be a director of an issuer and speak up for compliance with the law when it comes to insiders and hidden control persons, or such a person can be a monkey and get ready to pay investors some serious coin for their losses if things go wrong.
Two months ago, the Alberta Securities Commission (“ASC“) issued an order permanently banning two individuals it called “scoundrels” from the capital markets permanently, together with an issuer that operated a pump and dump scheme.
The individuals are Cem Can (“Can“), a Turkish foreign national, and Charles Michael Miller. The issuer is Bluforest Inc. (“Bluforest” or the “issuer“). The order flows from an ASC decision rendered in August 2020, here. Bluforest’s shares were listed on the OTC Markets in the US, and it was a reporting issuer in Alberta pursuant to 51-105.
The decision is an interesting example of the preparatory nature of securities fraud and the extent to which such activities are organized and transnational.
To illustrate, we created a data set of the legal and natural persons involved in Bluforest Inc. and subsequently converted the data to a geo network, below. It provides a visual representation of the transnational nature of the case.
The ASC decision covers the period of time from late 2010 to November 2013, and is closely related to a superseding indictment of numerous Canadians in the US for money laundering and securities fraud as part of a FATCA case.
Superseding indictments in the US
That superseding indictment was filed in the EDNY in July 2015, charging Cem Can and several Canadians from British Columbia – Gregg Mulholland, Philip Kueber, Paula Psyllakis and Brian De Wit – as well as an American Robert Bandfield, and two natives of the Bahamas, Rohn Knowles and Kelvin Leach, with various criminal offences, including securities fraud and some for money laundering.
The superseding indictment alleged that Mulholland, Can, Bandfield, Kueber, Psyllakis, De Wit and Godfrey, among others, created shell companies and opened numerous bank accounts which were used to move over US$500 million in proceeds of crime. Mulholland was alleged to have fraudulently manipulated the shares of more than 40 issuers and moved US$300 million in proceeds of crime into accounts he controlled.
Although many of the indicted were from British Columbia, they were situated in places like Belize, Nevis and Panama. The US government alleged that they created numerous shells with nominee directors and officers to conceal the legal ownership of the shells, acquired controlling interests in shares of pubcos, hired promoters to pump the share prices artificially, and exited when the share prices were high. The defendants owned, operated or worked at companies, including Legacy Global Markets S.A., Unicorn International Securities LLC, and IPC Corporate Services LLC, which were the vehicles allegedly used to perpetrate the fraud.
An undercover agent met with Can and others in the tax havens and was told, among other things, by Can that he knew a way to secretly pay “consultants” in stock manipulation schemes. The indictment explains how Mulholland allegedly made US$21 million in proceeds manipulating the trading of one issuer.
Several of the defendants were arrested. Mulholland was arrested when his flight from Vancouver landed in Phoenix, Arizona. He and Bandfield proceeded through the criminal trial process together and joined each other’s motions, ultimately both agreeing to plead guilty and go through sentencing and forfeiture together.
Mulholland pled guilty to money laundering and is serving a 12-year sentence of incarceration at a medium security prison in California, followed by a three year term of supervised release with special conditions. He asked to enter a prison-run drug abuse program while incarcerated. As part of a deal for a lesser sentence, he pled guilty and agreed to forfeit assets from the proceeds of his criminal activities, including forfeiting a private jet, homes in West Vancouver, California and Whistler and funds and securities held in bank accounts and brokerage firms in several tax havens.
Bandfield also pled guilty, served his sentence and is now released.
Kueber pled guilty and appears not to have entered the federal prison system which may mean he was sentenced to time served in remand.
De Wit and Psyllakis appear to have remained in British Columbia. It is not known whether the US government has an arrest warrant out for either of them that would be acted upon if they entered US air or land space, or if the US government has commenced extradition proceedings, or abandoned the case against them.
Can returned to Turkey. He may be in Istanbul or Antalya. According to an old news report which relied upon statements appearing in an Alberta Court judgment, he allegedly had ties (could be merely tenuous ties) to organized crime (the Calgary Hells specifically) in connection with an earlier capital markets deal gone sour that involved organized crime.
It is not known what happened to the other indicted individuals or entities.
Against that backdrop, the ASC looked into Bluforest, which involved some of the same individuals and entities, including Legacy Global Markets S.A., Unicorn International Securities LLC, and IPC Corporate Services LLC, Can, Godfrey, Bandfield and De Wit.
The president and CEO of Bluforest was Charles Miller but Can actually directed the affairs of the issuer. The SEC ultimately revoked its listing on the OTC Markets for failures to file.
The business activities of Bluforest appear to have been an illusion that existed on paper only. Bluforest alleged in one paid promotion to investors that it owned 135,000 hectares of forest in Ecuador called El Juval worth US$695 million and not only that, allegedly, it had carbon offset credits from that land equal to the same amount, US$695 million.
In another paid promotional campaign, it alleged to have US$700 million in assets and US$698,875,000 in property for developing carbon assets. However, at that time it only had $43 in the bank. And only $17,000 in actual assets. One of the material issues with respect to the issuer was how this happened when the issuer had an independent auditor responsible for the accuracy of its financial disclosure.
Can purchased the shares of Bluforest, and through nominees, maintained control of, and acted as its secret operating mind. In order to do that, he caused to be issued, numerous shares to various corporate entities in which he controlled. Two of the material entities were Mainland Investments Ltd. and North American Investments Inc.
He used a number of the same nominees including Branislav Jovanovic and Talal Fouani, who acted for some time upon his directions. The issuer operated effectively as a one-man show by Can, who exclusively called all the shots even though on paper, he had no role with the issuer in the corporate sense.
In respect of payments from the issuer from funds raised, the ASC found that substantial sums of money were directed by Can to be sent to a select group that included his company, Mainland Investments Ltd., and other entities he controlled, as well as to lawyers he instructed, including Faiyaz Dean, Scott Lawler, Norman Anderson and Diane Dalmy, and to various stock promoters.
Analyzing the case from a data perspective
We created a first layer network analysis of the Bluforest actors, shown below. The data shows a number of things:
The large dark central blue node is Bluforest Inc.
The red node is Cem Can.
The orange nodes are a type of service provider.
The light blue nodes are others, such as known shareholders, directors, officers, alleged debt holders, promoters, etc.
Interpretation of data:
The dandelion shape on left side depicts a normal functioning issuer relationship between the issuer and shareholders; the issuer and service providers; the issuer and directors / officers.
The right side of the dandelion breaks off and shows a clear disruption – a disfunction – in the issuer. The affairs of the issuer are blown out and form a tangled web.
You can see that the disfunction is tied to the red node, a few orange nodes; and several light blue nodes.
In the image below, we took the same data set and plotted it along one axis and it becomes more clear that information flows in respect of the issuer’s affairs went through only a few people. In a normal functioning issuer, the officers are the one source of all activities in the capital markets.
Alleged debt for shares
One of the most interesting aspects that the ASC decision focused on was the use of alleged debt settlement agreements to issue free-trading shares for alleged consulting services. In one instance, the issuer took an alleged debt of US$60,000 allegedly owed to Can’s company, North American Investments Inc., and re-paid the lenders consideration of $200 million to settle the debt, paid in shares of the issuer.
In order to ensure the shares were free-trading and avoid the hold period, a lawyer named Scott Lawler issued a closing opinion to the transfer agent to remove the restrictions.
The ASC found that the explanations given as to how US$60,000 became $200 million were “nonsensical”.
The ASC staff believed that the invoice underlying the alleged US$60,000 debt was fake, which the ACS panel took as meaning that no actual services were provided. In other words, $200 million in shares were obtained for no consideration.
Subsequently, the issuer completed a second series of debt settlement arrangements where shares were issued to settle alleged debts. In the second instance, there was an alleged debt of $90,000 and 100 million shares were issued to the lenders to pay out that debt. The ASC calculated that the transfer meant that the issuer, with alleged net assets of $695 million, transferred 97% of that value for $900,000.
A lawyer named Faiyez Dean wrote the opinion letter in respect of removing restrictive legends, enabling the 25 million shares to be issued to entities controlled by Can and Charles Miller as free-trading. The ASC found that the issuer deliberately mischaracterized the shares as a proposed resale of shares earlier acquired from Bluforest in order to justify the removal of restrictions, and held that the deals were intended to deprive the shareholders of their economic interest in the issuer.
The ASC found the share issuances for alleged debt settlement deals were in furtherance of a pump and dump scheme, and together with the false opinions, diluted other shareholders and concentrated control secretly with Can and Charles Miller.
The ASC also found that there were issues with the alleged forestry deals announced by the issuer.
When Bluforest announced that it had entered into a series of forestry-related agreements in Ecuador, it represented that they were arms length in the disclosure record, when in fact they were non-arms length. Despite the forestry-related deals that were touted as being so valuable, the ASC found that they were not pursued and the agreements and rights thereunder appear to have expired over time, if they existed at all. Those deals were what was supporting the issuer’s valuation.
Paid promoters promoted
The ASC found that Can hired, indirectly, a number of promotional companies to aggressively promote the issuer across various mediums. Over time, the share price went from $0.25 to $6.19, and was artificially increased as a result of paid promotional activities. Eric Cusimano and Jamie Boye were among the paid promoters that Can hired using his own companies, to promote the issuer’s stock.
Cusimano and Boye were indicted in the US in connection with paid promotional activities in the capital markets and pled guilty in that case.
At the end of the day, because Bluforest was just a business that looked good on paper to investors while there was nothing behind the curtain when it was pulled back to substantiate its share price, or valuation, it crumbled apart.
The ASC found that Can and Charles Miller were centrally involved in virtually all aspects of the pump and dump scheme and played significant roles in the secret control of the issuer and manipulation of its shares in the capital markets. IPC Corporate Services LLC, Unicorn International Securities LLC, and Legacy Global Markets S.A., were some of the offshore vehicles used by Can and others to receive shares of Bluforest and the proceeds from the sales of shares.
The ASC called the Bluforest pump and dump scheme “a deplorable form of securities fraud.”
Typologies of pump and dumps
This decision is also useful from the perspective of typologies that can be gleaned that raise red flags for potential capital markets fraudulent activities.
The alleged past ties of Cem Can to organized crime wasn’t explored but perhaps should not be discounted as a risk factor of the prospect of organized crime infiltration in the life cycle of some issuers.
Two of the largest securities fraud cases occurred in Canada and involved Mafia figures.
In the first, Russian crime boss Semion Mogilevich caused the pumping of the stock of a Canadian issuer he controlled, YBM Magnex, which lost investors over US$1 billion. In the second, deceased Canadian Costa Nostra leader Vito Rizzuto and one of his associates, allegedly came to control a series of Canadian stock promotion newsletters owned by Canadian Eric Van Nguyen, which allegedly were material in the loss to investors of an estimated US$3 billion in connection with several issuers that were pump and dump schemes orchestrated from Canada.
Mogilevitch and Van Nguyen remain wanted US fugitives. Mogilevitch is in Russia. Van Nguyen allegedly went from Montreal to Toronto. Some experienced securities investigators in the private sector believe, based on their investigations, that Van Nguyen is behind several recent paid promotions of several issuers in Canada, including several being pumped to investors right now in real time.
The Securities and Exchange Commission (“SEC“) filed a civil complaint against 5 American promoters of the Blockchain protocol known as BitConnect this week. Investors from around the world lost over US$2 billion with BitConnect. The SEC alleges that the defendants conducted an unregistered offering and sale of securities in connection with its native coin and lending program.
BitConnect is iconic with GenZs literally the world over – not in a good way – rather because of the memes created of a promoter allegedly named Carlos Matos, who was the public face of BitConnect.
BitConnect is similar to OneCoin – same formula using some elements of MLM. Like OneCoin, the BitConnect folks issued an initial coin offering (“ICO“), and like OneCoin, they alleged that there was a Blockchain protocol behind it. The ICO was called the BitConnect Coin (“BCC“). You can read about OneCoin here.
The SEC says that BitConnect also created a lending platform (in much the same way as many DeFi platforms do now), and promised holders of Bitcoin and other digital currencies 40% monthly interest for depositing their holdings for lending purposes. BitConnect was not licensed or authorized anywhere to provide online lending services to consumers, or be deposit-taking. Those who sent fiat or Bitcoin to BitConnect for ostensible lending, lost their money.
Eventually, in early 2018, the State of Texas issued a cease and desist order to BitConnect. One of the paid promoters, Trevon Brown, posted on social media, a message to the world not to let a US government shut them down. When the State of North Carolina issued its own cease and desist order, BitConnect sent one of its promoters 200 Bitcoin as a retainer for a securities lawyer (now equal to US$7.4 million). In the following weeks, BitConnect shut down operations.
The SEC says that the ICO promoters earned significant commission from touting investing in BCC or using the lending platform, as follows: Joshua Jeppesen earned US$2.6 million; Craig Grant earned US$1.3 million; Michael Noble earned US$730,000; Ryan Maasen earned US$475,000; and Trevon Brown earned US$480,000.
The founder of BitConnect is an Indian foreign national, whom the SEC declined to name.
The SEC is seeking various forms of relief against the defendants including an order permanently enjoining the defendants from violating US federal securities law and the payment of penalties.
The Securities and Exchange Commission (“SEC“) filed a complaint in the Southern District of New York this week against RenovaCare, Inc. (the “Company“) and Harmel Rayat (“Rayat“) alleging that material misrepresentations were made in the disclosure material filed by the Company, and that the Company used a secret paid promoter to pump its stock and lied about it.
RenovaCare is an issuer in British Columbia but is listed in the US on the OTC Markets. Rayat is a Canadian who resides in Vancouver, and is one of the original shareholders of the Company, its director and its majority shareholder. There are two previous SEC enforcement actions involving Rayat and others, one in 2000, (here) and the other in 2003 (here); one involved §17(b) violations, which is part of what is alleged in the SEC’s latest complaint.
The SEC is not specifically alleging a pump and dump occurred with RenovaCare per se. Rather, the SEC is alleging that a pump occurred in conjunction with other securities violations but that a brokerage firm stepped into prevent a dump involving one or more of the key actors.
Since the filing of the SEC complaint, the stock price reacted on the OTC Markets.
How securities lawworks
Skip this part if you know that caveat emptor does not apply in modern securities law, and the capital markets.
By way of background, the Securities Act and the Securities Exchange Act were enacted following the 1929 stock market crash and the Great Depression that followed. The securities acts safe-guard the capital markets and investors by requiring a system of mandatory public disclosures in place of caveat emptor.
The disclosure-based regulation that, as a fundamental principle replaced caveat emptor, is based on trust – it commences from the proposition that in exchange for the privilege of being able to list a stock to the public, and take money from investors who become shareholders, all the actors in the system will be honest and provide the requisite fulsome disclosure. It presumes no information asymmetry from issuers or their advisors. It also assumes that so long as investors have fair access to accurate fulsome material information, they can intelligently assess the risks of a stock and make an informed decision to buy or sell. Disclosure, therefore, is required episodically whenever securities are offered to the public, periodically thereafter, and whenever material events occur.
The private sector actors who are entrusted in respect of the capital markets are those who earn fees and other compensation from capital markets activities and control the content and distribution of disclosure and include lawyers who draft all of the securities disclosure material; auditors who pass on the financial condition of issuers for capital markets participants; an issuer’s directors and officers; significant shareholders; brokers; listing exchanges; underwriters; and securities trust agencies (the “Capital Markets Trustees“).
From time to time, Capital Markets Trustees can and do breach the public trust, in a number of ways including by participating in the drafting of documents containing untrue information, negligently or deliberately. Investors who rely upon such information are lured into making investments without informed consent and with asymmetric information which may be untruthful. All of the Capital Markets Trustees enter the capital markets understanding that they assume responsibilities for their part of a larger puzzle to protect the integrity of the capital markets through, inter alia, adequate, truthful and timely disclosures.
With respect to promoters, it is lawful to use stock promoters and to pay them but it is unlawful to have secret paid promoters for the reasons articulated above.
Medical claims about a skin gun
RenovaCare’s three founders, according to its Sedar filings, appear to have been Kundan Rayat, Jasbinder Chohon and Harmel Rayat.
For decades it was and remains, a development stage company with no revenues. A few years ago, it began to represent that it was developing a medical gun called a skin gun, for treating skin burns.
In mid-2017, the SEC says that the Company prepared and disseminated false information. For example, in its Form 8-K, news releases and paid promotional content, the SEC says that the Company stated that it had filed with the FDA, a 510(k), and that the FDA could soon approve its skin gun, which was untrue. As at that date, the Company had not filed a 510(k) with the FDA.
A secret paid promoter
The SEC says that the Company used a secret paid promoter called StreetAuthority, apparently owned by a longtime friend of Rayat in Austin, Texas, whom the SEC did not name.
The latter published a so-called independent report in which it described a case study involving the Company’s skin gun where a burn victim with what looks like severe burns on his or her arm, was promoted as having been cured in three days using the skin gun.
The promoter published before and after pictures in the report of the burn victim’s alleged cure by the skin gun in three days. The after picture of the burn victim show his or her burn was healed and the skin returned to normal after those three days. According to the NHS, a mild burn heals in 14 days.
The SEC says that the victim’s skin remained discoloured for over a year. Moreover, the SEC says that the photos in the before and after series were, for lack of a better word, disingenuous in that the before photo was not the arm of the burn victim and the after photo was actually taken five years after the victim sustained a serious burn, not three days after.
Alleged false statements
The SEC alleges that part of the disclosure record of the Company during the relevant period, contained materially false statements or was misleading in the way it was drafted and presented in the disclosure documentation, and that the Company engaged in acts designed to defraud investors.
With respect to Rayat, the SEC alleges that he aided and abetted the commission of the unlawful securities law conduct.
Among other things, the SEC alleges that Rayat devised a deceptive payment scheme to hide that StreetAuthority was a paid promoter. StreetAuthority was required to disclose its payments from the Company but failed to do so.
The SEC says that StreetAuthority touted the Company highly, claiming that the burn gun was a “revolutionary wound-healing device,” encouraging investors to buy the Company’s stock, promising investors they could hold it for “10, 20x, even 40x gains.”
The SEC says that the Company executives were questioned by the OTC Markets about paid promotional activities and lied, denying having used a paid promoter.
A reporter here reported that in a recent annual financial statement, in one fiscal year, the Company disclosed that it spent $309,503 on R&D, whereas its executives were paid $453,488 during the same period.
Over ten years earlier, in 2007, David Bains wrote (here), about Rayat and trying to get his foot in the door of his opulent offices in Vancouver.
It didn’t go so well – they asked him to remove his foot from their opulence.
The touting biz
A number of securities law academics looked at the role of promoters (also called touters) across Germany in cases of pump and dumps that manipulated the market.
Working with two agencies, the researchers were able to obtain data sets of issuers, Capital Markets Trustees and victims of pump and dump schemes over a set period of time in Germany. The findings with respect to Canadian promoters (touters) in the study are interesting – the data showed that although Canada has 1/10th the population of the US, Canada not only, per capita, breeds more promoters, it breeds more promoters on a pure numerical basis that were active in the relevant time period of the study in the capital markets in Germany.
Another academic study conducted for a mathematics thesis looked at the economics of promotions and promoters. The study found that promoters are raking in US$122,600 per issuer they tout, and earn between US$1,000,000 to US$10,000,000 per year promoting issuers – one earned US$8,000,000 in its first year of business.
With access to justice becoming a growing problem in Canada, as more people and companies become unable to afford to litigate, or be litigated against, lawyers and governments are turning to technology to find ways to bring down the costs of litigation and of prosecution. Covid-19 has forced us to accelerate the use of technology in our courts with virtual hearings, and much of the practice of litigation has moved to remote environments.
Those are not the only changes taking place in respect of litigation and technology. In order to remain competitive and increase client value, litigators are using new technologies, including legal analytics, which is growing in popularity in major litigation centres.
Analytics capabilities and tools are available in an increasing variety for various aspects of the litigation process. Technology that maps out decision trees for clients is one such example of a solution provided by a magic circle firm. Its legal tech enables clients to tap into firm databases where simple predictive AI assesses the viability of commencing litigation before deciding to proceed, helping to make litigation more cost effective and providing a broader service to clients.
Another powerful analytics tool is the network analysis branch of network science.
Although used historically and primarily by law enforcement and the intel community for mapping and dismantling terrorist and organized crime networks, network analysis technology is an ideal tool for almost any aspect of the legal process.
Network analysis identifies key players, and gatekeepers, highlights subgroups within a network and identifies individuals who call the shots. It can be used to prove or disprove a set of facts during an investigation or a trial, and as a tool for deeper analysis. Because it can be deployed to prove or disprove a set of facts, its benefit applies to defense or plaintiff counsel.
It can also be a powerful litigation analysis tool particularly for M&A deals where the network and the activities are transnational and involve hundreds of actors. Network analysis also reveals previously unobserved associations of actors within a network and identifies gaps to prioritize investigation efforts.
Centrality of actors
Network analysis uses concepts of centrality (i.e., degree, closeness, betweenness and eigenvector), brokers and density. These are mathematical determinations used to measure things like network typology, degree centrality and influence of certain actors over outcomes.
But it does more than that. The data can be used to calculate links, the strength of relationships, weakness in organizational infrastructure, money movement routes, and much more.
For example, the evidence in connection with a group of individuals, companies, and firms engaged in M&A deals involving suspected bad conduct might involve 500 different nodes and relationships by the time an investigation has concluded. Among the maze of 500 nodes and relationships, the litigator or enforcement agency needs to find out who the key actors are.
All networks have certain key actors. They control something of value – the documents, bank accounts, financings, connections, information or the process – which gives them power in the network to drive an outcome.
If the actors in the network have a criminal or fraudulent intent, the key actors act in furtherance of that goal. Sometimes only a few actors have a criminal or fraudulent intent in a network and network analysis reveals that as well because it can reveal breakages from the network by non-bad actors who break away from the network and disassociate. Bad actors only use people they trust in the commission of bad acts and a break-away actor demonstrates something about the functioning and activities of the network for further inquiry.
In financial crime or fraud cases, key actors tend to be the ones who financially profit the most from network activities. Using betweenness in network science against the network data, can reveal deeper and more accurate information about aspects of a case that lead to financial benefits by tracking linkages from actors to financial intermediaries.
Data preparation, inputs
Two legal persons that we looked at presented with typologies of being potentially problematic. A network analysis showed that they had connections in 8 countries but interestingly but only one professional gatekeeper used by both. A concentration of control in one gatekeeper is an important reveal from network analysis.
Mapping out their combined network took a long time because, in this case, analysts had to research and identify, as well as verify, the accuracy of over 314 legal and natural persons and plot the connections between them.
Ultimately, we created the network below (which is anonymized for this purpose).
In the network above, the two legal persons are the two blue nodes.
The red nodes represent the key group that directed the activities of both companies.
The one purple node in the centre between the two legal persons represents a professional gatekeeper which the key red node group appears to have used.
Identity of co-offenders
The yellow nodes in the network are what can be used for betweenness centrality; applying that analysis led to one central figure through which many of the activities flowed. Interestingly, it also led to a third legal person with co-offenders, demonstrating that network analysis has an added benefit – one case of network analysis can lead to revealing co-offenders which can lead to identifying other cases in which the natural persons are involved.
In the non-anonymized version of the network, all the nodes are identified and labeled and ergo, an analyst or the ultimate client knows at a glance who is connected to whom and how the network functions.
Using network analysis as a litigation or investigation tool requires data accuracy and standardization of raw data to conduct legal and criminal analysis and yield a network result that can be relied upon. Standardization also ensures that when analysts exchange analytical products for a case, which happens from investigator to regulator, law firm or enforcement agency, the data has the same meaning and is interoperable.
Once verified data sets are entered consistent with criminal analysis standards for network science, and parties use network analysis tools to identify the structure and control of a network engaged in alleged wrongful conduct, law enforcement, a regulatory body or a litigant can use the intel to disrupt the network by focusing on the key decision-makers and thereby, prevent problematic actors from future harm.
According to the Twitter account of a Bitcoin investor, the DeFi platform called DeFi100, that is listed on Binance, posted a notice on its website earlier today that it scammed its investors and that there was nothing the investors could do about it.
“Ha ha. All you moon boys have been scammed. Fuck you moon boys,” it also reads.
The Twitter account user says that DeFi100 ran away with US$32 million. The website is now dark.
No party has confirmed whether the notice on the website is accurate but its odd that the website is now dark.
It’s not the first time that digital currency platform owners have posted a notice online confessing they took funds from investors.
In 2019, the six owners of the ICO called Plus Token in China stole over US$4 billion from customers. Just before fleeing, they inserted Hex code into a Bitcoin transaction that said: “Sorry, we have run”.
It was China’s largest digital currency Ponzi scheme.
The Plus Token was sold online and at events in China, Korea and Hong Kong. It was headquartered in Yancheng in the province of Jiangsu. The six employees were Chen Bo, Yuan Yuan, Ding Zanqing, Peng Yixuan, Wang Renmi and Dong Jianhua.
Four of them fled to Vanuatu in June 2019. The Vanuatu government confirmed that four of them had acquired citizenship in advance, which would suggest that there was an exit strategy planned.
They were subsequently arrested in Vanuatu by Chinese officials and removed to Mainland China in July. China hunted the other suspects in other countries as well, and went to Cambodia, Vietnam and Malaysia and other undisclosed countries and picked up 27 fugitive members of the PlusToken team. In all, 82 employees of PlusToken were arrested and prosecuted.
On September 22, 2019, Chen, Ding and Peng were sentenced for organizing and leading pyramid schemes. They and other defendants received sentences ranging from two to 11 years. Their WeChat messages between them played a material role in the prosecution.
The hunt for Faruk Fatih Özer’in, aka Özer, a Turkish foreign national, may be over. Özer ran a large digital currency exchange in Turkey called Thodex. He fled Turkey in April and US$2 billion of money from its customers is apparently missing, or inaccessible. In the CCTV footage below, he is seen arriving at the Istanbul Airport and going through customs on the day he fled. Where is the US$2 billion? Perhaps on a Trezor in his bag.
Özer turned up in Albania and appeared on CCTV footage checking into a hotel after fleeing Istanbul. From Albania, he issued a statement alleging that the allegations against him were baseless and that he was in Albania on business and would return to Istanbul in a few days. That was over a month ago, and he is not likely coming back to Turkey voluntarily.
Then on May 15, 2021, the Turkish police announced that they were authorized to enter Albania and capture him. Özer was on an Interpol Red Notice list but he has since been removed from that list, which may mean that Turkey has captured him.
Turkey arrested 62 employees of the exchange in respect of whom they believed played a part in facilitating the loss of the US$2 billion. Özer and Thodex denied any money was missing on Twitter, and Özer did the same on his Instagram account. He deleted all the content from his Insta except the message below and the photo of him in a Ferrari.
Özer’s brothers and sister, Güven Özer, Zuhal Özer and Serap Özer, who appear to have run the exchange with him, were arrested in Turkey, as well as the exchange’s accountant who allegedly cooked the books, and the software developers who worked on the exchange and created allegedly false UIs for customers so that they would believe that the balances they were seeing online were legitimate, when in fact according to the police, there was no money in crypto or fiat behind the balances reflective on the UI customers saw online.
It’s not the first time that software developers and accountants in connection with digital currency exchanges have been arrested or prosecuted. Accountants usually control access to banking and ultimately make the decisions to move customer money – for good or for bad purposes. They perform a financial gatekeeping function for digital currency exchanges in respect of customers funds.
According to Turkish news, the Turkish government asked Albania to prosecute any Albanians who assisted Özer after the collapse of the exchange.
Once upon a time there was an issuer in British Columbia that went through so many pivots, one’s head spins reading their Sedar filings. Its name is StillCanna. We went through its Sedar filings for the sole purpose of documenting how some issuers pivot.
The issuer started out as Symbio Capital Corp., as a CPC hunting for a QT, founded, inter alia, by a self-described promoter named Richard Haslinger, and Ron Miles and David Franklin, a lawyer in Ontario.
In 2012, Symbio announced its IPO, selling securities offshore and raising $600,000.
All was quiet until 2014, when it announced it had entered into an option agreement in respect of mineral claims. An option agreement in the British Columbia mining ecosystem is an option to exercise an option for a right to acquire a mineral right.
Back in the day, issuers paid certain parties, often the same set of parties across Vancouver, exorbitant amounts of consideration for options to exercise an option to acquire a mineral right. For example, Symbio was on the hook to pay consideration of $100,000 plus 1 million shares for its option to acquire an option. The fact that its 43-101 said there were no mineral reserves or mineral resources on the mining property, and that no testing for one mineral was done on the site, appears to have been immaterial.
In 1998, VancouverSun reporter David Bains, wrote about a Vancouver issuer named Auromar Development Corp., that he said pumped out “steroid- enhanced news releases” in which the issuer alleged to investors that it would produce $10 million in diamonds per year. The stock flew up to $7. Not one diamond ever emerged from the site.
According to a ForbesMagazine article, Auromar’s lawyer in Vancouver recommended that Auromar merge with a company called Casmyn Corp. to remove it from Canadian jurisdiction to avoid a potential criminal investigation. Casmyn faced similar allegations of having promoted a stock based on alleged misrepresentations. In the end, it was the professional insurers of the gatekeepers – the lawyers and the auditors – who appear to have paid out shareholders who sued for losses – but not in Canada – in the US. Deloitte, in its capacity as auditor of the issuer, paid US$2.3 million and the insurer for the lawyer of the issuer paid US$900,000.
Back to the issuer; new natural persons entered into the picture with the acquisition of the option to exercise an option, including Jason Leikam, Nick Ayling, Faisal Manji, George Nicholson and a Richard Simpson. Ayling was, perhaps still is, a securities lawyer, according to the issuer’s disclosure.
In 2014, the issuer changed its name to Blackeagle Development Corp. And in 2016, it announced plans to get into the silica sand business and to change its name to EVI Global Developments Corp. with a view to expanding into China with two new people, Chun Kwok Cheung and Timo Strattner.
We don’t know if it ever extracted silica or expanded into China.
In 2016, it later announced it was now getting into gold.
By mid-2017, the issuer announced it was onto new things and it was now entering the money services business by acquiring an online MSB, in essence a foreign exchange and payment processor.
Days later, it announced it was back in the silica business too.
The summer announcements weren’t over. Two months later, it announced a third line of business into cannabis, acquiring shares from Matthew Kyska. A Chris Yu-Kai Hung then joined the board.
Material contracts were not filed on Sedar in respect of many of these deals.
A mere six months later, the issuer was back into mining – in Peru this time.
A month later, it was back into FinTech, specifically back into payment processing and announced it was acquiring a global payments processing processor called CashTeleport Inc. that operated as an online money transmitter (an MSB) for consideration of $5 million. The issuer said it hoped to be able to cash teleport. We can find no trace of an MSB or payment processor that operated globally, even locally, called CashTeleport Inc.
A week later, Brendan Purdy, from the Vancouver issuer Global Blockchain Technologies Corp., another securities lawyer in the microcap space, joined the issuer.
The issuer then completed a plan of arrangement and Jason Dussault joined the issuer, followed by an executive from a home gutter cleaning service named Denis Semenov.
By September 2018, it was back into cannabis, acquiring a company in the EU.
In 2019, the issuer announced a name change to StillCanna Inc. and a series of cannabis deals in Eastern Europe and the listing of its shares in the US and Germany.
A few weeks later, it announced another microcap securities lawyer by the name of William Macdonald was joining the issuer to replace the executive from the home gutter cleaner, as a director.
But not just that, the issuer announced that the lawyer was going to be acting as both a director of the issuer and legal counsel, providing advice in respect of the issuer’s legal obligations.
Since the days of lawyer Michael Seifert (coincidentally who was a finder, twice collecting a finder’s fee in convertible units with the same now-cease-traded issuer Global Blockchain Technologies Corp. as Brendan Purdy, mentioned above), it used to be that it was not permitted for a lawyer to act qua director of an issuer and as legal counsel but that rule appears not to have been enforced in a while and in fact, a review of many British Columbia issuers shows that lawyers are acting as both at the same time, being remunerated in both capacities.
It is possible, but doubtful, that the rules changed allowing lawyers to act as a director of an issuer for compensation, as well as to accept shares and options for free from the issuer, and then to put on a third hat and act as legal counsel for compensation. How such a lawyer attends an AGM, or writes the Information Circular in respect thereof for that matter, keeping those three different hats on his head is a kind of a neat hat trick.
Back to the issuer; several more natural persons then joined the issuer, including a Polish national named Kazimierz Malik. Around the same time, a Vancouver person named Marc Crimeni, appeared in a Sedar filing of the issuer as a material shareholder and director.
Crimeni was banned from being a director of an issuer in British Columbia for a short period of time over a failure to disclose that he was facing a criminal charge over improperly storing a gun.
Later, the issuer announced that Crimeni was its “founder” and that he relocated to the EU.
Wait – its founder?
Not according to the securities law disclosure record. According to that, the founders were the promoter Haslinger, Ron Miles, Paul Fong, Alex Kim and David Franklin, and copies of their share subscriptions for founder shares are filed on Sedar.
So what was Cremeni’s role and how long he was with the issuer is unknown.
The issuer then changed its name once more to Sativa Wellness Group Inc. and then Covid hit the world, and then a lawsuit hit the issuer.
China is reporting that in 2020, 64% of cybercrime involved financial fraud, including online illegal gambling, online illegal loans and illegal securities sold online on various platforms, such as WeChat and QQ.
Many of the fraud cases involved Bitcoin and other digital currencies.
In December 2020, the public security agency of China intercepted a transnational criminal organization operating a fraudulent digital currency lending service between the city of Quezon and the Philippines, arresting 342 Chinese foreign nationals and seizing 7,329 mobile phones and nearly 1,000 computers.
Last year in China, 141,870 people were prosecuted for cybercrimes, an increase of 47.9%, according to data from the Supreme People’s Procuratorate. This flowed from 361,000 arrests. In 2020, China took down 1.6 million fraudulent websites and dismantled 11,000 gangs involved in bank fraud using credit cards online.
Netflix’s “The Serpent“, is bringing the story of Canadian Marie-Andrée Leclerc back into the spotlight. Leclerc, together with her partner Hatchand Bhaonani Gurumukh Charles Sobhraj, aka Charles Sobhraj, were serial killers who, in the late 1970s and early 1980s, murdered several back-packers in Asia, stole their money and lived off the proceeds of crime. She was prosecuted for two of the murders.
Leclerc was from Levis, Quebec.
In 1975, Leclerc met Sobhraj, a Vietnamese foreign national, in India and fell in love with him. She returned to Canada, packed up her things and moved with Sobhraj to Thailand in 1975.
Their strategy involved befriending young tourists, drugging them, often killing them and taking their passports, cash and travellers cheques. They needed the passports to cash the travellers cheques but also used them to travel across Asia. They invented fake names – she was ‘Monique’ and he was ‘Alain Gautier’.
One of the first victims was a tourist from Seattle named Teresa Knowlton. She was drowned in the gulf of Thailand near Pattaya. Some of Ms. Knowlton’s belongings were found in the apartment of Leclerc and Sobhraj. It was not Sobhraj’s first victim, though. He had left a trail of criminality across several countries before meeting Leclerc.
The next victim of the pair in Thailand was a Turkish national named Vitali Hakim. His body was found near the same town of Pattaya, as Ms. Knowlton. He had been badly burned. He had spent several days with Leclerc and Sobhraj before his death. Sobhraj used Hakim’s passport to travel.
Two other victims, Heink Bintanja and Cornelia Hemker, were found dead and burned in Bangkok, and they too had spent time with Sobhraj and Leclerc before their deaths. Another victim, Ann Mary Parry, was murdered while she was searching for Vitali Hakim.
One of their victims who lived, Dominique Renelleau, who was poisoned over a three month period, later testified that Leclerc acted as the poisoner for the duo.
Another person who met Sobhraj but refused to engage with him further, as well as Nadine Gires, who lived in the same apartment complex as Leclerc and Sobhraj in Thailand, met many of the victims and describes her experiences below.
In December 1975, Leclerc and Sobhraj used the passports of Heink Bintanja and Cornelia Hemker to leave Thailand for Nepal. A few days after arriving, they murdered a Canadian, Laurent Armand Carriere, and an American named Connie Bronzich. After those murders, they traveled to India, where they killed an Israeli named Avoni Jacob. They then returned to Thailand.
Shortly after returning to Thailand, Sobhraj became aware that there was an investigation into the deaths of Heink Bintanja and Cornelia Hemker, among others, and that he was a suspect.
He and Leclerc fled to Delhi, where they hooked up with two women, Mary Ellen Eather and Barbara Smith – those four were then accused of poisoning and robbing a man named Jean-Luc Solomon, who was subsequently murdered.
Several months later, in New Delhi, they decided to drug a group of French tourists who reported it to the police. The four were arrested. Eventually, Sobhraj revealed his identity in prison.
In 1980, Leclerc was found guilty of the murder of Avoni Jacob. In 1983, she was diagnosed with cancer in prison and was allowed to return to Canada for one year under compassionate grounds to receive treatment. She appears in this video here, arriving back in Canada like a celebrity.
For unknown reasons, Canada never prosecuted Leclerc for the murder of fellow Canadian, Laurent Armand Carriere, when she returned to the country. Or for offences in connection with the possession and use of his passport by her and Sobhraj. Leclerc, together with Sobhraj, is believed to be connected to at least 20 murders, making her one of Canada’s worst serial killers.
Leclerc died of cancer in 1984, after writing and publishing a number of memoires of her life in which she portrayed herself as an innocent victim of Sobhraj, and denied any complicity in the murders.
None of the victim’s families have sought to disgorge from Leclerc’s estate, the revenues from her books, or to sue Leclerc’s estate for wrongful death in the civil sense.
A reporter from La Presse, Madeleine Poulin, travelled to India after the arrest of Leclerc and met with her. She says in this video (here), that her impression of Sobhraj was that he was a psychopath. With respect to Leclerc, she says that Leclerc tried to sell herself as a powerless person who herself was locked up by Sobhraj in the apartment in Thailand who had had no role in the murders.
Poulin, however, in her investigations in Thailand, visited the apartment in which victims were effectively incarcerated while they were poisoned to death and she notes that it would be impossible to be in that apartment and not see and hear the victims.
She also reported that people in the apartment complex who knew Sobhraj and Leclerc in Thailand told her that Leclerc was not locked-up and they saw her coming and going as she pleased.
Poulin also met Australian victims who survived and she said that the Australians told her that they were poisoned by Leclerc.
Poulin also says that the family of Leclerc in Quebec were very angry with her because her reporting detailed her findings in respect of Leclerc, as opposed to the story the family wanted told about her. Leclerc never expressed any remorse to any of the families of the victims and her family never expressed any compassion to those families either, in respect of the harm Leclerc caused.
In Nepal, Sobhraj was eventually convicted of killing Connie Bronzich. His lawyer alleged that the presiding judge accepted bribes in connection with his trial.
Sobhraj is still alive. He is believed to have committed major crimes in Thailand, Nepal, India, Iran and Afghanistan. Crime + Investigation here summarizes his crime spree.
Dutch diplomat, Herman Knippenberg, and his wife Angela Knippenberg, (who were not investigators or in law enforcement), worked for years to collect evidence and piece the case together in Thailand. They were investigating what happened to Bintanja and Hemker.
Eventually, the Knippenbergs identified Alain Gautier (Sobhraj) as the likely killer and connected their murders to several others which had occurred across Thailand. This article (here) describes their journey to bring Sobhraj and Leclerc to justice.
It was the RCMP in Canada who actually cracked the case because it was their investigation that made the key connection and determined that the person named Alain Gautier was actually Charles Sobhraj.