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.
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.”
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.”
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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 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, 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).
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.
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. 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.
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 (“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.
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.
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.
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, 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”).
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).
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.
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).
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 (“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.
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.
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 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 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.
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). 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.
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.
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.
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 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.
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.
 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.
 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.
 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.
 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.
 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.
 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.
 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.
 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.
Kaitz allegedly has been found inadmissible to enter Canada, according to one defendant.
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.
 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 subscribedfor 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.
 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.
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.
A Canadian has been charged in the US with being an ISIS fighter, as well as providing material support to ISIS and producing, editing and disseminating ISIS material for approximately five years. He is alleged to be the narrator in some of the more gruesome ISIS videos of beheadings.
The Canadian, Mohammed Khalifa, was captured overseas by the Syria Democratic Forces in January 2019, and was recently transferred to the US. The Affidavit in support of the criminal complaint which sets out the allegations, is here.
Khalifa is also alleged to be aka Abu Ridwan Al-Kanadi and Abu Muthanna Al-Muhajir. The Affidavit in support of the criminal charges deposes that Khalifa swore an oath of allegiance to ISIS’ former leader, al Baghdadi (now deceased). He is alleged to have sent emails to a number of relatives, explaining that he went to Syria to do jihad (e.g., kill people). He said in a media interview that his work with ISIS, including the decision to travel to Syria to join ISIS, was done knowingly.
With respect to ISIS’ beheadings of aid workers and journalists, Khalifa essentially said that “a kuffar is a kuffar” and being a journalist or aid worker does not change their kuffar blood.
A kuffar is a derogatory term to refer to a non-believer.
The videos and PR material that Khalifa worked on were studio-quality with offensively-crafted content intended to recruit like-minded persons to renounce citizenship and join ISIS and/or commit terrorist acts in their home countries, and to shock and instill fear.
This tweet (below) which links to an ISIS video of a very young boy murdering an adult with the caption “kuffars are gonna rage”, appears to capture the essence of the media and PR machinery of ISIS.
The Syrian Defense Forces which captured Khalifa is comprised of members of the Kurdish People’s Protection Group, including the YPJ, the all-female division that played a material part in the defeat of ISIS. The YPJ was responsible for the capture of many of the men of ISIS and took control of them pending international resolution on the prosecution of terrorist foreigners in Syria and Iraq.
Other terrorists with ISIS have been sent to the US for redress in respect of the harm they caused as members of a terrorist group, and in those cases, there were legal issues raised in respect of the use of MLATs and the so-called prosecution by MLAT legal theory which is unlikely to arise in this case.
A lot has been written about Ponzi schemes, but did you know that the Ponzi scheme seems to have had its genesis in Canada? Since this December is the 101st anniversary of the conviction of Charles Ponzi, its probably a good time to explore the Canadian side of the world’s most famous securities fraudster.
Ponzi scheme defined
What is a Ponzi scheme?
There is no settled definition of a Ponzi scheme but the most relied upon definition is a financial fraud that induces investment by promising returns, usually in a short time period, from an allegedly legitimate business venture where proceeds from new investors are funnelled to previous investors from the alleged business venture, cultivating the illusion of legitimacy and inducing further investment (Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008)). Ponzi schemes are presumptively insolvent from inception, as a matter of law.
CarloPonzi immigrates to US
Charles Ponzi was born in 1882, in Italy as Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi. He immigrated to the US in 1903, landing in Boston.
Once in the US, he moved from job to job, unable to stay with one employment for very long. Possibly as a sign of things to come, he was fired from a job as a waiter after he was caught shortchanging customers when they paid their bills.
Ponzi moves to Canada
In 1907, he moved to Montreal, Canada, after learning that another Italian immigrant in Boston named Luigi Zarossi, had moved to Montreal and was running his own bank, the Banco Zarossi. Ponzi changed his name to Carlo Blanca, tracked down Zarossi in Montreal, and convinced him to give him a job as a teller at the bank. Ponzi was quickly promoted to bank manager.
Zarossi and Ponzi operated the bank more like an investment company than a deposit and savings institution. They solicited deposits from Italian immigrants, promising them 6% interest on deposits, when other banks were paying significantly less. They also offered remittance services to Italian immigrants, facilitating the sending of funds from Montreal to Italy.
Early Ponzi affinity-based fraud
The bank ostensibly grew as an increasing number of immigrant Italian customers opened accounts and left funds on deposit, but its growth and success was an illusion because instead of sending out remittances and managing customer deposits, the funds were going into Zarossi’s pocket. In the early days, when customers came to make withdrawals of their principal plus the 6% in promised returns, Zarossi and Ponzi repaid them with money from newer customers (the Ponzi scheme in operation). Word got around the Italian immigrant community that they made good on their promises and that generated more customer deposits into Banco Zarossi.
And thus Ponzi learned from Zarossi how to master what we now call affinity frauds, through existing social networks. In that case, the social network was the Italian immigrant community. By targeting Italian immigrants, Ponzi and Zarossi had instant trust and proximity to the victims. Ponzi also learned in Canada, how to master the type of fraud that would later bare his name.
All Ponzi schemes have to collapse at some point because of the fact that they are insolvent from inception and in 1908, the Banco Zarossi was collapsing because depositors could not be paid back. Zarossi took off to Mexico with a suitcase full of cash. Ponzi blamed Zarossi for the scheme and the disappearance of customer funds. One bank employee committed suicide and another disappeared, presumably killed.
A few months later, Ponzi forged a cheque of a former customer of the bank, made out to himself using a third name, “Charles Ponsi”, and cashed it. He was caught and charged under that name.
He was convicted and sentenced to a term of incarceration of three years in Quebec, under another fake name, Charles Bianchi. While in prison, he wrote to his mother in Italy and explained that he was working as an assistant to a warden at a Canadian prison, hence his address at the St. Vincent-de-Paul prison.
In 1911, he was released from prison.
Ponzi returns to the US
That year, Ponzi decided to return to Boston and within a week of his release from prison, he crossed the border into the US with 5 Italians whom he was attempting to smuggle into the US illegally. He was charged, convicted and sentenced in the US to a term of incarceration of two years.
Ponzi was released after 25 months, and after his release, he took odd jobs for a number of years in New York City, Alabama and Florida.
In 1917, he returned to Boston and took a job as a store clerk. He met his future wife, Rose Gnecco, on a streetcar, and they were married in 1918. Ponzi took over a grocery business owned by his father-in-law and managed to run the business into the ground in less than a year.
Ponzi’s coupon scam
Broke, with mounting debts, Ponzi tweaked the Montreal formula pulled off with Zarossi and went into business for himself in Boston, selling Italian immigrants shares of a business (in the form of notes that evidenced the securities) that allegedly provided arbitrage opportunities over the discrepancy in prices of International Reply Coupons (“IRC“).
IRCs still exist – they are physical pieces of paper with a certain monetary value attached to each one – in the 1920s, the amount was about 5 cents.
Ponzi told investors that he was buying IRCs overseas and cashing them in the US, where the rates were better, making an alleged profit on each IRC purchased.
Ponzi promised investors a return of 50% in 90 days. When investors sought to cash out, Ponzi sweetened the deal to keep them on, promising them a 50% return in 45 days. Similar to the Montreal banking scam, he used money from new investors to pay out the old. The first few customers were paid back with the promised returns, to convince future investors that the scheme was legit.
Pulling in millions per week
Ponzi was wildly successful luring in investors to give him money. By March 1920, people were lining-up down the street where his office was located, to drop off cash to invest. He was pulling in US$1 million per month. By June, 1920, he was pulling in US$1 million per week and was sitting on a fortune.
But it was a scam. For one thing, if the investments were legitimate, it meant that Ponzi was buying IRCs in Europe and having them shipped, physically, to the US where they would be cashed out. According to the US Postal Service, it would have required ships the size of the Titanic to be filled up with IRCs for it to be true. For another thing, it would have required a large number of employees and agents all across Europe to buy and ship the IRCs to the US, which Ponzi did not have.
As the money rolled in, Ponzi began to spend on a lavish lifestyle, moving to a 12-room mansion, buying luxury watches, the latest fashionable clothing, and luxury cars. The Boston Globe reported that he had a massive imported scotch collection in the cellar of his mansion that was worth more than the house itself. It could be that Ponzi intended to sell it, because in January 1920, the Volstead Act came into force, ushering in prohibition. In December 1920, however, when the receiver published the assets of Ponzi’s company and of Ponzi’s personal estate, the scotch collection was absent.
By July, 1920, Ponzi claimed to be worth US$8 million, about US$110 million today. He was so flush with cash, he bought a bank in Boston.
Then towards the end of July 1920, an investor in Boston filed a lawsuit for US$1 million against Ponzi, for an alleged debt and the Boston newspapers ran a story about it.
Run on the bank
That caused a flood of customers to visit Ponzi and ask for their money back, and for investigators to start to ask questions. There was a run on Ponzi’s company and the bank Ponzi acquired, for over a week during the first week of August.
During that time, Ponzi made numerous untrue statements to keep the con alive. For example, he fabricated a telegram to show a reporter that a fictitious bank in Canada called Levtur Canadian Bank, was sending him US$7,000,000. He did, however, pay investors who lined up back their principal during that first week but not without suggesting that they were going to lose out on big returns by cashing out early.
During the run on the money, Ponzi alleged that he had a secret winning formula to make money, and that a French organization had offered him US$10 million for his “secret”. He also informed investors and reporters that he had more than enough money in banks all over the US to pay every investor back.
His ego was not small for he once told the crowds swarming his office that he was the 3rd greatest Italian in the history of the world.
On August 12, 1920, the Boston Globe revealed that Ponzi was a former convict from Canada, who was tied to a previous similar scheme at the Banco Zarossi in Montreal, and had been convicted in Canada and the US for various offences.
The next day, Ponzi was arrested. The US Attorney General’s early calculations estimated that he owed investors US$5 million, equal to US$40 million today.
Ponzi was charged with mail fraud.
After he was arrested and in order to deflect, Ponzi gave a certified statement to the Court alleging that a number of other people were responsible for the loss of investor funds, outright lying. The US Federal Court ruled, as a preliminary matter, that Ponzi was a one-man fraud show. Mr. Justice Morton called Ponzi’s statement blaming others for his actions “false and fraudulent”.
In the criminal complaint, the US federal government alleged that Ponzi falsely represented to investors that his company was in a position to repay them their investment funds whereas in truth, he was not in a position to repay each investor; it was also alleged that he fraudulently represented that he was in the business of trading in IRCs, which enabled his company to make large returns of profits, knowing that that was untrue.
On August 15, 1920, the Boston Globe published a story in which the US Postal Service was quoted as explaining that from 1907 to 1920, the value of all IRCs issued in the entire world was only US$1,349,235, and therefore Ponzi could not have bought US$5 million worth of IRCs and the scheme could not be legitimate.
Several banks collapsed in the aftermath of Ponzi’s arrest and tens of thousands of investors received only 30 cents for every dollar invested.
Ponzi was convicted on federal charges of mail fraud and later, he was convicted on state charges of fraud. He was released from jail in 1934, and deported to Italy.
How did Ponzi and Madoff do it?
A number of academic studies in criminology have drawn parallels between Ponzi, Bernie Madoff and other Ponzi schemers to explain how come people fall victim to Ponzi schemes. Madoff was an American fraudster and financier who ran the largest Ponzi scheme in history, worth about US$64.8 billion in 2009.
Among the common features between Ponzi schemers, are that they are trust violators. They inspire trust among investors to such an extent that investors fail to apply rational decision-making or to conduct due diligence before investing, and then the fraudsters breach that trust.
Using social network analysis, academics have looked at the exploitative and deleterious effects of socially embedded networks and transactions used by Ponzi and Madoff, finding that both excelled at constructing and maintaining socially embedded networks for proximity between them and the victims, in essence perpetrating sophisticated affinity frauds.
Because this type of fraud is carried out through embedded networks, investor education programs advising investors to be weary of “too good to be true” investment schemes tend not to be effective.
Ponzi and Madoff both relied on culture, religious, social and family connections to launch their frauds, and those close knit groups remained oblivious that they were being defrauded until the very end.
The same is true of the Bulgarian-based OneCoin and the Canadian HabibiCoin founders from Montreal, both of whom used networks tied to Islamic finance and MLM techniques, and of Miami-based Scott Rothstein, who used the legal community, to run Ponzi schemes that were affinity-based. Finico, the alleged Ponzi scheme using Tether in Russia, is another recent example of using Islamic finance and affinity groups to scam investors.
Another well-known Ponzi scheme orchestrated by Sergey Mavrodi in Russia used affinity techniques to lure in poor investors en masse by projecting himself as the little guy against the state. In later iterations, Mavrodi (and those who continue his Ponzi scheme) used MLM techniques to lure in investors in Nigeria, India and Indonesia, and later, using the fake promise of the alleged financial freedom allegedly achievable by the fake Mavro Coin and Blockchain.
You can read about the Mavrodi scheme and its ICO iteration here, and watch their video promoting the Mavro Coin to investors on YouTube.
 A sine qua non of any Ponzi scheme is the repayment to one or more investors by the fraudster. To be a Ponzi scheme, the scheme must, therefore, have evidence of the manufacturing of returns to investors from other investors contributions. A fraudulent scheme that takes investor funds in violation of securities law, or which is a financial fraud with no legitimate business venture underlying the activities is not a Ponzi scheme if new investor funds are not used to issue “returns” or a payment to at least some investors.
The source of information in respect of Charles Ponzi was primarily from news articles published by the Boston Globe from 1920 – 1922, whose reporters interviewed Ponzi contemporaneously with the operation, end and prosecution of his Ponzi scheme.
The Securities and Exchange Commission (“SEC“) has filed a complaint against several Vancouver individuals involved in the microcap space, calling them “foreign actors” and accusing them of attacking the US capital markets and US investors using various alleged securities fraud schemes. The SEC says that over US$1 billion in illegal stock sales occurred under the control of a handful of Vancouver individuals in less than a decade.
It’s believed to be the first time that the SEC has used such language and referred to Vancouver market participants as foreign actors attacking the US financial markets.
So while on its surface, this SEC case is about alleged pump and dump fraud schemes allegedly perpetrated by alleged secret control persons in the corporate law sense, it is also about the take down by US law enforcement of professional service providers, more particularly “company service providers”.
Connected cases tied to Vancouver
This SEC complaint ties into earlier SEC enforcement actions against other people in the capital markets, some but not all of which are connected to Vancouver (see, for example, SEC v. Carrillo et. al., SEC v. Basic et al. and SEC v. Knox).
The Canadian defendants in this case are Frederick Sharp, Zhiying Chen, Courtney Kelln, Mike Veldhuis, Paul Sexton, Jackson Friesen, Graham Taylor and Avtar Dhillon. The microcaps whose shares were manipulated, says the SEC, include a Vancouver Bitcoin company called Evolution Blockchain Group Inc., OncoSec Medical Incorporated, Arch Therapeutics Inc. and Vitality Biopharma Inc. Zhiying Chen is a/k/a Yvonne Gasarch in Canada; Zhiying Chen in China.
The SEC is seeking a permanent injunction against the defendants, enjoining them from violating the Securities Act and Securities Exchange Act, as well as other relief including disgorgement.
Company service providers
The SEC alleges that Sharp, Chen and Kelln worked at one company (“Sharp Co.”) which provided corporate registry services (e.g., known as “company services providers” under the FATF Recommendations as part of DNFBPs).
“Company services providers” provide services that involve incorporating and maintaining private companies domestically, and arranging for such services offshore with other company services providers in offshore jurisdictions. Company service providers, materially, control corporate records and they not only create the paperwork to evidence the officers and directors of private companies, they control its anonymity (or not).
The FATF Recommendations require that such persons be registered under AML law but Canada decided to exempt the regulation of company service providers under the Proceeds of Crime (Money Laundering) Terrorist Financing Act because they took the position that company service providers were not material in the money laundering ecosystem in Canada.
Threema and secret communications; secret control persons; secret promoters
The SEC alleges that Sharp Co. employed the use of cellular phones it called “xPhones”, which were cellular devices which operated on an encrypted network. That network appears to be Threema, which promises a guarantee of encryption of messaging. Sharp Co. also, the SEC alleges, acted as what appears to be an unregistered money services business, exchanging funds and moving funds around for clients.
The pleadings say that Dhillon is a business associate of Sharp and is described as a super control person and an insider, who appears to have controlled the control persons. According to an Affidavit filed by the FBI, Dhillon directs another little issuer named Emerald Health Therapeutics based in Vancouver, Canada, listed in the US on the OTCBB. It had days where millions of shares were sold in a period of a few months in late 2017, as depicted in the graph, below. It is not named as part of the SEC complaint as an issuer whose securities were allegedly manipulated.
The SEC says that Dhillon used a paid promoter named William Kaitz. He allegedly promoted the stock of the issuers named in the complaint that the control persons allegedly dumped after such stock had been pumped up to artificially high prices. Kaitz is also alleged to have concealed the identity of the entity that paid for the stock pumping services. Sharp Co. allegedly provided Kaitz with one of the xPhones for what they believed would be secret communications. According to securities law disclosures filed for investors, Dhillon states that he was formerly with a Canadian entity named Lumira Capital Corp. and another named BC Advantage Funds (VCC) Ltd. Both are VC funds in Vancouver, Canada and the latter appears to have gone bust and self-liquidated its assets and was wound up.
James Bond culture
Some of the defendants appear to have believed they were running covert ops, and were akin to secret agents.
The leader of Sharp Co., Fred Sharp, used the code name “Bond”, as in 007 for himself, and described his firm’s services as comprehensive and which included payment processing, loans, private placements and “keeping clients out of jail.” He appears to have written a book of fiction in 2003 and has an IMDb profile. The Facebook page of one of his children has “007” as part of the profile name.
Sharp’s company services provider entity was called Corporate House, operated out of Vancouver. It was one of the largest clients from Canada of Mossack Fonseca, the law firm in Panama that melted down after the Panama Papers, and in fact Sharp ran a Canadian office of Mossack Fonseca in Vancouver.
The SEC alleges that Sharp found front people and front companies for the scheme. One such front person was his wife’s tennis coach in Vancouver.
Along the James Bond theme, the SEC says that Sharp set up a secret accounting system called “Q”, allegedly to track the proceeds from the illegal sales of securities. Q also allegedly tracked the fees and commissions payable to Sharp Co. for alleged obfuscation and other professional facilitator services. The encrypted communications and Q were hosted on servers in CuraÃ§ao because Sharp believed that CuraÃ§ao was beyond the reach of US law enforcement. He was wrong – pursuant to an MLAT, the FBI obtained mirrored copies of Q and the xPhone communications from CuraÃ§ao.
The SEC alleges that from Vancouver, Sharp’s associate Kelln, hired a number of lawyers – not of the issuers but of the Vancouver nominee shareholders associated with Dhillon and Sharp, and the SEC says they wrote false opinion letters opining that shares of the microcap issuers were unrestricted, when they were not. The SEC may reveal in due course, who wrote the false opinion letters but thus far they have not.
Parallel criminal filings
In parallel proceedings, the US Attorney for the District of Massachusetts announced criminal charges against Sharp, Kelln, Veldhuis and Dhillon (and one other) for conspiracy to commit securities fraud and securities fraud. The FBI Affidavit in support for Sharp et. al. is here. When the case was unsealed, arrest warrants were issued for Sharp, Veldhuis and Kelln. A separate criminal complaint was issued against Dhillon for securities fraud, conspiracy to commit securities fraud and for obstruction for lying under oath on a number of occasions to the SEC during its investigation. A warrant was issued for Dhillon’s arrest as well. Although Dhillon resides in California, he is from British Columbia.
The Dhillon criminal complaint provides a more fulsome picture of the allegations from the microcap issuer perspective. The US Government alleges that Dhillon and his lawyer deliberately hid certain shareholdings of microcap companies he owned using two shell companies. One shell was called “Walk on Water”, perhaps because Dhillon felt he walked on water and was untouchable. Dhillon and his lawyer are alleged to have conspired to defraud several investors (shareholders) and to have obtained money from them based on false representations connected to companies they were raising funds for. Dhillon allegedly sold shares he secretly owned that were held in the names of nominee shareholders (which was not disclosed) after promotional schemes increased the price, artificially, of those shares.
Dhillon, the US government states, had in particular, corporate ties to his fellow co-accused Sharp and Veldhuis through the use of nominees, and also to his fellow co-charged, Friesen, Taylor and Sexton, and as between them, they allegedly transferred shares to nominee entities or nominee persons, or instructed others to do so.
A Vancouver Blockchain company
One of the issuers identified in the SEC proceeding is a Vancouver Bitcoin company called Evolution Blockchain Group (formerly Garmatex Holdings Ltd.). It did a pivot from allegedly making bras and allegedly being a supplier of fabric to the global brand ASICS, to become a Blockchain company during the ICO hype. It is headquartered, and during the relevant time operated from Vancouver although incorporated in Nevada. Its president is or was a geologist in Ontario named Lawrence Stephenson. Although allegedly supplying fabric for bras and ASICS, no material contract was filed on Edgar or Sedar with ASICS.
According to its filings on Edgar, it bought a Bitcoin gambling payments website and Bitcoin gambling software from Canada, from 10604496 Canada Inc., whose shareholders are disclosed on Edgar as including Dominic Dos Santos, Bradley Rowe, Naeem Kassam, Randy Bunka, Dean Stambolich, Tony Marziliano, Richard Lonsdale-Hands, Crystal Casey and Junior Ofori. The assets were purchased in April 2018, although the company was only incorporated a few months earlier.
Drive Coin ICO
Evolution Blockchain also launched an ICO from Vancouver called “Drive Coin” (as in driving a vehicle), and provided online crypto lending, according to its website.
A boiler room in Colombia cold calling to sell stock
According to the SEC, at the beginning of March 2017, one of the secret control persons of Evolution Blockchain paid a boiler room operator in Medellin, Colombia, to call US investors to promote the stock of Evolution Blockchain. They also launched an email campaign to promote the stock and then hired a promoter in Canada to pump the stock.
When the stock was shooting up, the SEC alleges that the issuer issued a press release stating that it was unaware of anything that could account for the increase in its market activity. That pump and dump, the SEC says, resulted in US$7 million in illicit proceeds just for the one secret control person but that same person collected US$75 million from the fraudulent trades of securities over the course of nine years, says the SEC. The SEC does not state who published the press release on Sedar.
Another stock that was allegedly sold at the Colombian boiler room was PureSnax International Inc., now IQST, which is an issuer in Florida that states that it allegedly sells FinTech, Blockchain, and electric vehicle services, as well as operates a digital currency exchange. Previously, it allegedly manufactured healthy snacks according to its Edgar filings with one or more Canadian, but reported having no employees or facilities. The other is Oroplata Resources Inc., now American Battery Metals Corporation (ABML), a lithium battery issuer.
The documentary (clips below) by 60 Minutes Australia shows the busting of a boiler room that sold fake securities listed in the US to victims in several countries. In the documentary, the boiler room cold callers blame victims of securities fraud for the thefts, calling them “stupid.”
This is called neutralizing – neutralizing theory is used by scholars to explain how securities fraud and other financial crime criminals rationalize their conduct by blaming others for criminal acts they commit. For example, both Charles Ponzi and Bernie Madoff neutralized to law enforcement (and in their own minds) to deflect blame to others for their schemes.
But it isn’t what the boiler room promoters say in the 60 Minutes documentary, so much as their attitude towards the harmed investors that is different.
Watch this clip below from 1:44 to 1:50.
And then watch this part below from 14:54 to 15:40.
In the documentary, one of the interviewees characterizes boiler room securities fraud activities as transnational organized crime, and says that whistleblowers of securities fraud have been killed.
That is true – over ten years ago, David Bains, who was a reporter in Vancouver, reported about a British Columbia issuer listed on the OTCBB, run and promoted by organized crime, where, he reported, five people were killed in Vancouver by organized crime for reporting to regulators that the issuer was engaged in a pump and dump scheme. Fast forward to today and one of those organized crime figures is active in the Vancouver microcap space as an executive of at least two issuers, according to Sedar filings.
Fake expertise to pump the stock
Lawyers at the American Bar Association (“ABA“) wrote an excellent law review article looking at penny stock fraud perpetrated against Americans, including from foreign issuers (most of which are in Canada) and, with respect to the creation of fake documents similar to the allegations in this SEC case, the ABA wrote that professional facilitators who work in the microcap pump and dump space who prepare documents for issuers that involve misrepresentations, do so “fully aware of the corporate fiction they are creating”.
The ABA went on to describe a troubling practice of fraudsters who use the names of people who are well-educated and with credentials to give themselves credibility and respectability without the knowledge or consent of such persons.
Bitcoin people, particularly, have often used the names and likenesses of lawyers, law firms, and large global advisory firms without the knowledge or consent of the persons or the firms.
Both the SEC and the OSC have taken regulatory action against Canadian capital markets participants who have expropriated the names or likenesses of individuals without their consent or knowledge on the basis that it is a type of fraud on the market.
Supporting the ABA finding that the fraudulent use of someone’s name happens frequently, a recent case brought to our attention involved a case whereby an issuer in Vancouver took the names of experts of another company and without the knowledge or consent of the individuals involved, posted their likenesses and names on the issuer’s website, alleging they were consultants and/or advisors of the issuer (which was not true) and raised money from US investors relying upon that misrepresentation.
A few years ago, a Bitcoin issuer in Vancouver used the logo of a US federal law enforcement agency on its website and in its pitch deck, without the knowledge or consent of the US federal law enforcement agency, to raise money from investors and only ceased to do so after the US federal agency communicated with the issuer to request they remove the US government logo.
And just yesterday, a Vancouver microcap issuer listed on the OTCBB, whose stock is being promoted via email newsletters as a company that “literally could SAVE LIVES!” by a promoter put the logos of the US Special Operations Command, NATO, the US Department of Defense and the US Marines on its website and in its pitch deck to investors, alleging that each of those agencies were tied to the issuer. According to its Sedar filings, the issuer does not have one direct contract with any US military agency or with NATO.
SEC whistleblower program
With respect to the Sharp and Dhillon case, if there is a silver lining, it may be that some parts of this SEC and DOJ action arose, in part, because of a filing by an American pursuant to the SEC whistleblower program in the US, which speaks to the effectiveness of the program, as well as the trust that it has among the public in its handling of cases that result in helping to protect the integrity of the US capital markets, and this case may be the catalyst that convinces lawmakers to adopt effective trust-based whistleblower laws in Canada where no one is at risk for being a securities law whistleblower.
If you are interested in other boiler rooms cases connected to Canada, you can read this story here about Canadians who ran a boiler room scheme, whom US law enforcement prosecuted, and also refer to the CFTC and OSC cases against Canadians who ran alleged binary options scams from Israel that used boiler rooms to sell the securities.