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

By Christine Duhaime | March 2nd, 2022

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

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

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

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

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

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

Or did it?

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

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

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

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

Our Summary of Proceedings

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

Criminal Complaint – Dhillon

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

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

Avtar Singh Dhillon, 2017 (Source: Instagram)

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

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

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

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

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

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

Criminal Complaint – Sharp et. al.

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

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

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

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

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

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

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

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

Civil Complaint – Sharp Group

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Civil Complaint – Avtar Singh Dhillon

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

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

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

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

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

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

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

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

Fraud Round One

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

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

Fraud Round Two

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

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

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

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

“Rich mother fucker”

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

Fraud Round Three

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

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

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

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

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

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

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

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

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

Fraud Round Four

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

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

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

Arch Pump and Dump

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

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

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

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

Avtar Dillon Land / Land Documents

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ranjit Singh Cheema

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

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

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

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

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

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

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

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

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

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

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

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

What’s not in the Complaint?

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

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

Wait Russia? Yes, Russia.

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

A Tiny Village in Switzerland

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

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

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

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

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

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

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

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

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

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

And here we are. 

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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We’re finally elevating open source intelligence

By Christine Duhaime | October 21st, 2021

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

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

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

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

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

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

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

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

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

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

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Canadian charged with being ISIS fighter and for involvement in creation of gruesome beheading terrorist videos

By Christine Duhaime | October 8th, 2021

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.

ISIS used to publish a top 10 list of their gruesome propaganda videos (Source: Screenshot from Twitter, blurred by us, 2014)

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.

Image edited by us but this is the type of social media post that ISIS or its supporters would publish on social media on a consistent basis, in English (Source: Screenshot from Twitter, 2014-2015).

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.

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The Ponzi scheme has Canadian roots – who knew?

By Christine Duhaime | October 4th, 2021

Ponzi scheme is 101 years old

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.[1]

Carlo Ponzi 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.

Mug shot of Ponzi, Montreal, 1908 (Source: Montreal Police)

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 arrested again, 1910 (Source: US Government)

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.

An IRC from Britain (Source: Wikipedia)

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.

Lavish lifestyle

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.

Charles and Rose Ponzi at their 12-room mansion with Ponzi’s Mama visiting from Italy, Boston, 1920 (Source: Blackington, Alton H. Charles Ponzi, standing on the steps with his wife and mother: Copy image, ca. 1920. Alton H. Blackington Collection (PH 061). Special Collections and University Archives, University of Massachusetts Amherst Libraries)

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.

A run on Ponzi’s company, Boston, August 1920 (Source: Blackington, Alton H. Charles Ponzi: Copy image of a crowd thronging in the streets, possibly a run on Ponzi’s company, ca. 1920. Alton H. Blackington Collection (PH 061). Special Collections and University Archives, University of Massachusetts Amherst Libraries)

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.

Ponzi investors camped outside Ponzi’s office hoping to be repaid, Boston, August 3, 1920 (Source: Boston Globe, August 3, 1920)

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.

Ponzi arrested

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.

Ponzi arrested again, Boston, August 13, 1920 (Source: US Government)

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.

Bernard Madoff, 2009 (Source: US Government)

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.

Slick investor video for Mavro ICO (Source: YouTube)

[1] 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.

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SEC files complaint against several Vancouver individuals for allegedly orchestrating US$1 billion in fraudulent sales of microcap stock

By Christine Duhaime | September 21st, 2021

Foreign actors attacking US capital markets

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.

This case is also important because of the June 3, 2021,”Memorandum on Establishing the Fight Against Corruption as a Core US National Security Interest” issued by US President Biden, pursuant to which he stated, inter alia, that professional service providers enable money laundering and support corruption, and threaten the national security of the US, threaten democracy and harm the rule of law. Among the resultant harms he listed, was market distortion.

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.

EMH Share History (Source: PitchBook)

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 Curaçao because Sharp believed that Curaçao 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 Curaçao.

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.

Vancouver headquartered Evolution Blockchain – online gambling money services business with Bitcoin (Source: Evolution Blockchain Group Inc.)

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.

The “Drive Coin” ICO (Source: Evolution Blockchain Group Inc.).

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.

(Source: YouTube Channel of 60 Minutes Australia)

And then watch this part below from 14:54 to 15:40.

(Source: YouTube Channel of 60 Minutes Australia)

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.

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Get some monkeys and other stock promotion tactics in Vancouver

By Christine Duhaime | August 11th, 2021

In 1988, Madam Justice Southin, as she then was, was judging a massive pump and dump case involving microcap issuers that was orchestrated in Vancouver, United Services Funds (Trustee of) v. Lazzell [1988] B.C.J. No. 743, 28 B.C.L.R. (2d) 26.

Although 33 years old, the case should be required reading for capital markets participants for an understanding of the unique typologies of the architecture of pump and dump schemes carried out in British Columbia.

Some issuers in British Columbia have no interest in getting a business going

In the reasons for decision, Madam Justice Southin describes British Columbia promoters as follows, writing (paraphrased):

‘There is a world of difference between the practice of persons promoting a company in which they invest their own money and which they truly intend to make into a successful business and the practice of persons promoting stock as it appears to be carried on by some people in British Columbia. Some promoters have no interest in getting a business going. Their only interest is running up the price of the stock and unloading it on others.’

And so there you have it.

In 1988 and continuing to today, in Vancouver, the game may not always be about running a successful business in the capital markets for some people – it’s about earning revenues from pumping stocks and dumping them on innocent investors.

In this case, Madam Justice Southin quoted a song about the Vancouver capital markets called “Howe Street” that she appears to have heard in a Vancouver theatre about an investor who invested on a tip from a Vancouver stock promoter and got “screwed” when the promoter skipped town.

You may be wondering how they do it – how have they done it for decades?

9 not-so-easy steps to perpetrate securities fraud

Madam Justice Southin describes in the reasons for decision of the case, how such frauds on the market are perpetrated in nine not-so-easy steps:

  1. Control persons operate behind the scenes who call the shots – they never appear on the documents for securities law disclosure purposes so that a securities regulator doesn’t necessarily know that they are involved;
  2. Using beneficial ownership structures and aliases, the control persons obtain control of the issued and outstanding shares;
  3. Appoint what Madam Justice Southin termed a “tame board of directors”, whom she called “monkeys”;
  4. Issue press releases and periodic required disclosure documentation to give the impression of corporate success as well as file material information (or as Madam Justice noted, not file material information that ought to be filed);
  5. Line up a brokerage house “related in spirit to the monkeys”, she wrote, to feed stock through, without questions being asked;
  6. Use a jurisdiction with an under-funded agency with oversight over brokers that lacks resources to detect unusual dealings on the market;
  7. Use Toronto secret undisclosed powerful promoters in the mix whose names never appear in print, who handle or cause to be handled, all of the administrative work for a group of microcap issuers such promoters are promoting;
  8. For some of the issuers, line up mining claims on certain properties which she noted, as is usual with such companies, won’t amount to anything; and
  9. The control persons, as undisclosed insiders, pay to have the stock promoted and cash out when it is high, never filing as insiders.

Liability on other directors of issuers for hidden insiders

In United Services Funds, the defendants were found liable for, among other things, acting as undisclosed insiders. Madam Justice Southin noted that under the Securities Act of British Columbia, the “law considers that investors have a right to know who has control and who is an insider…which are material matters.”

She went on to discuss the liability of all directors of issuers in British Columbia who acquiesce in respect of such conduct.

She held that while not every director of every issuer in British Columbia who knows that the material provisions of the Securities Act are being breached by the issuer and/or another person (in this case, a hidden person ostensibly unconnected to the issuer), are themselves guilty of an offense, if their silence in respect of statutory breaches is an act of assistance or their silence in respect of the stock price shooting up for no legit reason tied to a breach of the Criminal Code of Canada is of assistance, such directors may be liable for losses in pump and dump schemes.

In the United Services Funds case, the directors were indeed held liable for losses suffered by investors by the wrongful conduct of the hidden undisclosed insiders and control persons. Their silence was a breach of their duties as directors under the corporate legislation and their silence assisted wrongful conduct to continue.

In essence, where she got to as a matter of the law of acquiescence, was that a breach of corporate law by the on-paper directors led to the not-on-paper hidden control persons being able to commit securities law offenses and enabled Criminal Code violations, and ergo, those on-paper directors were liable for the conduct of the not-on-paper hidden control persons.

Dusting off key 33-year-old case

While United Services Funds remains the law in British Columbia in respect of the liability in the capital markets of directors of microcap issuers who acquiesce or remain silent in the face of market manipulation and hidden control persons, the case seems to have remained buried in the law books.

It might be a good time to dust it off and use it because this is one of the most important cases in securities fraud litigation in Canada.

The case is valuable not just in respect of understanding the unique typologies of the architecture of pump and dump schemes carried out in British Columbia to this day, but also for acquiescence law applied to hold directors of issuers in British Columbia accountable to investors who suffer losses tied to material breaches of the Securities Act, who invest in microcap companies believing that they are investing in a viable enterprise.

Be a real director or be a monkey and get ready to pay

If there is a take-away from this case, it may well be that the message from the Supreme Court of British Columbia is that a person can be a director of an issuer and speak up for compliance with the law when it comes to insiders and hidden control persons, or such a person can be a monkey and get ready to pay investors some serious coin for their losses if things go wrong.

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Alberta Securities Commission decision to permanently ban two “scoundrels” who were the hidden operating minds of an issuer, shows the anatomy of modern pump and dump schemes

By Christine Duhaime | June 6th, 2021

Two months ago, the Alberta Securities Commission (“ASC“) issued an order permanently banning two individuals it called “scoundrels” from the capital markets permanently, together with an issuer that operated a pump and dump scheme.

The individuals are Cem Can (“Can“), a Turkish foreign national, and Charles Michael Miller. The issuer is Bluforest Inc. (“Bluforest” or the “issuer“). The order flows from an ASC decision rendered in August 2020, here. Bluforest’s shares were listed on the OTC Markets in the US, and it was a reporting issuer in Alberta pursuant to 51-105.

The decision is an interesting example of the preparatory nature of securities fraud and the extent to which such activities are organized and transnational.

To illustrate, we created a data set of the legal and natural persons involved in Bluforest Inc. and subsequently converted the data to a geo network, below. It provides a visual representation of the transnational nature of the case.

We created a network map of the geographical range of Bluforest Inc. actors – it shows the transnational nature of this market manipulation scheme.

The ASC decision covers the period of time from late 2010 to November 2013, and is closely related to a superseding indictment of numerous Canadians in the US for money laundering and securities fraud as part of a FATCA case.

Superseding indictments in the US

That superseding indictment was filed in the EDNY in July 2015, charging Cem Can and several Canadians from British Columbia – Gregg Mulholland, Philip Kueber, Paula Psyllakis and Brian De Wit – as well as an American Robert Bandfield, and two natives of the Bahamas, Rohn Knowles and Kelvin Leach, with various criminal offences, including securities fraud and some for money laundering.

The superseding indictment alleged that Mulholland, Can, Bandfield, Kueber, Psyllakis, De Wit and Godfrey, among others, created shell companies and opened numerous bank accounts which were used to move over US$500 million in proceeds of crime. Mulholland was alleged to have fraudulently manipulated the shares of more than 40 issuers and moved US$300 million in proceeds of crime into accounts he controlled.

Although many of the indicted were from British Columbia, they were situated in places like Belize, Nevis and Panama. The US government alleged that they created numerous shells with nominee directors and officers to conceal the legal ownership of the shells, acquired controlling interests in shares of pubcos, hired promoters to pump the share prices artificially, and exited when the share prices were high. The defendants owned, operated or worked at companies, including Legacy Global Markets S.A., Unicorn International Securities LLC, and IPC Corporate Services LLC, which were the vehicles allegedly used to perpetrate the fraud.

An undercover agent met with Can and others in the tax havens and was told, among other things, by Can that he knew a way to secretly pay “consultants” in stock manipulation schemes. The indictment explains how Mulholland allegedly made US$21 million in proceeds manipulating the trading of one issuer.

Several of the defendants were arrested. Mulholland was arrested when his flight from Vancouver landed in Phoenix, Arizona. He and Bandfield proceeded through the criminal trial process together and joined each other’s motions, ultimately both agreeing to plead guilty and go through sentencing and forfeiture together.

Mulholland pled guilty to money laundering and is serving a 12-year sentence of incarceration at a medium security prison in California, followed by a three year term of supervised release with special conditions. He asked to enter a prison-run drug abuse program while incarcerated. As part of a deal for a lesser sentence, he pled guilty and agreed to forfeit assets from the proceeds of his criminal activities, including forfeiting a private jet, homes in West Vancouver, California and Whistler and funds and securities held in bank accounts and brokerage firms in several tax havens.

Bandfield also pled guilty, served his sentence and is now released.

Kueber pled guilty and appears not to have entered the federal prison system which may mean he was sentenced to time served in remand.

De Wit and Psyllakis appear to have remained in British Columbia. It is not known whether the US government has an arrest warrant out for either of them that would be acted upon if they entered US air or land space, or if the US government has commenced extradition proceedings, or abandoned the case against them.

Cem Can allegedly in Istanbul (Source: Twitter)

Can returned to Turkey. He may be in Istanbul or Antalya. According to an old news report which relied upon statements appearing in an Alberta Court judgment, he allegedly had ties (could be merely tenuous ties) to organized crime (the Calgary Hells specifically) in connection with an earlier capital markets deal gone sour that involved organized crime.

It is not known what happened to the other indicted individuals or entities.

Bluforest Inc.

Against that backdrop, the ASC looked into Bluforest, which involved some of the same individuals and entities, including Legacy Global Markets S.A., Unicorn International Securities LLC, and IPC Corporate Services LLC, Can, Godfrey, Bandfield and De Wit.

The president and CEO of Bluforest was Charles Miller but Can actually directed the affairs of the issuer. The SEC ultimately revoked its listing on the OTC Markets for failures to file.

The business activities of Bluforest appear to have been an illusion that existed on paper only. Bluforest alleged in one paid promotion to investors that it owned 135,000 hectares of forest in Ecuador called El Juval worth US$695 million and not only that, allegedly, it had carbon offset credits from that land equal to the same amount, US$695 million.

In another paid promotional campaign, it alleged to have US$700 million in assets and US$698,875,000 in property for developing carbon assets. However, at that time it only had $43 in the bank. And only $17,000 in actual assets. One of the material issues with respect to the issuer was how this happened when the issuer had an independent auditor responsible for the accuracy of its financial disclosure.

Can purchased the shares of Bluforest, and through nominees, maintained control of, and acted as its secret operating mind. In order to do that, he caused to be issued, numerous shares to various corporate entities in which he controlled. Two of the material entities were Mainland Investments Ltd. and North American Investments Inc.

He used a number of the same nominees including Branislav Jovanovic and Talal Fouani, who acted for some time upon his directions. The issuer operated effectively as a one-man show by Can, who exclusively called all the shots even though on paper, he had no role with the issuer in the corporate sense.

In respect of payments from the issuer from funds raised, the ASC found that substantial sums of money were directed by Can to be sent to a select group that included his company, Mainland Investments Ltd., and other entities he controlled, as well as to lawyers he instructed, including Faiyaz Dean, Scott Lawler, Norman Anderson and Diane Dalmy, and to various stock promoters.

Analyzing the case from a data perspective

We created a first layer network analysis of the Bluforest actors, shown below. The data shows a number of things:

  • Legend:
    • The large dark central blue node is Bluforest Inc.
    • The red node is Cem Can.
    • The orange nodes are a type of service provider.
    • The light blue nodes are others, such as known shareholders, directors, officers, alleged debt holders, promoters, etc.
  • Interpretation of data:
    • The dandelion shape on left side depicts a normal functioning issuer relationship between the issuer and shareholders; the issuer and service providers; the issuer and directors / officers.
    • The right side of the dandelion breaks off and shows a clear disruption – a disfunction – in the issuer. The affairs of the issuer are blown out and form a tangled web.
    • You can see that the disfunction is tied to the red node, a few orange nodes; and several light blue nodes.
First layer network analysis of Bluforest Inc. shows that the normal dandelion shape of a corporation is disrupted by activity concentrated around several key nodes.

In the image below, we took the same data set and plotted it along one axis and it becomes more clear that information flows in respect of the issuer’s affairs went through only a few people. In a normal functioning issuer, the officers are the one source of all activities in the capital markets.

The plotting of the data along one axis helps to show which
persons or entities exercised actual control over the issuer.

Alleged debt for shares

One of the most interesting aspects that the ASC decision focused on was the use of alleged debt settlement agreements to issue free-trading shares for alleged consulting services. In one instance, the issuer took an alleged debt of US$60,000 allegedly owed to Can’s company, North American Investments Inc., and re-paid the lenders consideration of $200 million to settle the debt, paid in shares of the issuer.

In order to ensure the shares were free-trading and avoid the hold period, a lawyer named Scott Lawler issued a closing opinion to the transfer agent to remove the restrictions.

The ASC found that the explanations given as to how US$60,000 became $200 million were “nonsensical”.

This is what Bluforest Inc. looks like when a second layer of data is added.

The ASC staff believed that the invoice underlying the alleged US$60,000 debt was fake, which the ACS panel took as meaning that no actual services were provided. In other words, $200 million in shares were obtained for no consideration.

Subsequently, the issuer completed a second series of debt settlement arrangements where shares were issued to settle alleged debts. In the second instance, there was an alleged debt of $90,000 and 100 million shares were issued to the lenders to pay out that debt. The ASC calculated that the transfer meant that the issuer, with alleged net assets of $695 million, transferred 97% of that value for $900,000.

A lawyer named Faiyez Dean wrote the opinion letter in respect of removing restrictive legends, enabling the 25 million shares to be issued to entities controlled by Can and Charles Miller as free-trading. The ASC found that the issuer deliberately mischaracterized the shares as a proposed resale of shares earlier acquired from Bluforest in order to justify the removal of restrictions, and held that the deals were intended to deprive the shareholders of their economic interest in the issuer.

The ASC found the share issuances for alleged debt settlement deals were in furtherance of a pump and dump scheme, and together with the false opinions, diluted other shareholders and concentrated control secretly with Can and Charles Miller.

Ecuador deals

The ASC also found that there were issues with the alleged forestry deals announced by the issuer.

When Bluforest announced that it had entered into a series of forestry-related agreements in Ecuador, it represented that they were arms length in the disclosure record, when in fact they were non-arms length. Despite the forestry-related deals that were touted as being so valuable, the ASC found that they were not pursued and the agreements and rights thereunder appear to have expired over time, if they existed at all. Those deals were what was supporting the issuer’s valuation.

Paid promoters promoted

The ASC found that Can hired, indirectly, a number of promotional companies to aggressively promote the issuer across various mediums. Over time, the share price went from $0.25 to $6.19, and was artificially increased as a result of paid promotional activities. Eric Cusimano and Jamie Boye were among the paid promoters that Can hired using his own companies, to promote the issuer’s stock.

Cusimano and Boye were indicted in the US in connection with paid promotional activities in the capital markets and pled guilty in that case.

At the end of the day, because Bluforest was just a business that looked good on paper to investors while there was nothing behind the curtain when it was pulled back to substantiate its share price, or valuation, it crumbled apart.

The ASC found that Can and Charles Miller were centrally involved in virtually all aspects of the pump and dump scheme and played significant roles in the secret control of the issuer and manipulation of its shares in the capital markets. IPC Corporate Services LLC, Unicorn International Securities LLC, and Legacy Global Markets S.A., were some of the offshore vehicles used by Can and others to receive shares of Bluforest and the proceeds from the sales of shares.

The ASC called the Bluforest pump and dump scheme “a deplorable form of securities fraud.”

Typologies of pump and dumps

This decision is also useful from the perspective of typologies that can be gleaned that raise red flags for potential capital markets fraudulent activities.

The alleged past ties of Cem Can to organized crime wasn’t explored but perhaps should not be discounted as a risk factor of the prospect of organized crime infiltration in the life cycle of some issuers.

Two of the largest securities fraud cases occurred in Canada and involved Mafia figures.  

In the first, Russian crime boss Semion Mogilevich caused the pumping of the stock of a Canadian issuer he controlled, YBM Magnex, which lost investors over US$1 billion.  In the second, deceased Canadian Costa Nostra leader Vito Rizzuto and one of his associates, allegedly came to control a series of Canadian stock promotion newsletters owned by Canadian Eric Van Nguyen, which allegedly were material in the loss to investors of an estimated US$3 billion in connection with several issuers that were pump and dump schemes orchestrated from Canada.

Mogilevitch and Van Nguyen remain wanted US fugitives. Mogilevitch is in Russia. Van Nguyen allegedly went from Montreal to Toronto. Some experienced securities investigators in the private sector believe, based on their investigations, that Van Nguyen is behind several recent paid promotions of several issuers in Canada, including several being pumped to investors right now in real time.

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SEC files complaint against BitConnect promoters in the US

By Christine Duhaime | May 31st, 2021

The Securities and Exchange Commission (“SEC“) filed a civil complaint against 5 American promoters of the Blockchain protocol known as BitConnect this week. Investors from around the world lost over US$2 billion with BitConnect. The SEC alleges that the defendants conducted an unregistered offering and sale of securities in connection with its native coin and lending program.

BitConnect is iconic with GenZs literally the world over – not in a good way – rather because of the memes created of a promoter allegedly named Carlos Matos, who was the public face of BitConnect.

The original popular BitConnect video (Source: YouTube).

BitConnect is similar to OneCoin – same formula using some elements of MLM. Like OneCoin, the BitConnect folks issued an initial coin offering (“ICO“), and like OneCoin, they alleged that there was a Blockchain protocol behind it. The ICO was called the BitConnect Coin (“BCC“). You can read about OneCoin here.

The SEC says that BitConnect also created a lending platform (in much the same way as many DeFi platforms do now), and promised holders of Bitcoin and other digital currencies 40% monthly interest for depositing their holdings for lending purposes. BitConnect was not licensed or authorized anywhere to provide online lending services to consumers, or be deposit-taking. Those who sent fiat or Bitcoin to BitConnect for ostensible lending, lost their money.

Eventually, in early 2018, the State of Texas issued a cease and desist order to BitConnect. One of the paid promoters, Trevon Brown, posted on social media, a message to the world not to let a US government shut them down. When the State of North Carolina issued its own cease and desist order, BitConnect sent one of its promoters 200 Bitcoin as a retainer for a securities lawyer (now equal to US$7.4 million). In the following weeks, BitConnect shut down operations.

The SEC says that the ICO promoters earned significant commission from touting investing in BCC or using the lending platform, as follows: Joshua Jeppesen earned US$2.6 million; Craig Grant earned US$1.3 million; Michael Noble earned US$730,000; Ryan Maasen earned US$475,000; and Trevon Brown earned US$480,000.

A BitConnect meme music video (from 1:37 to 2:22) (Source: YouTube)

The founder of BitConnect is an Indian foreign national, whom the SEC declined to name.

The SEC is seeking various forms of relief against the defendants including an order permanently enjoining the defendants from violating US federal securities law and the payment of penalties.

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SEC files enforcement action over alleged disclosure misreps against British Columbia issuer and its Vancouver major shareholder

By Christine Duhaime | May 30th, 2021

Complaint filed by the SEC

The Securities and Exchange Commission (“SEC“) filed a complaint in the Southern District of New York this week against RenovaCare, Inc. (the “Company“) and Harmel Rayat (“Rayat“) alleging that material misrepresentations were made in the disclosure material filed by the Company, and that the Company used a secret paid promoter to pump its stock and lied about it.

2016 skin gun video (Source: YouTube)

RenovaCare is an issuer in British Columbia but is listed in the US on the OTC Markets. Rayat is a Canadian who resides in Vancouver, and is one of the original shareholders of the Company, its director and its majority shareholder. There are two previous SEC enforcement actions involving Rayat and others, one in 2000, (here) and the other in 2003 (here); one involved §17(b) violations, which is part of what is alleged in the SEC’s latest complaint.

The SEC is not specifically alleging a pump and dump occurred with RenovaCare per se. Rather, the SEC is alleging that a pump occurred in conjunction with other securities violations but that a brokerage firm stepped into prevent a dump involving one or more of the key actors.

Since the filing of the SEC complaint, the stock price reacted on the OTC Markets.

How securities law works

Skip this part if you know that caveat emptor does not apply in modern securities law, and the capital markets.

By way of background, the Securities Act and the Securities Exchange Act were enacted following the 1929 stock market crash and the Great Depression that followed. The securities acts safe-guard the capital markets and investors by requiring a system of mandatory public disclosures in place of caveat emptor.

The disclosure-based regulation that, as a fundamental principle replaced caveat emptor, is based on trust – it commences from the proposition that in exchange for the privilege of being able to list a stock to the public, and take money from investors who become shareholders, all the actors in the system will be honest and provide the requisite fulsome disclosure. It presumes no information asymmetry from issuers or their advisors. It also assumes that so long as investors have fair access to accurate fulsome material information, they can intelligently assess the risks of a stock and make an informed decision to buy or sell. Disclosure, therefore, is required episodically whenever securities are offered to the public, periodically thereafter, and whenever material events occur.

The private sector actors who are entrusted in respect of the capital markets are those who earn fees and other compensation from capital markets activities and control the content and distribution of disclosure and include lawyers who draft all of the securities disclosure material; auditors who pass on the financial condition of issuers for capital markets participants; an issuer’s directors and officers; significant shareholders; brokers; listing exchanges; underwriters; and securities trust agencies (the “Capital Markets Trustees“).

From time to time, Capital Markets Trustees can and do breach the public trust, in a number of ways including by participating in the drafting of documents containing untrue information, negligently or deliberately. Investors who rely upon such information are lured into making investments without informed consent and with asymmetric information which may be untruthful. All of the Capital Markets Trustees enter the capital markets understanding that they assume responsibilities for their part of a larger puzzle to protect the integrity of the capital markets through, inter alia, adequate, truthful and timely disclosures.

With respect to promoters, it is lawful to use stock promoters and to pay them but it is unlawful to have secret paid promoters for the reasons articulated above.

Medical claims about a skin gun

RenovaCare’s three founders, according to its Sedar filings, appear to have been Kundan Rayat, Jasbinder Chohon and Harmel Rayat.

For decades it was and remains, a development stage company with no revenues. A few years ago, it began to represent that it was developing a medical gun called a skin gun, for treating skin burns.

In mid-2017, the SEC says that the Company prepared and disseminated false information. For example, in its Form 8-K, news releases and paid promotional content, the SEC says that the Company stated that it had filed with the FDA, a 510(k), and that the FDA could soon approve its skin gun, which was untrue. As at that date, the Company had not filed a 510(k) with the FDA.

A secret paid promoter

The SEC says that the Company used a secret paid promoter called StreetAuthority, apparently owned by a longtime friend of Rayat in Austin, Texas, whom the SEC did not name.

The latter published a so-called independent report in which it described a case study involving the Company’s skin gun where a burn victim with what looks like severe burns on his or her arm, was promoted as having been cured in three days using the skin gun.

The promoter published before and after pictures in the report of the burn victim’s alleged cure by the skin gun in three days. The after picture of the burn victim show his or her burn was healed and the skin returned to normal after those three days. According to the NHS, a mild burn heals in 14 days.

Burn victim before and after photos (Source: SEC complaint)

The SEC says that the victim’s skin remained discoloured for over a year. Moreover, the SEC says that the photos in the before and after series were, for lack of a better word, disingenuous in that the before photo was not the arm of the burn victim and the after photo was actually taken five years after the victim sustained a serious burn, not three days after.

Alleged false statements

The SEC alleges that part of the disclosure record of the Company during the relevant period, contained materially false statements or was misleading in the way it was drafted and presented in the disclosure documentation, and that the Company engaged in acts designed to defraud investors.

With respect to Rayat, the SEC alleges that he aided and abetted the commission of the unlawful securities law conduct.

Among other things, the SEC alleges that Rayat devised a deceptive payment scheme to hide that StreetAuthority was a paid promoter. StreetAuthority was required to disclose its payments from the Company but failed to do so.

The SEC says that StreetAuthority touted the Company highly, claiming that the burn gun was a revolutionary wound-healing device, encouraging investors to buy the Company’s stock, promising investors they could hold it for 10, 20x, even 40x gains.

The SEC says that the Company executives were questioned by the OTC Markets about paid promotional activities and lied, denying having used a paid promoter.

A reporter here reported that in a recent annual financial statement, in one fiscal year, the Company disclosed that it spent $309,503 on R&D, whereas its executives were paid $453,488 during the same period.

Over ten years earlier, in 2007, David Bains wrote (here), about Rayat and trying to get his foot in the door of his opulent offices in Vancouver.

It didn’t go so well – they asked him to remove his foot from their opulence.

The touting biz

A number of securities law academics looked at the role of promoters (also called touters) across Germany in cases of pump and dumps that manipulated the market.

Working with two agencies, the researchers were able to obtain data sets of issuers, Capital Markets Trustees and victims of pump and dump schemes over a set period of time in Germany. The findings with respect to Canadian promoters (touters) in the study are interesting – the data showed that although Canada has 1/10th the population of the US, Canada not only, per capita, breeds more promoters, it breeds more promoters on a pure numerical basis that were active in the relevant time period of the study in the capital markets in Germany.

Another academic study conducted for a mathematics thesis looked at the economics of promotions and promoters. The study found that promoters are raking in US$122,600 per issuer they tout, and earn between US$1,000,000 to US$10,000,000 per year promoting issuers – one earned US$8,000,000 in its first year of business.

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Using complex network analytics to improve litigation and financial crime outcomes

By Christine Duhaime | May 26th, 2021

With access to justice becoming a growing problem in Canada, as more people and companies become unable to afford to litigate, or be litigated against, lawyers and governments are turning to technology to find ways to bring down the costs of litigation and of prosecution. Covid-19 has forced us to accelerate the use of technology in our courts with virtual hearings, and much of the practice of litigation has moved to remote environments.

A network of companies and actors involved
in several M&A deals, shows that decision making is clustered.

Those are not the only changes taking place in respect of litigation and technology. In order to remain competitive and increase client value, litigators are using new technologies, including legal analytics, which is growing in popularity in major litigation centres.

Analytics capabilities and tools are available in an increasing variety for various aspects of the litigation process. Technology that maps out decision trees for clients is one such example of a solution provided by a magic circle firm. Its legal tech enables clients to tap into firm databases where simple predictive AI assesses the viability of commencing litigation before deciding to proceed, helping to make litigation more cost effective and providing a broader service to clients.

Network science

Another powerful analytics tool is the network analysis branch of network science.

Although used historically and primarily by law enforcement and the intel community for mapping and dismantling terrorist and organized crime networks, network analysis technology is an ideal tool for almost any aspect of the legal process.

Network analysis identifies key players, and gatekeepers, highlights subgroups within a network and identifies individuals who call the shots. It can be used to prove or disprove a set of facts during an investigation or a trial, and as a tool for deeper analysis. Because it can be deployed to prove or disprove a set of facts, its benefit applies to defense or plaintiff counsel.

It can also be a powerful litigation analysis tool particularly for M&A deals where the network and the activities are transnational and involve hundreds of actors. Network analysis also reveals previously unobserved associations of actors within a network and identifies gaps to prioritize investigation efforts.

Centrality of actors

Network analysis uses concepts of centrality (i.e., degree, closeness, betweenness and eigenvector), brokers and density. These are mathematical determinations used to measure things like network typology, degree centrality and influence of certain actors over outcomes.

But it does more than that. The data can be used to calculate links, the strength of relationships, weakness in organizational infrastructure, money movement routes, and much more.

For example, the evidence in connection with a group of individuals, companies, and firms engaged in M&A deals involving suspected bad conduct might involve 500 different nodes and relationships by the time an investigation has concluded. Among the maze of 500 nodes and relationships, the litigator or enforcement agency needs to find out who the key actors are.

All networks have certain key actors. They control something of value – the documents, bank accounts, financings, connections, information or the process – which gives them power in the network to drive an outcome.

If the actors in the network have a criminal or fraudulent intent, the key actors act in furtherance of that goal. Sometimes only a few actors have a criminal or fraudulent intent in a network and network analysis reveals that as well because it can reveal breakages from the network by non-bad actors who break away from the network and disassociate. Bad actors only use people they trust in the commission of bad acts and a break-away actor demonstrates something about the functioning and activities of the network for further inquiry.

In financial crime or fraud cases, key actors tend to be the ones who financially profit the most from network activities. Using betweenness in network science against the network data, can reveal deeper and more accurate information about aspects of a case that lead to financial benefits by tracking linkages from actors to financial intermediaries.

Data preparation, inputs

Two legal persons that we looked at presented with typologies of being potentially problematic. A network analysis showed that they had connections in 8 countries but interestingly but only one professional gatekeeper used by both. A concentration of control in one gatekeeper is an important reveal from network analysis.

Mapping out their combined network took a long time because, in this case, analysts had to research and identify, as well as verify, the accuracy of over 314 legal and natural persons and plot the connections between them.

Ultimately, we created the network below (which is anonymized for this purpose).

The network of 314 people, entitles and firms tied to
two legal persons engaged in problematic activities.

In the network above, the two legal persons are the two blue nodes.

The red nodes represent the key group that directed the activities of both companies.

The one purple node in the centre between the two legal persons represents a professional gatekeeper which the key red node group appears to have used.

Purple node is the key node
connected to other key nodes.

Identity of co-offenders

The yellow nodes in the network are what can be used for betweenness centrality; applying that analysis led to one central figure through which many of the activities flowed. Interestingly, it also led to a third legal person with co-offenders, demonstrating that network analysis has an added benefit – one case of network analysis can lead to revealing co-offenders which can lead to identifying other cases in which the natural persons are involved.

In the non-anonymized version of the network, all the nodes are identified and labeled and ergo, an analyst or the ultimate client knows at a glance who is connected to whom and how the network functions.

Using network analysis as a litigation or investigation tool requires data accuracy and standardization of raw data to conduct legal and criminal analysis and yield a network result that can be relied upon. Standardization also ensures that when analysts exchange analytical products for a case, which happens from investigator to regulator, law firm or enforcement agency, the data has the same meaning and is interoperable.

Once verified data sets are entered consistent with criminal analysis standards for network science, and parties use network analysis tools to identify the structure and control of a network engaged in alleged wrongful conduct, law enforcement, a regulatory body or a litigant can use the intel to disrupt the network by focusing on the key decision-makers and thereby, prevent problematic actors from future harm.

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