The Penny Stock Chronicles
If your goal is to launder money through a brokerage account, paper losses are worth serious money. Buying imaginary shares of a stock guaranteed to lose value is an awesome way to do that. You just need someone to set it up.
Say you’re a Swiss bank and you want to launder some money for high-net-worth clients.
Here’s one way: Start by placing large quantities of the funds into a brokerage account at the bank under the name of a shell corporation.
Then, conduct multiple financial transactions with the funds, confusing the true source of the money. Once the transactions “wash” the money, it can be spent out of the brokerage account as simply as writing a check or using a credit card.
Photo: Serdar Yagci/Getty Images
UBS, the giant Swiss bank that self-appointed investigator Chris DiIorio suspected was part of the kind of penny-stock manipulation that wiped out his penny-stock investment in 2006, has a checkered history with these types of activities.
The bank entered into a deferred prosecution agreement with the Justice Department over cross-border activities for its clients in February 2009, paying a $780 million fine. UBS admitted that it established secret accounts for roughly 17,000 wealthy American clients “in the name of offshore companies, allowing United States taxpayers to evade reporting requirements and trade in securities as well as other financial transactions (including … using credit or debit cards linked to the offshore company accounts).”
Department of Justice press release.
Source: U.S. Department of Justice.
DiIorio believes UBS never stopped. Years of digging through public records and connecting dots led him to that conclusion.
But this is also where DiIorio’s accusations get considerably harder to substantiate, and his theories start to multiply, sometimes even contradicting one another.
His suppositions up to this point come with swaths of data that bolster them. From this point onward, DiIorio’s main argument is the absence of alternate explanations.
Here, however, is the way DiIorio thinks it worked — and continues to work: UBS clients use their brokerage accounts to invest in penny stocks issued by companies that appear to conduct no business activity and have no revenue potential — all they do is issue billions of shares of stock. These stocks, he figures, are the same ones Knight Capital is naked shorting: selling shares it doesn’t really have.
UBS’s clients, according to DiIorio, purchase the penny stocks because they know they will drop in price. That way, they can use capital losses to offset any capital gains in the brokerage account, “resulting in a reduction in their reported income-tax liability and the underpayment of millions in taxes,” according to DiIorio’s 2013 complaint to the SEC.
That happens at the same time that the money placed in the brokerage account is being commingled with the various trades, he argues — effectively laundering it.
Photo: Artiom Muhaciov/Getty Images
In fact, illicit financial flows through brokerage accounts are rarely scrutinized at all. “In federal law enforcement, we have skilled people, but we have a whole lot of people in there, they don’t get the securities markets,” said Cassara, the former Treasury agent. “They don’t get trade-based money laundering. The bad guys know this so they pile on the layering.”
He cited statistics from Raymond Baker, president of the research group Global Financial Integrity, that indicate money-laundering enforcement fails 99.9 percent of the time. “I use his line, total failure is only a [decimal] point away.”
DiIorio argues that client losses from the drops in value of the penny stocks are a small price to pay for the layering activity and tax avoidance. That’s if they’re even losses at all. Because if the stock shares never really existed, maybe the payments never happened either.
In fact, DiIorio also alleges that many of the transactions go through outside hedge funds, which convert promissory notes from the penny stock companies into equity, in private stock offerings. (The CEO of E Mobile tried to sell DiIorio a private placement back in 2006, you may recall.)
Normally, a company issues a promissory note in return for cash — the note representing a promise to pay it back later, plus interest. But some notes, called convertible promissory notes, are also convertible to stock.
DiIorio claims that in some cases, penny stock issuing companies were simply creating convertible promissory notes as a way of issuing more stock. The funds from these investments never appeared on the balance sheet of the companies — suggesting that no money changed hands for the purchase of the note, which was then converted to stock. That would make the losses merely on-paper losses: a classic tax evasion play.
One example DiIorio provides comes from FreeSeas, the shipping company referenced earlier (see The Penny Stock Chronicles, Part 3). It engaged in four convertible promissory note sales with stated values of between $500,000 and $600,000 in five months in 2015, with Alderbrook Ship Finance Ltd. (April), Casern Holdings Ltd. (June), the AMVS Value Fund (July), and Casern again (September). Alderbrook Ship Finance didn’t exist until two days before the sale; AMVS had a lifespan of four days before it purchased FreeSeas’s promissory note. The two companies share the same Toronto address and the same director, Justine Kerrivan of Ber Tov Capital. And despite all the cash flow, FreeSeas only had $20,000 cash on hand at the end of 2015, per its annual SEC filing.
“FreeSeas is a structured tax evasion/money laundering scam being perpetrated on the investing public as we speak,” DiIorio wrote in an email to SEC officials last September.
A contact for Casern, a company incorporated in the British Virgin Islands (a location notorious for shell corporations), did not respond to a request for comment. Ber Tov Capital, the company that apparently set up Alderbrook and AMVS, also declined to comment.
DiIorio jumps back and forth in his claims. Sometimes he says there’s no money changing hands, just a bunch of paper losses. Sometimes he says there are some losses, but less than the tax liability avoided. And sometimes he says the losses are real, but worth the cost in exchange for laundering large sums of money. To DiIorio, it’s all variations on the same basic scheme: using sham companies and stock manipulation to generate losses on purpose, tailored to clients’ individual needs.
The Intercept asked UBS about all of these allegations. The only response, from Director of Media Relations Peter Stack, came in a single line: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Collateral Damage
DiIorio’s initial investment in 2006 — where the on-paper value dropped from $1.3 million to next to nothing in a matter of months — was a fluke, he now believes. Sure, naked shorting rips off investors, but that’s not the true aim. In his view, penny stocks like FreeSeas or NewLead or Colorado Goldfields were structured tax evasion vehicles for the benefit of unknown people with money looking to hide their activities.
He was unlucky enough to be collateral damage.
The theory has an internal logic to it but is based on a fair bit of speculation. While trading activity can be used to launder money, some experts argue there are far simpler ways to do so instead of actually losing a share of the money to throw regulators off the trail.
For example, Jack Blum, a former U.S. Senate investigator and white-collar crime expert, suggests that launderers can more easily wire money through international markets, use bogus tax shelters, or even lend themselves money to buy property while falsifying the records of the transfer. (“Each case requires a small book to explain,” he said.)
And none of those tactics involves actually losing money intentionally. Even in his complaint to the SEC, DiIorio acknowledged that he was “alleging a massive and nefarious conspiracy based, at least in part, on circumstantial evidence.” And in a separate complaint, he admitted that he does not have the taxpayer records that would be critical to pinpointing the scheme.
But John Cassara found the theory relatively plausible. “People do what they know,” he said. “If you’re talking about financiers that work in a world I can’t relate to, for them it may be, let’s construct this financial instrument, this trade, I’ll work with my guy, a wink and a nod and it’s done.”
Furthermore, many of the facts DiIorio based the alleged conspiracy on checked out. There was an array of penny stocks that kept undergoing reverse splits. Knight and UBS did trade in them. Knight’s balance sheet appeared to expand strangely, including an increase in the “sold not yet purchased” liability. And UBS had a history of helping its clients evade taxes, often through shell corporations.
UBS’s admission and fine in 2009 came only after whistleblower Bradley Birkenfeld, a former UBS banker, divulged the schemes that the bank used to encourage American citizens to dodge their taxes. But Birkenfeld’s information exposed the undeclared bank accounts. “How did the cash get there, and how do they get the cash back?” DiIorio said. “I explained how.”
Bradley Birkenfeld.
Photo: Bloomberg/Getty Images
The SEC wouldn’t answer our questions, either. And through spokesperson Sophie Sohn, Knight also declined to comment for this story.
And then something happened that changed DiIorio’s entire perception of how the securities regulators were dealing with his claims. He went from thinking that the SEC and its counterparts just didn’t understand the sophisticated scheme — to believing they were waving it through.
Part 5
Turning Up Like a Bad Penny
The Penny Stock Chronicles
If your goal is to launder money through a brokerage account, paper losses are worth serious money. Buying imaginary shares of a stock guaranteed to lose value is an awesome way to do that. You just need someone to set it up.
“But this is also where DiIorio’s accusations get considerably harder to substantiate, and his theories start to multiply, sometimes even contradicting one another.”
And as a responsible journalist you decide to run with this story anyways. So, let me get this straight. Of all the less transparent and less risky ways of laundering money, UBS decides use penny stocks traded on the OTC. This makes no sense, but fine. And then Knight does naked short selling to the public because they know that UBS is engaging in money laundering and the firm will fail. That would be preposterous but at least could make logical sense. But, you are saying that UBS was on the other side of the Knight trade. If Knight makes money on a trade that means UBS loses on that trade. That’ snot money laundering, that’s just losing money. To launder money, you need to generate fake losses not real ones.
You should talk to someone who understands these things to get a second opinion before writign articles. It seem Dilario got played. This is a standard pump and dump scheme How someone with trading experience can put a substantial portion of their wealth on a single penny stock is beyond me. I guess this is why these schemes work in the first place. You should do some due diligence, otherwise you are doing a dis-service to your readers.
Ok where to begin. This entire story is just simply preposterous, at least this part. The evidence he presents is that the company that issued $600K in notes took no money for them is that the company had little money left at the end of the year? Really? Let’s see…. say you’re a small company looking to raise money to get your next great deal off of the ground. Say you are able to raise $600K. What do you do with it? You spend it! At the end of the year, you have nothing left. Criminal!!
This man who knows so much, knows nothing. Investing in convertible debentures is not illegal, immoral or even undesirable. You cannot deposit the stock derived from a convertible debenture without PROVING you paid consideration. I invest in convertible debentures. If the company is not registered and in good standing with the SEC, I must wait one year to even consider converting, if it is, six months. I must not exceed 9% of the outstanding shares, if I give a company $600k and they drop to zero in the intervening year, I lose the money, in most circumstances. Now the terms of the debenture might allow for a sliding conversion ratio, the terms of most debentures have floors and ceilings in order to prevent the ratio from getting too low or too high, protecting the shareholders. In no circumstances is 100% of my investment protected and this is debt.
Then, after I start converting, I must get a legal opinion and provide proof of consideration, in the form of wire transfer advices, cancelled checks, or agreements showing that I paid something else of value, say I sell a company to another company. Without this, no stock will be accepted by any broker. Period.
Then, this guy assumes that I will take a loss on.a penny stock to offset other gains? Huh? I invest $1,000,000 in Apple. It goes to $1,200,000. I have a gain of $200,000, but only when I sell. Now I buy $200,000 worth of shitty penny stock XXXX. It goes to $50,000. I just lost $150,000 REAL dollars. This will offset my gain of $200K by $150K, leaving me a taxable gain of $50K which, if I owned the Apple stock more than a year, will offset my taxes by $30K. If I owned it for less than a year, by $60K. This means that investing in XXXX saved me $30-60K! Yeah! Oh but wait, I lost $150K, in order to save $30-60K. Please.
Are there penny stock scammers. Of course. Who are they, for the most part they are the guys who invest in convertible debentures. They put in their cash, with a discount to market. Get a floor so low theyalmost can’t lose money. Wait their year and just spiral the deal to death. They are evil. No question. I could make a list. But in the end, the reason they exist is because the capital makers are so regulated, so overburdened by morons masquerading as regulators and left wing “protectors” of the poor investing public, that actually raising cash without going to these vultures is a practical impossibility, leaving more and more money in the hands of those who can afford to raise it.
I just began raising more money for an innovative medical company, with one drug ready to cure Rheumatoid Arthritis and another almost ready for leukemia. I am doing it “the right way.” Since I’m no longer going into pocket, I have had to spend $150K on legal fees, just to ask accredited investors (those who make $200-300K a year or who have more than $1,000,000 liquid) to invest. Obama signed the JOBS Act (the only action he has taken that is an unfettered good) and even under that, it’s still really, really hard to raise cash in any significant way. This leaves entrepreneurs scrambling to find $ somewhere and many fall victim to death spiral financiers.
Regulations, even when well intentioned, increase the cost of doing business. Sometimes this is necessary, like clean air and clean water. Sometimes it isn’t, like requiring 2,000 hours of cosmetology school in order to braid hair, something they don’t teach in cosmetology school.
In investing, much, most, of the securities acts are reasonable and common sense, but some are not, and the regulations promulgated under the acts are often times extremely unreasonable. However, investing in penny stocks is over regulated, not under regulated. Your broker is required to inform, you, in painstaking detail, and to receive your signature, verifying that you understand, that investing in penny stocks involves a great deal of risk and, that you are highly likely to lose your entire investment. BUYER BEWARE!. This guy had a $100K, he knew the risks, he agreed to a lockup which he did not have to agree to, he lost his ass. Tough titty toe nails.
So you describe how the markets are suppose to work. As a securities compliance officer I look into the ways that people rip off the markets and other investors.
I would love to have full access to the information a due compliance review to all this. It is a good hypothesis. while I have access to everything at my firm, this case will be tough because you need access to so many securities firms, hedge funds and clearing houses. Only the SEC has the means and power.
Side note: I started my career in a boiler room, moved to a discount brokerage firm owned a large market maker similar to Knight. While their went to law school and become a compliance officer working in the less seedy side of the business (which is still very corrupt, but does not compare to where I started). Most compliance officers and regulators have never traded or sold anything and barely understand the nuts and bolts of the business.
I have worked for pink sheeted startups. I have been paid in pink sheeted stock. For a couple of years I lived, not very well, trading the pinks. I was active on all the message boards and read all the filings, if there were any. Followed companies on the daily. This group of schemes make perfect sense.
Here is a perfect example: http://www.businesswire.com/news/home/20060303005268/en/GlobeTel-Update-Closing-Russian-Transaction
Tens if not hundreds of millions of dollars “changed” hands over a few years of this company. This link being the biggest example of manipulation. This was so much more than a pump and dump.
Regardless, the company’s Russian WiMax plans were no more. As The Motley Fool’s Seth Jayson wrote at the time, “I do think it’s possible that GlobeTel was outmaneuvered by the still-mostly-nameless Russian federation. But I won’t be crying too many tears for GlobeTel managers and their $12 million worth of compensation last year – on gross earnings of only $413,729.”
http://www.wi-fiplanet.com/columns/article.php/3630821/GlobeTels-Not-So-Excellent-Russian-Adventure.htm
Investigative journalism with cliffhangers – I love it!
“He went from thinking that the SEC and its counterparts just didn’t understand the sophisticated scheme — to believing they were waving it through.”
Exactly. Keep the stock and housing markets pumped up at all costs to keep the house of cards U.S. economy from collapsing
Good expose but does not explain anything to ordinary people who live in physical reality where you cannot sell Brooklyn bridge without buying it first.
Not on Wall Street and variety of intermingled obfuscated exchanges.
But one cannot understand anything without understanding that everything stands on debt, which for IRS is not money unless forgiven but not money if it is continuously refinanced especially with ZIRP of the FED.
Aside from shenanigans simple investing is a tax avoidance scheme by the fact that most of stock are bought on margin and most of gains are not realized (stock not sold) but borrowed against it as collateral for another loan, again not taxable, defaulting on such a loan causing bank to sell or more commonly not sell but hold on to the stocks [if with potential to grow] to cover paper calculated principle and interests of the loan. banking system perpetuate this illusion for some, cronies and steal money from the gullible rest believing market propaganda of having a chance to make it. In fact if you make it too much you will be arrested by SEC and thrown to jail, as many dreamers are doing time.
Additionally, rich do not own personally anything and hence pay no taxes, all is owned by corporation they run, often established as foundation, and if necessary they may personally lease house, car etc., and pay only taxes on income necessary to cover the lease. And all of it is openly legal, It is real problem though, if you deal with cases of dirty cash laundered by HSBC was bloody cash of Mexican mafia, an act that would put you in prison for life and only resulted in monetary penalty for banksters who got too careless and did not pay up US treasury department.
The penny stock manipulations are mostly for big professional speculators like UBS etc., who want to fleece get-rich quick dilettantes, otherwise there are plenty of alternatives to steal in this Wall Street fantasy land that is nothing but a parasite of the mainstream economy. And what’s worse is that all of this “crime” could be fixed immediately if there was a will of doing so.
I here you. I have 10 NASD licenses and was a internal compliance officer for 10 years. Started in the sales than trading at discount house for a market maker. Most people in the business especially in compliance end regulation don’t understand it at all. It is not that complex, but you have to see it on computer screens to get it. Try explain how to play a complex video game without ever seeing the video game.
Most fraud starts with people doing computer entries and noticing that the system has flaws.
You guys realize UBS had a decent sized market making company at one point, right? Doesn’t it make more sense that their market making business was doing the same things Knight was, for much the same reasons?
These claims are incoherent gobbledeygook, and if the SEC has ignored them, it is most likely for this reason.
I appreciate Dave’s effort on a complex scheme. More extensive than complex really. Don’t want to steal the thunder on part 7. But, some of the comments need to be addressed. This latest 1 particularly. Moving money around through shell llc’s (Panama Papers) is another aspect that needs to be discussed. But, you asked why anyone would want to take a loss in an offshore account. Per part 6, Birkenfeld only gave the DOJ and SEC info on undeclared Swiss Bank accounts. The laundering that goes on before and after that is what I set out to explain. The Panama Papers show 3 of the largest creators of shell llc’s were/are Credit Suisse, UBS, and HSBC. This facilitates the movement of undeclared funds. Linked to Swiss bank accounts. Once in a Swiss bank account, the funds sit until needed to buy that condo in South Beach or Ferrari. You can’t write checks out of a number id Swiss bank account. So, how do you access those funds? If the UBS banker knows the funds are in a Swiss bank account undeclared, not likely to blow ghe whistle when funds are wired to a UBS brokerage account. There, activity is key. Wiring money from a Swiss bank account to a brokerage account then no activity but check writing would likely send up red flags somewhere. But through brokerage activity (gains and losses), there wouldn’t be many red flags. Losses can be custom tailored. And, the IRS never questions losses. Not even in the OTC market. I know this for a fact because I met with 2 IRS ci agents on 4/28 in Denver. I also filed an IRS whistleblower claim. At the heart was the Economic Substance doctrine. Losses are a cost of doing business for tax evaders and money launderers. 10, 15, 20% better than the top tax rate. After brokerage activity, funds can be swept into a US bank account or checks can be written directly from brokerage account. As for the promissory notes creation/assignments/conversions, there really is no legitimate economic rationale for an issuer to consent to a note assignment to a third party. The issuer can negotiate directly with a creditor to convert the note to stock. Just a mechanism to distribute certs. These notes/conversions are used to pay for acquisitions which never accrue to shareholders. NEWLF as an example: a firm that shows up often is Hanover Magna. They supposedly did a $60 million “debt consolidation” in 2013. Part of this consolidation was to “pay” for certain coal assets. NEWLF was sued by a coal trading company called TransAsia. The suit alleges massive fraud. Dave went over reverse splits. Since 2013 when the notes were assigned, the SEC and FINRA approved an aggregate of 1:1,125,000 in reverse splits PRIOR to the last 1:300 in NEWLF. Meaning: if you bought 1,125,000 shares from the Magna note conversion in 2013, you would own 1/300th of a share today. These splits/conversions were approved while the TransAsia suit has been pending. Recently, the TransAsia attorney in the case added bank fraud and money laundering. KCG traded 270 million shares in August. 1 of the other top traders is a firm called Buckman Reid. Recently, NEWLF announced they were seeking buyers for their coal “assets” and wrote down $56 million in assets as held for sale. 1 of these assets is the 5 Mile Mine in KY. A “greenfield” property. No mining. I contacted the KY Div of mines directly. $11 million of the Magna notes were supposed to pay for this property. According to the KY Div of mines, all that was needed to transfer the permit was a 75k reclamation bond. NEWLF never put up the bond. The permit was never transferred to NEWLF.
On CGFIA, the CEO Guyer said the DTCC Chill on his stock was “arbitrary”. After a year of telling the SEC what was going on and them doing nothing, I had a 2 hr cc with Robin Traxler in the FINRA whistleblower office. We discussed my claims and 2 stocks specifically: CGFIA and APCX. In 2013, FINRA filed an AML complaint against little Oppenheimer. 2 stocks in the complaint: CGFIA and APCX. The SEC then piled on with a complaint (along with FINCEN). In their last 10q filing,CGFIA disclosed the DTCC had put a Global Lock on their stock due to the actions of a third party broker dealer in September 2013. The FINRA Opco complaint cited trading activity from 2007-2009. My complaint cited trading activity by UBS and KCG in 2011-2012 that was multiple billions more shares than Opco. And more recently. So, which BD was Guyer referring too? Last point then I’ll let Dave tell the rest. My claims cite trading activity by KCG and UBS in 2009-2012. Specifically, prior to Aug 1 2012 for KCG: activity that pre dates the “trading glitch”. For UBS: post 2010 means after the DOJ dropped criminal charges saying UBS “was in full compliance” in unwinding the cross border business.
Regards,
Galactus says the fellow should go to the FBI, which just granted immunity to Cherly Mills for the evidence, which is a major NO-NO, they should have SUBPOENED the evidence and not granted her any immunity, if the FBI were anything other than a criminal operation.
I’ll admit, I’m not sure which is funniest at this point.
That you believe the FBI wouldn’t go after a petty scam that stole $100K from a guy, or that this is something more than a petty scam like a conspiracy between two companies to ripoff a guy for $100K?
Especially since even the author is now doubting this guy and his story after 6 days of dribbling on about Naked short sales, Phantom stock sales, tax evasion schemes, money-laundering, Aged Fails and having obvious errors in the story such as the disclosures of Aged Fails pointed out.
It’s really funny how some people are susceptible to conspiracy theories to the point of ignoring facts.
Well gee, this guy’s been researching the issue for ten years and the author of the piece spent months researching it, but you spent a half hour on Google so yeah, I’m going to believe you. You got it all figured out.
If you have a problem with G’s analysis, you should specify it.
The appeal to authority is a logical fallacy.
Don’t believe me. I expect that and don’t disagree. Look at the posts I’ve made and links I’ve provided. Decide for yourself.
I admit I’m only theorizing. But so is the Dilorio. Same for the author after 6 days.
Don’t you also think it’s strange that Adrian Stone couldn’t be found for comment?
Especially in light of the fact that he’s such an entrepreneur starting so many companies?
He’s a go-getter.
Here is the list of companies owned by Adrian Stone, the guy on the press release (that I suspect is fake).
CHOICE FINANCIAL GROUP USA, INC.
CHOICE FINANCIAL GROUP USA, INC.
CUBIO LLC.
APPSTONE MOBILE LLC
STONEADEN ENTERPRISES, INC.
BEST RATE TRAVEL USA INC.
BEST RATE TRAVEL USA INC.
BEST RATE TRAVEL INTERNATIONAL INC.
BEST RATE TRAVEL INTERNATIONAL INC.
BEST RATE HOTELS INC.
BEST RATE HOTELS INC.
BEST RATE INTERNATIONAL, INC.
BEST RATE INTERNATIONAL, INC.
SPIRIT RENT-A-CAR,INC
SPIRIT RENT-A-CAR,INC
BEST RATE HOLDINGS INC.
BEST RATE HOLDINGS INC.
INTERNATIONAL BUILDERS INCORPORATED
INTERNATIONAL BUILDERS INCORPORATED
KDS INTERNATIONAL, INC.
KDS INTERNATIONAL, INC.
BROWNSTONE INTERNATIONAL INC.
BROWNSTONE INTERNATIONAL INC.
PHARMACELL INC.
PHARMACELL INC.
YORA INTERNATIONAL, INC.
YORA INTERNATIONAL, INC.
ART COMMODITIES, INC.
ART COMMODITIES, INC.
M&S COMMODITIES, INC.
M&S COMMODITIES, INC.
FAA BALTIK GROUPE
FAA BALTIK GROUPE
SPACECOAST REMOVAL SERVICE, INC.
STONEADEN ENTERPRISES, INC.
BESTRATETRAVEL INCORPORATED
BESTRATETRAVEL INCORPORATED
BEST RATE USA INC.
BEST RATE USA INC.
Yea, he’s legit with all these companies. These can be found at the State of Florida board of corporations website located here:
http://www.sunbiz.org/index.html
Go and check their Articles of Incorporation. They are void of substance.
To be fair, it’s pretty common for articles of incorporation for small startups to include very little substantive information. Most jurisdictions don’t require much and incorporators/organizers (and their counsel) often prefer to keep things as vague as possible — for “flexibility,” ya know.
BTW, Most of those entities are inactive, the vast majority having been “administratively dissolved” by the Department of Corporations for failure to file annual reports or to pay the associated fees.
Also, it’s a good guess, but we don’t really know, from the filings, whether Stone is an owner, the sole owner, etc. We can only tell that, depending upon the company, he is/was the registered agent or a responsible officer.
In some, he’s the sole officer. In others, there are two or three other individuals.
Have you looked at any of the AOIs? Also look at the dates. He’s creating one a month in the case of Best Travel Co.
Yeah, why keep them active when your scam has concluded. Right? You don’t want the mark to keep calling you once you have his money.
Yeah, and why close them voluntarily, when the state will do it for you, if you just don’t file the annual report or pay the $150.
You’re almost certainly correct: this is a bait and switch. And Mr. Switcher isn’t even too concerned about covering his trail.
It does look like he may have moved (some of?) his operations from Houston, no doubt because Florida is even more lax about these obvious shenanigans than Texas.
If he had done this in, say, California, the Secretary of State and the Franchise Tax Board would have hounded him endlessly over the filings, the fees and the annual minimum tax. After a couple of years, they would have forwarded the file to the Attorney General’s office and, sooner rather than later, someone would have taken a serious look at the guy’s escapades.
Choice of domicile is very important for scammers and crooks.
You close them voluntarily because your defense against fraud allegations is that the business is Legitimate. Companies are a separate legal entity. Therefore, if Dilorio wanted to to sue Stone, he’s have to prove that the company is not legitimate, ie…a shell not actually engaged in a business venture.
My open questions are how much other structure you’d normally find in a business venture is missing with Best Travel. Do they have bank accounts, leases, bills, salaries, board of directors meeting minutes?
This is a very gray area. And even after so many years, the statute on frauds runs out.
I didn’t make my point adequately or my sarcasm clear enough: for the most part, he did not close them voluntarily; they were subject to “administrative dissolution” by the state for failure to file reports of pay annual fees.
This story gets more confused at every twist and turn. How many seasons worth of episodes has The Intercept purchased?
The original story was a straight forward pump and dump. Company management was obviously complicit, since they structured the lock-up agreement that facilitated the pump and dump. Knight, as market maker would have had virtually no choice but to short sell the stock, since the pumping was increasing the demand, but no sellers were coming forward, due in large part to the lock-up agreement that prevented major stock holders from selling their shares.
In the latest episode, this has morphed into UBS operating a scheme of paper losses for investors to reduce their tax burden. But it’s not clear how UBS would compensate investors for these paper losses, since losing money just to reduce your tax burden is a lame strategy. It’s also unclear why all these investors who are going to so much trouble to set up offshore accounts and create paper losses, are reporting all this activity on their taxes back home. Most people who set up offshore accounts avoid reporting the capital gains on their taxes, because the accounts (supposedly) can’t be traced to them. So a scheme using offshore accounts to lose money for tax reporting purposes makes very little sense.
DiIorio has read a book on financial fraud, without understanding very much and is throwing out terms like naked shorting, offshore accounts and tax evasion. Not only does he not present any proof of his accusations, but the accusations themselves are incoherent. It’s like attending a Truther’s convention where everyone is pretending to be an expert on thermite, but no one has a clue what they are talking about.
The simple fact is that most companies on the Pink Sheets don’t have a viable business model and as they fail to make any profits, this gradually becomes apparent to all investors and the share price gradually declines to zero. People still invest in the Pink Sheets in the hopes they are lucky enough to pick the small company that becomes the next Apple Computer. Their odds would be better buying lottery tickets, but everyone should have a chance to dream. The market makers make money on every trade along the way, earning the difference on the spread between buy and sell prices. Do they get greedy from time to time and use naked shorts to increase their earnings on stocks they know will eventually fail? Quite possibly, but it seems foolish to make a bet on the market direction, when you can earn more money simply by trading the stock. It’s the same reason that bankers don’t usually rob banks, even though they have plenty of opportunity to do so. They make more money by operating the bank.
Why dismiss the idea that a system set up to do one thing (say, produce paper losses of an exact amount to reduce the taxes paid) can not also be used to do another thing (convert dirty cash into clean cash) once it is up and running. It is sort of like saying that it is contradictory to say that a people smuggling system runs both sweat shops and drug running.
A Twist in the Tale.
More like the revolving door.
In 2008, for example, the SEC alleged that UBS Securities LLC and UBS Financial Services Inc.—subsidiaries of UBS AG, the big Swiss bank—had “misled tens of thousands of…customers” about the risks of investing in products known as auction rate securities. As a result, “over forty thousand UBS customer accounts holding more than $35 billion in auction rate securities had their investments rendered virtually illiquid overnight,” according to the SEC’s complaint.
Meanwhile, Kenneth J. Berman—an attorney at the law firm of Debevoise & Plimpton LLP, and a FORMER ASSOCIATE DIRECTOR of the SEC’s Investment Management Division—requested and obtained a waiver allowing UBS AG, the parent company, to retain its WKSI privilege. He argued, among other things, that UBS AG and its subsidiaries had “strong records of compliance with the securities laws.”
In 2012, another UBS subsidiary was charged with violating the anti-fraud provision. In this case, Colleen P. Mahoney—a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP and a FORMER SEC DEPUTY ENFORCEMENT DIRECTOR who left the agency in 1998 after
15 years of service—requested a waiver on behalf of UBS AG. The SEC granted the waiver shortly after filing its charges.
http://www.pogo.org/our-work/reports/2013/dangerous-liaisons/sec-alumni-help-firms-get-a-break.html
Dilorio should go to the FBI. Who’s to say who initiated the trades just because UBS or Knight executed them?
This whole mess sounds like a Bait-and-Switch scheme. A victim invests in Stock A shell company. Through a series of stock trades initiated by unidentified 3rd party, victim’s stock position is both transferred and diluted at the same time into company B. Company B has a Fire Sale on their stock reducing it to pennies and victim racks up losses.
FYI, Knights Aged Fails in terms of receivables and payables for all years covered by this story are disclosed in their annual 10k’s under the Footnotes sections of the documents.
There are no mysterious hidden amounts in the named balance sheet account in this story as Knight capitals financial were audited by PWC for all years presented.
Dilorio really has no idea other than he lost money for an unexplained reason.
Personally, I think the guy was a victim of a bait and switch scheme with the changing cusip numbers and nothing more.
Oh, and Adrian Stone of Best Rate Travel has articles of incorporation that are virtually non-existent plus he has opened up and closed 15-25 companies in Boca Raton FL.
He’s got kids day care companies, travel companies and other companies spanning different markets.
He’s most likely the culprit here. You can find. All his companies at the link I posted in the 2nd installment of this story.
Watching last night’s cage match, I learned the actions detailed here in parts 1-6 makes UBS and Knight “smart”, and DiIorio a “loser”. Get it? Cheating investors out of their money by greasing tax payer-funded regulators with high-salaried jobs in private industry when their passive regulation is complete = Smart. An individual investor who tries to jump in and benefit from an “oligarch and bankers” scheme he couldn’t see, and who is then upset when the banks and oligarchs use him = Loser … That’s all bullshit of course, but … Can we just hurry up and cut these fucking middlemen out with blockchain already?
Can’t the big investors manipulate the crypto-currencies in various ways? They don’t seem stable.
This time you’re losing me. To start with the whole plan to make money by losing your shirt on penny stocks is the kind of thing only a banker could understand. Worse, you have one guy taking on the SEC, but then you say “his theories multiply” and almost make him sound like a quack … but he’s your guy, the Virgil who was supposed to be leading you to the bottom of this Inferno, and now you’ve abandoned him. I wish you had some models – doesn’t have to be one, doesn’t have to be all of them either – that you had written down on a piece of paper and gotten some finance people to say yes, this makes sense beginning to end (not saying these companies did it, but that they could have under these circumstances).
The other thing I don’t get is why you don’t focus on Knight making money. I mean, the way I understand your previous segments, they apparently had a license to sell overpriced “naked short” shares at will when every normal stockholder was chained up in the cellar getting crapped on. So I mean if you have one guy making money and one guy losing money – that sounds like it could be useful for money laundering, isn’t it? If they’re both the same guy I mean, with an account with both firms or something (I don’t even know they do that). For that matter … I don’t think Knight and UBS even have to be formally “in on it”, would they? You could have a customer of the two who is making huge transactions in a penny stock nobody else wants to touch and if he’s doing the biggest buys and the biggest sells in the market he pretty much knows he’s dealing with himself, doesn’t he? He can plan to take a bath in the one knowing that he’ll be sopping up the water on the other, right? Of course, that doesn’t mean that Knight wouldn’t be to blame for making this naked shorting thing available – if they do – to the customer, but it’s the sort of nuance that might leave them off scot free in any proceeding.
Now I’m speculating at random. Yeah, it’s contagious. But really, I wish you’d gotten together a few models and validated them with somebody.