Securities and Exchange Commission and Department of Justice at it Again in Parallel Crackdown on Microcap Stocks

The United States Securities and Exchange Commission recently charged several Chief Executive Officers and their companies, along with three penny stock promoters, with securities fraud violations for their alleged offer of illicit kickbacks and market manipulation schemes in connection with certain microcap stocks. One case involved a scheme to make undisclosed bribes to a stock broker who agreed to purchase shares in the subject company in the open market for his customers’ discretionary accounts. Another case involved kickbacks — disguised as payments to phony consulting companies — to a fund manager who, in alleged breach of his fiduciary duty, agreed to purchase shares of a microcap stock for the fund. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, financial penalties, penny stock bars and officer-and-director bars.

As I have found to be historically true in these types of cases, the SEC worked in conjunction with the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of Florida during the investigative stage. The U.S. Attorney’s Office also filed criminal charges against the same individuals sued by the SEC.

Given this historical and ongoing cooperation between the SEC and the U.S. Attorney’s Office in the Southern District of Florida, those subject to SEC investigation need to be ever vigilant as to the potential criminal consequences of actions taken when defending a SEC investigation. It is therefore critical that SEC defense counsel take into account not only potential civil liability, but also criminal exposure, in order to best fashion a strategy that protect the client’s interests on both fronts.

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