BOSTON (Reuters) - Federal authorities have moved to halt an ongoing fraud scheme that they say has generated more than $25 million through illegal sales of penny stocks, some of which were promoted with false claims aimed at capitalizing on the COVID-19 pandemic.
The U.S. Securities and Exchange Commission in a lawsuit unsealed on Thursday in Boston federal court said Canadian citizen Nelson Gomes runs a business that allows penny stock company insiders to conceal their identities while selling stock to unsuspecting investors.
The SEC said Gomes and his associates used foreign entities and trading accounts to obscure the identities of the individuals who secretly controlled at least 20 companies whose stocks were dumped into the market since 2018.
The commission said Gomes carried out the scheme with the help of associates including another Canadian, Michael Luckhoo-Bouche, who along with three other individuals and six offshore entities were named as defendants in the case.
The stock sales were boosted by promotional campaigns that at times included false and misleading claims about the companies whose shares Gomes was selling, including statements aimed at taking advantage of the pandemic, the SEC said.
Those included that one of the companies, Sandy Steele Unlimited Inc, could produce medical quality facemasks, and that another, WOD Retail Solutions Inc, had automated kiosks for retailers to use during the pandemic, the SEC said.
Authorities said the secret owner of Sandy Steele was Shane Schmidt, a Vancouver man who federal prosecutors in Boston criminally charged with securities fraud on Wednesday over his participation in the pump-and-dump scheme.
Prosecutors and the SEC said Schmidt used fake documents including a passport to essentially steal the company from its former owner by submitting change-of-control documents to OTC Markets as the fictitious new company president, “John Scott.”
Prosecutors said he then set up a website containing false claims about Sandy Steele’s purported heated garment business by using pictures of products for sale by other companies. The SEC said he and others coordinated with Gomes to sell their stock.
Prosecutors said Schmidt is believed to be in Canada. The SEC previously suspended trading in Sandy Steele’s stock and on Thursday obtained a temporary restraining order and asset freeze aimed at halting Gomes’ scheme.
An attorney for Gomes could not be identified. Michael Klein, a lawyer for Schmidt at Michael Klein Law, and Alistair Crawley, a Canadian lawyer for Luckhoo-Bouche with Crawley MacKewn Brush, did not respond to requests for comment.
The case marked at least the fourth the SEC has brought since March related to the coronavirus public health crisis.
The SEC has previously warned investors to be aware of COVID-19 scams, including those by microcap companies claiming they have products that can help stop the virus.
”Microcap stocks can be particularly vulnerable to manipulative schemes, and investors should be alert to the heightened risks that exist during this national emergency,” Paul Levenson, the head of the SEC’s Boston office, said in a statement.
The cases in the U.S. District Court, District of Massachusetts, are U.S. Securities and Exchange Commission v. Gomes, et al, No. 20-cv-11092, and U.S. v. Schmidt, No. 20-mj-06415.
For the Justice Department: James Drabick of the U.S. Attorney’s Office for the District of Massachusetts
For the SEC: Trevor Donelan, Eric Forni, Kathleen Shields, J. Lauchlan Wash, Susan Anderson and Amy Gwiazda of the U.S. Securities and Exchange Commission
For Schmidt: Michael Klein of Michael Klein Law
For Luckhoo-Bouche: Alistair Crawley of Crawley MacKewn Brush