Shell firm hijacking: Males used SEC filings, faux press releases for inventory pump-and-dump fraud, the Fed says
Three men have embarked on a bold scheme to "secretly kidnap" and take over dormant mailbox companies, which they then fraudulently inflated and sold to ignorant investors, according to the indictment, which was unsealed on Friday.
The 2017-2019 men allegedly used fake resignation letters to take control of four mailbox companies and then used the Securities and Exchange Commission's EDGAR public filing system and fake press releases to fraudulently "pump up" their stock prices by seeking new business opportunities says.
Millions of shares of those stocks, which the defendants bought in many cases for less than 1 cent a share, were then sold over-the-counter by the men and others at gains of up to 900%, according to the court record.
The defendants – Mark Allen Miller, Christopher James Rajkaran and Saeid Jaberian, also known as Andre Jaberian – are charged with 15 securities fraud, securities fraud conspiracy and wire transfer fraud charges.
The indictment states that Minnesota residents, Miller and Jaberian, as well as an unidentified person who is a relative of Miller, actually became the nominal CEOs and presidents of the companies affected by the scam.
Prosecutors believe the men made hundreds of thousands of dollars in illegal profits just from the conduct described in the indictment, according to a spokeswoman for the US Attorney's Office in Minnesota.
The indictment, filed in the US District Court in Minnesota, was first reported Friday on the Twitter account of Seamus Hughes, associate director of the Extremism Program at George Washington University.
Hughes regularly searches the federal court's online archive system, PACER, for interesting criminal and civil litigation documents that have not been previously reported.
The Securities and Exchange Commission did not immediately respond when CNBC asked if the agency had taken any action against the defendants and whether they had made changes to the EDGAR file system to prevent its tampering by suspected fraudsters.
None of the defendants could be reached for comment.
Rajkaran, a resident of Queens, New York and Guyana, was arrested on Friday as a possible aviation hazard after appearing in court in Brooklyn, New York.
The other two defendants, Miller and Jaberian, are due to appear in federal court in Minnesota on July 2.
The four mailbox companies affected by the alleged conspiracy were Digitiliti, Encompass Holdings, Bell Buckle Holdings, and Utilicraft Aerospace Industries.
While the companies were supposedly doing business – online privacy services, computer software, debt collection, and aerospace – all were actually dormant mailbox companies "with no business or income to speak of," the indictment said.
The companies had all stopped filing required documents with the SEC and the Secretary of State, but their shares were publicly traded on the over-the-counter market.
After the corporate quartet was identified, "the conspirators then bought shares in the dormant public letterbox companies at low prices on the OTC market," the indictment said.
"The conspirators were able to buy hundreds of thousands or even millions of shares because the shares traded at a fraction of a penny per share."
In the Digitiliti case, according to the indictment, Miller drafted a forged letter of resignation and board minutes in September 2017 falsely stating that the company's previous CEO had resigned and Miller had been appointed president and CEO.
Miller then filed with the SEC papers falsely identifying himself as the company's new head and asked for "the login codes that allow him access to the company's SEC EDGAR filing account."
This in turn "allowed Miller to make public filings with the SEC on behalf of the company."
The EDGAR system is used by publicly traded companies to disclose material events, including quarterly and annual financial results, changes in management, and sales and purchases of significant amounts of company stock by insiders and others.
The indictment states that Miller bought 50,000 Digitiliti shares in November 2017.
"After Digitiliti's kidnapping, Defendant Miller used his control over the company to issue a false and misleading press release on behalf of the company," the indictment stated.
"On or about July 9, 2018, Miller issued a press release falsely claiming that Digitiliti was" in "negotiating" negotiations "with a private company that would" buy "Digitiliti . "
The press release also falsely alleged that the private company "has a proven track record of generating revenue and success in a highly desirable sector of the market," according to the indictment.
Miller sold his 50,000 Digitiliti shares three weeks later.
During the alleged June-November 2017 hijacking of Encompass Holdings, Miller and Rajkaran together bought more than 40 million shares in the company at low prices, the indictment said.
As with Digitiliti, Miller claimed in a forged letter of resignation and board minutes that he had become president and CEO, the indictment states.
Rajkaran then began posting about the company on investorhub.com to "promote and raise the price of ECMH stock," the indictment stated.
"For example, he announced that the new CEO" is likely worth nearly $ 20 million in real estate and construction equipment … heard that he owns millions of shopping malls, "" the indictment reads .
Miller then issued a press release falsely claiming that Encompass “had signed a letter of intent to acquire approximately $ 6.4 million in assets from DDG Properties. The press release went on to claim that Encompass was assuming gross revenues from DDG Properties of $ 534,000, ”according to the indictment.
"None of that was true."
The share price rose in response to the allegations, and Miller shortly thereafter sold 12 million shares in the company at fraudulently inflated prices and made a gain of more than 300%, the indictment said.
Rajkaran achieved an earnings return of around 150% after dumping more than 34 million shares, according to the indictment.