By Craig A. Huffman, Esquire, Managing Partner, Securus Law Group, P.A.-Public Company News, May 28, 2011-
The first sign of trouble is a telephone call a CEO gets from someone saying they are an FBI agent from Miami. With palms sweating and chest tightening, the CEO listens as the G-man explains how they have the CEO on video tape, emails, and by money and/or share tracking in a conspiracy to bribe a pension fund manager to buy the CEO’s company shares. The agent then warns the CEO he needs to have an attorney, preferably a criminal attorney, contact the agent immediately. And to make matters worse, it all happened well over a year or more ago.
If you think this is beyond the realm of ever occurring to you, make sure you jog your memory really well for any small investments from someone who said they were close to a pension fund manager or a stock broker, and made a deal to invest money into your company or buy shares in a controlled purchase on the market through an “outsider” where the money was invested back into your company after the purchase. If any of this does not ring a bell with you, then consider yourself lucky and/or law abiding.
Over the last few months, Securus and associated counsel have represented numerous individuals including CEOs and “outsiders” as they were targeted in these investigations. The investigations are ongoing and numerous (over 26 persons thus far), including CEO’s, investors, and close “outsiders” to companies have either pled in cooperation agreements, or been indicted. The sting operations are being done by the FBI Miami Field Office with prosecution by the U.S. Attorney’s Office for the Southern District of Florida. The investigations date from activities that occurred from early to later 2010 or even more recently due to cooperating persons informing or setting up others.
“The Securities and Investment Fraud Initiative” is explained to be a coordinated, multi-agency effort targeting “criminals” operating a broad grouping of stock and commodities frauds in the Southern District of Florida. In reality it is the government picking low hanging fruit off investment starved companies. There are two usual modus operandi by the FBI in these stings with minor twists.
The first type is that they set up false front companies or LLC’s, and use cooperating persons (those who have already been nailed and agree to set up others) to find companies that need immediate in-vestment. Most of the companies are OTCMarkets level and non-reporting, although BB’s are targeted as well. The cooperator arranges phone calls to the company CEOs or outsiders, and gets them hooked on the idea that he knows someone (an undercover FBI Agent) who knows someone (another Agent) who manages a pension fund, and that they will invest pension funds into penny stocks for the long term. After perhaps one or more phone calls with the undercover he explains that his friend (Agent #2) runs the investments of a pension fund and has authority to invest large amounts into companies they really think will pay off in the future. The pension fund will invest a smaller amount (always around $20,000) in return for restricted stock in the Company, usually at market prices. The illegal hook is that they want a kick back of money (usually 25-35%) of that money to go to an LLC or person for the pension fund manager to do the deal.
The second type of sting is pretty much the same as the first, except you have a broker instead of a pension fund investment manager. The payoff in this sting is meant to get the broker to go in and buy shares from an “outsider” in a structured transaction on the market, and from the sale, the “outsider” will invest back in the company (illegally structured transaction). The second illegal hook is the broker either wants money or shares sent to a third party for him to the do the transaction. When the time comes the FBI makes the buys as arranged through a brokerage account, usually com-municating closely to the “outsider” as he places his ask price and the FBI places the bid. At some point, before or after, the shares or money are sent to the third party (another FBI undercover or front entity).
In both situations the FBI and the cooperating informant arrange a face to face meeting, just to make sure everyone is on the same page. All of this is taped by several hidden cameras, and the CEO and/or outsiders give all the reasons their company is a great investment. What is usual and uncomforting is that during the meeting the undercover FBI agent gives all the verbal cues to the CEO, and the outsider who may be alongside, that they should get up and leave. Very few do so. The Agent usually explicitly tells them that what they are talking about is “across the line;” they have to “hide the kickback” and what they are doing is for all the world against the rules (illegal). Securus lead attorney Craig Huffman has been told that only a few have walked away and were left alone because they did.
Once that phone call (or in some cases a certified letter) comes from the FBI Agent, the defense attorney will talk to the Assistant U.S. Attorney who will arrange what we at Securus call “show and tell” time in Miami. When the CEO and outsider show up with their attorney at the Miami office of the U.S. Attorney, they are taken to an interview room where FBI agents and one or two U.S. Attorneys then show them the tapes of their meeting with the under cover agents, play tapes of telephone calls, all with transcripts, and more or less make the target feel like the world is over with. There is no time given or desired by the government for back and forth talking about why the CEO or outsider did it, and they don’t care about explanations of how much money the CEO did not take in pay or how much family and friends had invested. They don’t care if the company has the cure of cancer or cold fusion for free energy. They just want, as the lead Assistant U.S. Attorney said, to put “heads on the wall.”
The attorney and client are handed an already completed plea agreement, usually for one count of 18 U.S.C. §371, which is the general conspiracy statute. They are told they can go to lunch to talk it over and think about it. They are expected to sign and agree to plea that day or very soon thereafter. If they do not then they are told they will be indicted for more than just general conspiracy. A whole laundry list of charges are brought if the government has to go to the trouble of an indictment; conspiracy to commit securities fraud, wire fraud, mail fraud, attempting to pay illegal inducement payments to investment professionals, including stock brokers or pension funds as applicable, to induce professionals to violate their fiduciary duties by misusing client accounts stock and to manipulate the market for publicly traded securities. It is take it or leave it deal. No negotiation. The plea agreement has been streamlined over time and is non-negotiable. If signed the target is allowed time to cooperate, and no one knows he has plead, for up to a year, maybe longer. Cooperation is expected in order to get credit calculated. All of those sentenced thus far have had incarceration as part of their sentences. Sentences can range from 6 months to 5 years or more, followed by supervised release of 2 to 3 years.
The question for any astute defense attorney is whether the government’s actions are tantamount to entrapment. That is where the choice of an experienced criminal attorney who also has experience in small cap companies and securities is valuable. For over two dozen defendants, the evidence has led them to enter pleas. Our Securus counsel and associated counsel have the experience of hundreds of felony trials, and hundreds of conspiracy cases; combined with years of micro-cap company and investor experience; we may be able to help if you get that call. When pressed why they were making cases in this way, Huffman was told by the lead AUSA “These cases are like street level crack deals. They are easy to make. I just want heads on the wall.”
