Securities lawyer Faiyaz Dean, with offices in Seattle and Vancouver B.C., has taken public many tiny firms that later are misused by stock manipulators. Now for the first time, a Securities and Exchange Commission suit claims he played a direct role in such a fraud.
Nine years ago in this space we reported on the global parade of flimsy companies that securities lawyer Faiyaz Dean, with offices in Seattle and Vancouver B.C., was ushering into the U. S. stock market.
Typically their business prospects were doubtful — for instance, a one-man Russian firm planning to advise North American companies on Siberian oil and gas deals, though its papers said that fellow “does not have any technical experience in the oil & gas exploration sector.”
But Dean generally delivered a sufficient veneer of suitable paperwork to promptly get the Securities and Exchange Commission’s go-ahead for a tiny stock offering. Selling shares seemed beside the point — being SEC-registered positioned them as thinly traded public shell companies, ripe to be exploited by stock manipulators in pump-and-dump schemes.
This week, for the first time, Dean was sued by the SEC. Regulators claim the 40-year-old Seattle University law school graduate, who primarily operates in Vancouver, played a key role in a fraudulent 2013 penny stock promotion scheme that “quickly generated roughly $34 million in illicit proceeds.”
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Following the money in these deals can be hard: An SEC statement cited the cooperation of regulators in Canada, Spain, Cyprus, Hong Kong and Panama. Those officials likely helped obtain the emails, texts and financial records that the 47-page lawsuit uses to trace the defendants’ alleged activities through companies and collaborators based or registered in Argentina, Switzerland, and the Seychelles archipelago off Eastern Africa, as well as the U.S.
Antonia Chion, associate director in the SEC’s Division of Enforcement, said in the statement that the charges “demonstrate our commitment to unraveling even the most sophisticated international schemes that exploit retail investors.”
Dean is accused in the civil suit of facilitating crucial steps in the pump-and-dump scheme that inflated the price of a penny stock called Biozoom.
In 2012 he lined up the purchase of an existing shell company for his three co-defendants, the suit says, and “because of the deceptive manner in which Dean documented the purchase,” filings with the SEC did not disclose that those shares were no longer registered and could not be freely sold to the public.
He then arranged to have 20 million shares transferred to accounts nominally owned by several Argentines, although his co-defendants actually controlled them.
(The entire shell company cost just $430,000, and Dean pocketed $105,000 of that as a finder’s fee, according to the suit.)
Dean’s co-defendants then found an unsuspecting small German biomedical company that wanted to go public to raise money, and merged it with their shell. Although the German execs got 39 million shares that were officially non-tradable, the shell promoters had access to the other 20 million with the help of Dean, who “employed transfer agents, escrow agents, brokers and attorneys to facilitate the use of those shares,” says the suit.
Dean “orchestrated sham transactions … and provided fabricated documents and false information to brokers, lawyers and the transfer agent,” the SEC contends.
Those controlled brokerage accounts “began engaging in concerted trading” in mid-May 2013 to create the appearance of demand for Biozoom stock and lift its price. Dean’s co-defendants spent several million dollars to print and distribute mailers with titles like “Global Financial Insight” that promoted Biozoom’s prospects.
Between May 16 and June 19, those efforts had pushed Biozoom’s shares from the initial — and artificial — price of $1.10 to $4.50.
That netted the promoters about $34 million in sales from the accounts they controlled, says the suit.
The sudden surge in Biozoom activity evidently caught the SEC’s eye, because it suspended trading in the stock on June 25. It also got a court order freezing all of the sale proceeds, and got its hands on about $16 million that was later returned to defrauded investors.
However, the promoters had already wired another $17 million to offshore accounts they controlled, the suit contends.
Regulators are asking for “disgorgement,” or surrender, of those remaining millions, as well as further civil penalties and interest. They also seek to have the defendants, including Dean, barred from participating in any offering of penny stock or in activities with anyone issuing, trading or promoting such stocks.
Dean did not respond to repeated requests for comment on the lawsuit, and has not yet responded in court.
The SEC also declined to comment on the case. But in recent years it has cracked down on fraud in the microcap world, and an effort it calls Operation Shell-Expel has taken off the books many dormant shells that otherwise could be harnessed for manipulation.
“Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade,” Robert Khuzami, then the SEC’s director of enforcement, said back in 2012.
The agency since then has also made it known it’s targeting not just the promoters who conduct pump-and-dump schemes but those professionals — CPAs and lawyers — whose names repeatedly show up in association with such schemes.
What hasn’t changed is Dean’s work on behalf of itsy-bitsy companies that someone would like to get registered with publicly traded shares.
One of the latest was an outfit called Genesys Industries of Palmetto, Florida, seeking to sell 3 million shares for 10 cents apiece. Among the SEC staff’s comments on early versions of its initial public offering document was the instruction to “delete references to an existing management team” because it was a one-woman operation with no revenues.