Securities Fraud and Misrepresentation Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.
May, 2012:
SEC Charges U.S. Perpetrators in $35 Million International Boiler Room Scheme
The Securities and Exchange Commission recently charged a Hawaii resident and two firms he used to orchestrate a scheme in which he covertly founded small companies, installed management, and recruited overseas boiler rooms that pressured investors into buying their stock while he pocketed more than $2 million in consulting fees from proceeds of the fraudulent stock sales.
The SEC alleges that Nicholas Louis Geranio worked behind the scenes to create eight U.S.-based companies used to raise money through the sale of Regulation S stock, which is exempt from SEC registration under the securities laws because it is offered solely to investors located outside the United States. Geranio handpicked the management for the companies, primarily Keith Michael Field of Sherman Oaks, Calif., who served as an officer, director, or investor relations representative for each company and also is charged in the SEC's complaint. Geranio then set up consulting arrangements through his firms - The Good One Inc. and Kaleidoscope Real Estate Inc. - so he could instruct management on how to run the companies and raise money offshore. Geranio extracted consulting fees from the companies, which generally had few or no employees, little or no office space, and no sales or customers.
The SEC alleges that Field drafted misleading business plans, marketing materials, and website information about the companies that were provided to investors as part of fraudulent solicitation efforts by teams of telemarketers operating in boiler rooms that Geranio recruited primarily in Spain. The boiler rooms used high-pressure sales tactics and false statements about the companies to raise more than $35 million from investors. Meanwhile, Geranio instructed Field and others to buy and sell shares in some of the companies to create an illusion of trading activity and manipulate upwards the price of the publicly-traded stock.
According to the SEC's complaint filed in the U.S. District Court for the Central District of California, Geranio was the subject of a previous SEC enforcement action in 2000. In his latest misconduct, he concealed his role from investors and the public at all times by acting through The Good One and Kaleidoscope. The scheme lasted from April 2007 to September 2009. Geranio began by locating and acquiring shell companies to create the issuers used in the scheme: Blu Vu Deep Oil & Gas Exploration Inc., Green Energy Live Inc., Microresearch Corp., Mundus Group Inc., Power Nanotech Inc., Spectrum Acquisition Holdings Inc., United States Oil & Gas Corp., and Wyncrest Group Inc. Geranio then appointed management for these companies, in some cases turning to business associates, friends, or others. For example, the former CEO of Blu Vu was someone Geranio met while kite surfing in Malibu.
According to the SEC's complaint, Geranio worked behind the scenes to keep the companies' publicly-traded shares trading at prices conducive to the boiler room sales. He did this by directing Field, personal friends, and others to open accounts and buy or sell shares in at least five of the companies as part of matched orders and manipulative trades that created the false impression of active trading and market value in these stocks. The manipulative trades allowed the boiler rooms to sell the Regulation S shares to overseas investors at higher prices.
The SEC alleges that boiler room representatives recruited by Geranio induced investors by using aggressive techniques consistent with boiler room activity. For instance, they promised immediate and substantial investment returns, convinced investors that they needed to purchase the shares immediately or miss the grand opportunity altogether, and threatened legal action if an investor did not agree to purchase shares that the representatives believed the investor had already agreed to purchase. The boiler rooms also used "advance fee" solicitations, telling investors that only if they purchased shares in one of these companies would the boiler room agree to sell their other shares. Many of the investors were elderly and living in the United Kingdom.
According to the SEC's complaint, investors were directed to pay for their Regulation S stock by sending money to U.S.-based escrow agents. As arranged by Geranio, the escrow agents paid 60 to 75 percent of the approximately $35 million raised from investors to the boiler rooms as their sales markups, kept 2.5 percent as their own fee, and paid the remaining proceeds back to the companies that Geranio created. The companies (or in some cases the escrow agents) then funneled approximately $2.135 million of the proceeds back to Geranio through The Good One and Kaleidoscope in the form of consulting fees, and paid Field approximately $279,000.
The SEC alleges that Geranio also assisted in diverting $240,000 in investor funds toward an undisclosed down payment on a property to start a Hawaiian wedding planning company.
The SEC's complaint alleges that Geranio, Field, The Good One and Kaleidoscope violated Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder. The complaint alleges that Field also violated Section 17(a)(2) of the Securities Act and aided and abetted the companies' violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and Geranio is liable as a control person of The Good One and Kaleidoscope under Exchange Act Section 20(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, penny stock bars, and permanent injunctions against all of the defendants, as well as officer and director bars against Geranio and Field. The complaint seeks disgorgement and prejudgment interest against relief defendant BWRE Hawaii LLC based on its alleged receipt of investor funds.
