With all the money that's seemingly being minted from thin air in the initial coin offering market, enterprising financial fraudsters have found a perfect vessel for earning millions of dollars from gullible investors hoping to hit it big by investing in the next bitcoin.
But in the world of penny stocks, the model for ICOs, old-fashioned pump-and-dump operations still proliferate. Indeed, US prosecutors just unveiled a string of indictments against four companies and a half dozen individuals for their involvement in a multinational operation to defraud penny-stock investors and launder the profits.
The scam involved a shady stock brokerage based in the Virgin Islands which would organize penny-stock IPOs on the AIM market, a lightly-regulated junior exchange run by London Stock Exchange Group Plc, according to Bloomberg. It netted its perpetrators a cool $50 million payday (though they presumably won't be free to enjoy it).
The FBI first caught wind of the scheme in October 2016 - only a few months before ICOs exploded in popularity, seemingly becoming a billion-dollar business overnight.
A breakthrough arrived when one of the scheme's ringleaders suggested to an undercover FBI agent that they should launder their money with purchases of fine art - linking the operation with a London art dealer who was also charged.
Eventually they decided on Picasso's "Personnage, 1965"...
but the scheme was thwarted before the purchase could be made.
Later they proposed buying "Personnage, 1965" - a Picasso - for $6.7 million pounds ($9.2 million). Matthew Green, the owner of Mayfair, agreed to arrange the resale of the painting, according to the U.S. The money-laundering scam was stopped before the sale was completed, prosecutors said.
Contact information for Green, or Mayfair, couldn’t be immediately found. Green was charged in the case. Mayfair wasn’t.
The financial backers of Beaufort Securities, the brokerage used by the schemers to manipulate the price of their penny stocks, said they were unpleasantly surprised by news that the firm had been indicted and would be forced into bankruptcy. Both Beaufort Securities and Beaufort Asset Clearing are owned by Beaufort International Associates, which is based in an iconic building in downtown London.
The U.K. Financial Conduct Authority placed Beaufort Securities and Beaufort Asset Clearing Services into administration, a form of bankruptcy. Both firms are owned by Beaufort International Associates Plc, which is based near the iconic “Gherkin” building in the heart of London and where the chief executive and biggest single shareholder is Tanvier Malik, according to company filings. He wasn’t charged. The parent company isn’t in administration.
“I’m just as flabbergasted as everyone else,” said Nick Piazza, chief executive of Kiev-based SP Advisors, which bought a stake in Beaufort in 2014. “We were just kind of a passive shareholder but we were hoping they’d do well and we’d get our investment back. Unfortunately, something has gone haywire.”
A manager at the firm was also arrested...
Arvinsingh Canaye, of Mauritius, a Beaufort manager, was arrested Thursday. He pleaded not guilty in federal court in Brooklyn. A bail hearing is scheduled for March 6. Beaufort officials didn’t immediately respond to requests for comment.
The chief executive of Loyal Bank, a St. Vincent-based bank, was also indicted. Given the recent revelation that the SEC has begun subpoenaing companies involved in ICOs, we imagine a flurry of securities fraud indictments is imminent.
It’s the “only market that is unregulated,” one of the alleged wrongdoers boasted in a conversation that was secretly recorded, U.S. prosecutors said as they handed down an indictment in Brooklyn, New York, against six people on Friday.
But like penny stocks, evidence of pervasive fraud hasn't cooled investor interest in ICOs.
And despite the popularity of "The Wolf of Wall Street", ordinary people - the postmen, construction workers and teachers of the world - are just as willing as ever to wade into the shady world of penny stock pump-and-dumps.