International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, September 23, 2014

Penny Stock Frauds, Kick Backs Schemes, and FBI Stings

FBISeal (1)These proceedings arise out of a fraudulent scheme in which insiders of publicly-traded penny stock companies paid secret kickbacks to a purported corrupt hedge fund manager, who was in fact an undercover agent with the Federal Bureau of Investigation (“Fund Manager”), in exchange for the Fund Manager’s purchase of restricted stock of the penny stock companies on behalf of his purported hedge fund (“the Fund”), which did not actually exist.

Hadi Aboukhater and Michael Lee arranged for Seijin Ki to meet with the [FBI Sting] Fund Manager to discuss funding for Lightlake. On or about January 13, 2011, Ki met with the Fund Manager, Aboukhater and Lee to discuss a potential investment of the Fund's monies in Lightlake stock in exchange for a secret fifty percent kickback to the Fund Manager, thereby enabling the Fund Manager to keep half of the money he was supposedly investing on behalf of the Fund.  Ki and Aboukhater solicited the Fund Manager for funding for Church & Crawford. The Fund Manager agreed to invest Fund monies in Church & Crawford stock in exchange for a 50% kickback. 

On various dates between February 2011 and March 15, 2011, Aboukhater, on Ki’s behalf, sent the Fund Manager documents related to the kickback transaction with Church & Crawford, including a consulting agreement between Church & Crawford and one of the Fund Manager’s nominee consulting companies and a phony invoice in the name of the Fund Manager's nominee consulting company.

Seijin Ki was sentenced to 15 months’ imprisonment. Hadi Aboukhater (“Aboukhater”), age 43, is a resident of Haymarket, Virginia. Aboukhater was in the business of assisting publicly-traded companies in finding sources of funding. Aboukhater plead guilty to one count of wire fraud. Michael Lee (“Lee”), age 63, is a resident of Whitman, Massachusetts. Lee was the Chief Executive Officer and President of ZipGlobal Holdings, Inc. Lee was in the business of assisting publicly-traded companies in finding sources of funding. On January 11, 2012, Lee pleaded guilty to one count of mail fraud, one count of conspiracy to commit securities fraud, and was sentenced to 30 months’ probation, with nine months of that sentence to be served as home confinement with electronic monitoring.

The FBI Sting

The charges follow a year-long investigation focusing on preventing fraud in the micro-cap stock markets. Microcap companies are small publicly-traded companies whose stock often trades at pennies a share. Fraud in the microcap markets is concerning to regulators as such markets are fertile grounds for fraud and abuse. This is, in part, because accurate information about microcap stocks may be difficult for the average investor to find, since many microcap companies do not file financial reports with the Securities and Exchange Commission.

Ki was the fifteenth defendant charged criminally with having participated in the undercover operation.

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