Imagine a chess match where one player moves the board in the background, without the other players’ knowledge. This is a good metaphor for the $11 million penny-stock fraud that the Securities and Exchange Commission has been investigating. What are the players? The players in this game are a professional stock promoter, and a microcap issuer.
Checkmate for Stock Promoter
On May 23, the U.S. District Court of New York’s Southern District handed down its final judgment against Eleazar Kuderer, an experienced stock promoter. Kauderer had been accused of a fraudulent promotion campaign for shares in HempAmericana, Inc., an issuer of microcaps that was struggling. He was accused of acting as a middleman and hiring other individuals. “downstream” Promoters hide stock purchases and the role of the ultimate source for funding the promotion.
The Microcap Issuers Gambit
The same court issued a default judgment against HempAmericana on May 2, 2023. HempAmericana, according to the SEC, conspired with the largest shareholder in the company’s Regulation A offerings to use an important portion of proceeds to secretly market the stock. The investor was able to sell their shares at a gain. HempAmericana funded the promotion, but did not reveal the source of funding or whether the investor intended to sell shares during the promotion. HempAmericana was also accused of misleading public by failing to disclose, in its offering circulars filed before the Commission, that a substantial percentage of the Regulation A offering proceeds were going towards stock promotion.
Consequences
- Kauderer consented, without admitting to or denying these allegations, to the entry of an order permanently prohibiting him from violating Section 17a) of Securities Act of 1933 and Section 10b) of Securities Exchange Act of 1935, as well as Rule 10b-5 thereof. He was ordered to pay a disgorgement of $888,012 and prejudgment interests of $23,782.74. Kauderer was credited with his significant cooperation, and no penalty was requested.
- The default judgment entered against HempAmericana prevents future violations of Section 17(a), Section 10(b), and Rule 10b-5 of the Exchange Act, Section 10b, of the Securities Act of 1934.
- The SEC obtained final judgments also against four other participants in the August 2021 lawsuit. These judgments, along with other relief, prevent defendants from violating Section 17(a), Section 10 (b) and Rule 10b-5 under the Exchange Act or the Securities Act.
Investigations Continue
Brenda Wai Ming Chang and John C. Lehmann conducted the SEC investigation in this case. The SEC investigated it like a complex game of chess. Peter A. Lamore & Adam S. Grace also participated. Paul G. Gizzi, Ms. Chang, Mr. Lehmann, and Thomas P. Smith, Jr. supervise the ongoing litigation against defendants.
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Investors can expect a more fair and transparent stock market as the SEC continues exposing and halting these fraudulent practices.
