Blog : Weekend Rogues Gallery: California Pumpin', Eat After Reading

by Ed Zwirn on September 20th, 2014

California Pumpin'

Depending upon when you checked it out, a company most recently known as Gepco Ltd. was involved in equipment leasing, prepaid stored-value cards related to electronic devices and, most recently, the owner and operator of a social media website.

This pump-and-dump shell scheme came to an abrupt end on Thursday, when the Securities and Exchange Commission charged eight alleged principals in the scheme involving the penny stock company, based in California, and suspended trading in the company.

According to the SEC, the scheme was orchestrated by one Izak Zirk de Maison, who had been named Izak Zirk Engelbrecht before taking the surname of his wife Angelique de Maison. Both husband and wife along with others they installed as officers and directors of the fraudulent company bought, sold and promoted the bogus stock, while Zirk and his friends amassed large blocks of shares and manipulated the market to create the appearance of genuine investor demand. One of these associates was allegedly allowed to sell his stock at inflated prices, garnering hundreds of thousands of dollars in illicit profits for the ring.

The SEC narrative of the scheme is a textbook case of the way in which companies can morph into different lines of business and successfully defraud the gullible. According to the complaint, Zirk de Maison, whose assets have now been frozen along with his associates, secretly controlled the shell company now known as Gepco since its incorporation in 2008 under a different name.

During the next five years, he caused the company to enter into a number of reverse mergers through which its purported business evolved from equipment leasing to the prepaid cards, eventually becoming known as WikiFamilies, claiming to own a social media website. After a failed attempt to merge it into a private mixed martial arts company, de Maison created his own private company, said to be involved in the high-end diamond business, and merged Gepco into it.

"Zirk de Maison concoted an array of reverse mergers and company name changes on his way to gaining control of the vast majority of Gepco stock in order to conduct a multi-faceted manipulation scheme," said Amelia Cottrell, an associate director in the SEC's New York Regional Office. "To help avoid the pitfalls of microcap fraud, it's important to check the history of companies and determine their legitimacy before deciding whether to invest in them."

Eating the Paper Trail

A Friday action by the SEC charged a Brooklyn, New York man with facilitating a $5.6 million insider trading scheme that typically involved the passing of illegal tips via napkins or post-it notes at New York's Grand Central Terminal.

Earlier this year, the agency had charged a stockbroker and a law firm managing clerk with insider trading and alleged they were connected by a mutual friend who served as a "middleman." The SEC alleges that middleman Frank Tamayo received material nonpublic information from Steven Metro about 13 impending corporate deals involving clients of the law firm where Metro worked.

For a five-year period, Metro is said to have repeatedly accessed confidential information about the deals and met Tamayo at New York City bars and coffee shops to pass on the tips. Tamayo would then allegedly hook up with Eydelman near the iconic clock at Grand Central's information booth, where he would show him a post-it note or napkin on which the stock ticker, approximate transaction price and timing of the deal. "Tamayo then chewed up and sometimes even ate the post-it note or napkin to destroy evidence of the tip," the SEC stated.

Eydelman would then allegedly return to his office, gather research on the company and email Tamayo his supposed thoughts about why buying the stock made sense. "Their intent was to create a paper trail of emails to make it appear that they were making their trading decisions based on research and analysis rather than inside information," according to the SEC. Tamayo was then said to have kicked back a portion of his "ill-gotten" gains for eventual payback to Metro for the inside information.

This electronic "paper" trail was undoubtedly easier on the digestive tract than the napkins and post-its swallowed by Tamayo. But all gastronomic considerations aside, the criminal cases against the trio should serve as a cautionary tale for investors. As much as the honest investor may hope to legitimately profit from a buyout or other announced deal that would pump up the value of a particular stock, there may have been others who have gotten there ahead of them and may or may not eventually be caught by the law. Honest investors are often cheated of much of the gain they would have otherwise received in deals like this, and this in and of itself should be hard to swallow.