One of the most brazen financial schemes has been brought to an end after four Canadians who were assisted by five Americans swindled more than $140 million in penny stocks. Called one of the largest penny stock frauds in history, the alleged leader of the scheme, Sandy Winick, still remains at large.
Winick’s cohorts opened call centers across Canada, Thailand and Vietnam to help orchestrate the penny stock fraud. The eventual bust of this scheme was a result of years of cooperation between the RCMP and FBI who relied on wiretaps and undercover investigators to discover track and eventually gather the evidence to issue arrest warrants.
How the Scheme Worked
As the indictment indicates, the defendants in the case were using a tactic called “pump and dump”. They would purchase controlling interests in startup companies that were sketchy at best and then artificially inflate their value by heavy promotion through emails, news releases and the social media. The result was that their penny stock value would rise considerably and then they would sell at the most opportune time and reap the benefits.
Working from boiler room call centers, the defendants’ victimized investors by convincing them to pony up advance fees in the neighborhood of $20 million in return for assistance in selling their securities or joining lawsuits to reclaim their losses. To sell themselves, they allegedly pretended to work for organizations such as the IRS. Several hundred people in 35 countries were victimized in this scam which operated on two levels, getting people to invest in worthless penny stocks and then turning around to cheat them again in trying to get their money back.
How They Were Caught
When a big financial crime ring is suspected, experts in forensic accounting are sometimes brought in to help investigate. In this case, investigators from the FBI and RCMP were tipped off to this massive scam by moves in the penny stock market and reports from victims of the crime.
The investigation then is organized and advanced along multiple levels with forensic accountants doing the basic research into recent penny stock trades while undercover agents posed as investors while gathering the necessary evidence. In order for this investigation to begin, all members of the legal team have the proper certification or accreditations before being orchestrated to get as much information as possible.
In this particular case, the very nature of penny stocks played a large role in the scheme. Because penny stocks are often traded outside major market exchanges where they could be watched, this makes them very vulnerable to cheating and fraud. In addition, the fact that they are so cheap makes them easy for someone bent on fraud to take advantage of the system as what happened here.
Through proper investigation, years of work and building up their case, this massive penny stock ring was busted and stopped with all the major participants save for the ringleader in jail and facing charges which could land them up to 20 years in prison.