U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23127 / November 4, 2014
Securities and Exchange Commission v. James Wheeler and MicroHoldings US, Inc., Civil Action No. 11-cv-12117
Judgments Entered Against Company and CEO in Securities Kickback Scheme
The Securities and Exchange Commission announced that on October 31, 2014, the federal court in Boston, Massachusetts, entered judgments by consent against Oklahoma corporation MicroHoldings US, Inc., and its Chief Executive Officer, James Wheeler of Camas, Washington, in a fraud action that was filed in December 2011. The fraud involved a kickback scheme that was exposed by an undercover operation of the Federal Bureau of Investigation's Boston office. Among other things, MicroHoldings and Wheeler were permanently enjoined from violating an antifraud statute, and Wheeler was held liable for disgorgement of $24,000 of ill-gotten gains and permanently barred from serving as an officer or director of public companies or participating in offerings of penny stock.
MicroHoldings and Wheeler are two of several parties charged on December 1, 2011, by both the Commission and the U.S. Attorney for the District of Massachusetts, alleging that they used kickbacks and other schemes to trigger investments in various thinly-traded stocks. According to the Commission's complaint, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the participants in the scheme did not know was that the purported investment fund representative was actually an undercover agent of the FBI.
The Commission's complaint alleged that in May 2011, Wheeler met with an individual who purported to be a Boston, Massachusetts-based representative of a major hedge fund. In fact, the hedge fund representative was an undercover FBI agent. The complaint alleged that Wheeler and the hedge fund representative agreed to a scheme whereby the hedge fund would purchase $5 million of MicroHoldings stock in return for the payment of kickbacks to the hedge fund representative. Wheeler and the hedge fund representative agreed to structure the transaction in such a way that it would avoid detection by the hedge fund's compliance personnel and securities regulators. Among other things, they agreed to structure the transaction into smaller "tranches" of securities purchases, and to make the kickback payments to the hedge fund representative through a shell corporation pursuant to a consulting agreement to make it appear that the kickback payments were compensation for consulting services. The complaint alleged that, in May and June 2011, MicroHoldings and Wheeler followed through by entering agreements whereby the hedge fund purchased a total of $48,000 worth of MicroHoldings stock and kickbacks totaling $24,000 were funneled back to the hedge fund representative.
In the related criminal action, Wheeler was sentenced on January 16, 2014 to 18 months of probation and was ordered to forfeit $24,000 after pleading guilty on January 18, 2012 to one count of mail fraud and one count of conspiracy.
The judgments in the Commission's action, to which MicroHoldings and Wheeler consented, permanently enjoin MicroHoldings and Wheeler from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The judgment as to Wheeler holds him liable for $24,000 in disgorgement, but deems his disgorgement satisfied by the forfeiture order for the same amount of money in the related criminal action. The judgment also prohibits Wheeler from acting as an officer or director of any issuer that has a class of securities registered under Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act, and prohibits Wheeler from participating in any offering of penny stock, pursuant to Section 21(d)(6) of the Exchange Act.
The Commission suspended trading in the stock of MicroHoldings on December 1, 2011.
The Commission's case against Edward Henderson, also charged on December 1, 2011 as a result of the FBI undercover operation, remains pending. Judgments by consent were entered again Michael Lee and ZipGlobal Holdings, Inc. on September 4, 2014 and against Paul Desjourdy on September 11, 2014.
For further information, see Litigation Release No. 22177 (December 2, 2011) (Complaints); Exchange Act Release No. 65857 (December 1, 2011) (trading suspensions); Litigation Release No. 23002 (May 23, 2014) (Wheeler and others sentenced in parallel criminal actions); Litigation Release No. 23078 (September 4, 2014) (judgment by consent against Lee and ZipGlobal); and Litigation Release No. 23082 (September 12, 2014) (judgment by consent against Desjourdy).