Sec. & Exch. Comm'n v. Stubos

• Decision Date: 10 October 2022
• Docket Number: 22-cv-04674 (LJL)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GEORGE STUBOS, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
GEORGE STUBOS, et al., Defendants.

No. 22-cv-04674 (LJL)

United States District Court, S.D. New York

October 10, 2022

OPINION AND ORDER

LEWIS J. LIMAN, UNITED STATES DISTRICT JUDGE

The United States Securities and Exchange Commission (“SEC”) brings this action against Defendant George Stubos (“Stubos”) and Relief Defendant Dori-Ann Stubos (“Dori-Ann”) (collectively, “Defendants”). The SEC alleges claims against Stubos for fraud in the offer or sale of securities in violation of Section 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a)(1), (3), fraud in connection with the purchase or sale of securities in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rules 10b-5(a), (c) thereunder, 17 C.F.R. § 240.10b-5(a), (c), and market manipulation in violation of Section 9(a)(2) of the Exchange Act, 15 U.S.C. § 78i(a)(2). Dkt. No. 1. The SEC also seeks equitable relief against Dori-Ann as a relief defendant on theories of unjust enrichment and constructive trust. Id.

Defendants move the Court for an order dismissing the complaint pursuant to Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction, Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for relief and as time-barred by the statute of

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limitations, and Federal Rule of Civil Procedure 9(b) for failure to plead fraud with particularity.^[1]Dkt. No. 42. For the reasons that follow, the motion to dismiss is denied.

BACKGROUND

The SEC's complaint in this case (“Complaint”) alleges a pump-and-dump scheme.^[2]According to the Complaint, Stubos engaged in a sophisticated scheme from at least March 2012 through at least April 2015 in which he fraudulently concealed from investors that he, in concert with others, controlled the stock of at least two small and thinly traded U.S. companies. Dkt. No. 1 ¶ 1. While concealing his control of the companies, Stubos sought to increase demand for the companies' stock through funding various promotions touting the stock. Id. ¶¶ 2-3. As the price and trading value of the stock increased as a result of the promotions, Stubos secretly sold shares into the market. Id. ¶ 3. Stubos also allegedly engaged in manipulative trading that created the false perception of active trading in the penny stocks. Id. ¶¶ 4, 36-37, 41-45.

Stubos is a Canadian citizen and resident of Vancouver, British Columbia, Canada. Id. ¶ 11. In June 2007, he was barred by the British Columbia Securities Commission from participating in the securities industry or acting as a director or officer of any issuer for two years and from participating in any investor relations activities for two years. Id. In September 1998, Stubos was barred by the Vancouver Stock Exchange (“Exchange”) from the Exchange for one year followed by one year of supervision and was ordered to pay fines and disgorgement for trading in a client account without the client's permission. Id. ¶ 11.

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Dori-Ann is a Canadian citizen and resident of Vancouver, Canada. Id. ¶ 12. She is the wife of Stubos. Id.

The Complaint focuses on two companies that were vehicles of Stubos's fraud, and whose stock he controlled, promoted, manipulated, and sold. The first company is Petrosonic Energy Inc. (“Petrosonic”), a Nevada corporation with its principal place of business in Los Angeles, California, purportedly in the business of petroleum refining. Id. ¶ 14. The second company is Ener-Core, Inc. (“Ener-Core”), a Delaware corporation with its principal place of business in Laguna Niguel, California, purportedly engaged in the business of designing and manufacturing systems producing continuous energy. Id. ¶ 15. The common stock of both companies was registered with the SEC under Section 12(g) of the Exchange Act. Id. ¶¶ 14-15. Both Petrosonic and Ener-Core were quoted on OTC Link, which was operated by the OTC Markets Group, Inc., a stock quotation service based in New York that facilitates the public trading of shares in public companies that are not otherwise listed on national securities exchanges. Id. ¶¶ 14-15, 18-19.^[3]

Stubos effectuated the fraud utilizing the illicit services of Frederick L. Sharp and his employees (the “Sharp Group”). Id. ¶ 24. During the relevant period, the Sharp Group helped facilitate illegal stock sales in the public securities markets and helped its clients who were public company control persons conceal their identities when selling the stock of companies they controlled. Id. ¶ 25. In order to help its clients conceal their identities as control persons, the Sharp Group offered a variety of services including: forming and providing offshore nominee

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companies that held shares for undisclosed control persons; arranging for clients to deposit stock in offshore trading platforms to obfuscate the control person's association with their public company penny stock; and providing and administering an encrypted communication network by purchasing, configuring, and delivering devices which the Sharp Group referred to as “xPhones.” Id. ¶ 26. The Sharp Group also administered a proprietary accounting system that tracked a client's total stock holdings and sales across various nominee shareholders and trading platforms; paid out the proceeds of illegal stock sales at the client's direction to accounts around the world and/or to the client's internal accounts with the Sharp Group; arranged to route such payments by circuitous methods designed to conceal the source of funds; and fabricated documents, such as invoices, to conceal the nature and source of the payments. Id. ¶ 27.

Stubos became a client of the Sharp Group in 2012. Id. ¶ 28. Shortly after, he transferred his control position in Petrosonic to the Sharp Group; as of December 2012, Stubos, through the Sharp Group, held 56% of its outstanding shares and therefore was an “affiliate” (i.e., someone who either controls, is controlled by, or under common control with, an issuer) of Petrosonic. Id. ¶¶ 17, 28. Using various nominee companies supplied by the Sharp Group, “Stubos caused the Sharp Group to strategically split” his holdings of Petrosonic stock into blocks of less than 5% of the total outstanding stock to be held in the name of each nominee company. Id. ¶ 29. This splitting of his holdings was performed to avoid reporting requirements and restrictions and scrutiny by brokerage firms and other market participants like transfer agents. Id. ¶¶ 29, 31.

From 2012 through 2014, Stubos secretly funded promotions of Petrosonic stock to generate investor interest in the stock, increase demand for the stock, and drive up Petrosonic's stock price and trading volume. Id. ¶ 32. To hide his involvement, he used the Sharp Group to make payments to various stock promoters, funneled Sharp Group proceeds to a Washington

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state corporation that he controlled to pay U.S. promoters, and used a foreign entity created by the Sharp Group to hire stock promoters. Id. ¶¶ 32-33. The promotions did not disclose that they were paid for by an affiliate of the issuer. Id. ¶ 34. As the price and trading volume of Petrosonic stock began to rise in response to each of the promotions, Stubos began selling his shares into the market via the Sharp Group-administered nominee companies. Id. In all, Stubos generated approximately $18.5 million in net trading proceeds. Id. “While Stubos was selling millions of shares of Petrosonic penny stock through the Sharp Group during the promotions he funded, he also directed manipulative trading to drive up the price and liquidity of the stock he was trying to sell.” Id. ¶ 36.

From 2013 through 2014, Stubos engaged in a similar scheme involving the securities of Ener-Core. Id. ¶ 38. In April 2013, he purchased the public shell company which later became Ener-Core from another Sharp Group client for $325,000. Id. ¶ 38. Following the purchase, Stubos's account at Sharp Group held virtually all of the purportedly unrestricted and restricted shares of Ener-Core that had been issued by the company and Stubos controlled over 99% of the company's purportedly unrestricted stock as of June 2013. Id. ¶ 39. Beginning in May 2013, the Sharp Group transferred Stubos's Ener-Core holdings to its nominee companies, splitting those shares into blocks of less than 5% of the total outstanding stock; it then deposited those shares with brokerage firms in order to be ready for sale to the market. Id. ¶ 40.

After building up his position in Ener-Core, Stubos directed at least $1.1 million in payments to stock promoters to promote Ener-Core. Id. The promotional newsletter stated that the Belize Nominee was the paying party for the promotion and did not disclose Stubos's role. Id. Stubos then directed Sharp Group to sell his shares of Ener-Core stock during the promotional campaign-secretly selling 9.4 million shares of Ener-Core penny stock for net

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trading proceeds of $2.9 million. Id. Before Stubos began selling his Ener-Core stock and during the period from September 5, 2013 through December 31, 2013, Stubos engaged in manipulative trading to inflate Ener-Core's stock price and to create the false appearance of active trading in the market. Id. ¶¶ 41-45.

After engaging in these schemes, the proceeds of Stubos's sales of Petrosonic and Ener-Core stock were transferred to Stubos's account, which he used for his personal benefit. Id. ¶¶ 46-47. Stubos also directed the Sharp Group to wire approximately $3.6 million of his improper trading proceeds to an account he controlled at a Panamanian broker-dealer firm (the “Panamanian Account”). Id. ¶¶ 48-49. In May 2013, approximately $3.6 million was wired from the broker-dealer holding the Panamanian Account to a title company in California, which in turned purchased a property in Palm Springs, California in the name of Dori-Ann Stubos. Id. ¶ 50. The...