John Babikian used an e-mail list called AwesomePennyStocks to tout a coal company's stock while dumping his own shares, the Securities and Exchange Commission said last week in a civil complaint. AwesomePennyStocks' messages about that firm and 38 others, sent over five years, helped fuel spikes in share prices that boosted the combined value of the stocks by as much as $3 billion, according to data compiled by Bloomberg. The value of a prescription-drug distributor that AwesomePennyStocks promoted in 2012 ballooned by more than $700 million within two months. After the bulk emails stopped, the shares collapsed.
The SEC said Babikian left Canada in 2012 in the wake of tax-evasion allegations and his whereabouts aren't known. Babikian moved to Monaco, according to Anne-France Goldwater, a lawyer who represented his wife in a 2013 divorce case. Babikian didn't respond to letters sent last year to five addresses associated with him around the world. Stanley Morris, a lawyer in Santa Monica, Calif., who said last year he represented Babikian, declined to comment after the SEC's case.
Babikian owned a Bugatti Veyron -- the cars cost more than $1 million -- as well as a Bentley and Lamborghini, according to documents from Revenue Quebec, the province's tax authority. It obtained a judgment allowing seizure of some of his assets last year, after he left the country, relating to its claim that he owed C$4.6 million ($4.1 million) in unpaid taxes.
The SEC is freezing Babikian's assets, including two homes and the proceeds of selling a fractional interest in a plane, the agency said in a March 13 statement. Babikian bought a Los Angeles house in 2010 for $2.2 million, according to real estate website Blockshopper.com.
Market Manipulation in a Grand Way
While promoting stocks is legal -- Wall Street's biggest banks send reports daily advising investors on what to buy, often in companies that are clients -- U.S. securities law prohibits market manipulation. OTC Markets Group, which runs venues on which penny stocks trade, tracks the promoters and marks stocks it deems suspicious with skull-and-crossbones icons on its website, according to CEO Cromwell Coulson. AwesomePennyStocks was "one of the biggest promoters," he said in a phone interview last year.
"The traditional Stratton Oakmont has been replaced by the opt-in newsletter," Coulson said, referring to the boiler room depicted in "The Wolf of Wall Street," the 2013 movie directed by Martin Scorsese. "People just get an e-mail and they buy these things without doing any fundamental analysis."
The SEC routinely sanctions promoters for buying cheap stock, hyping it to investors, then secretly selling their holdings, according to Tom Sporkin, the SEC's former chief of market intelligence and now a lawyer at BuckleySandler in Washington. The scheme is called a pump-and-dump, or scalping, he said. "It's what I call the street crime of securities," Sporkin said. "The world of pump-and-dumps occurs in the shadows."
The SEC began its latest crackdown on penny-stock fraud in 2010 and had sued 40 individuals and 24 companies as of August, according to its website. In July, the agency formed a microcap-fraud task force. Short-sellers and stock promoters said in interviews that AwesomePennyStocks was the most successful of the penny-stock websites and that they had tried for years to figure out who was behind it. One promoter, who asked for anonymity because he's facing SEC market-manipulation claims, likened AwesomePennyStocks to Keyser Soze -- the character portrayed by Kevin Spacey in the 1995 film "The Usual Suspects" whose power is legendary and identity a secret. "It was always kind of a mystery," Peter Nicosia, who runs a stock-promotion site called Bull in Advantage, said late last year. "They had the market cornered."
Do the Math: $3 Billion Then, 1 Cent Today
AwesomePennyStocks built a list of subscribers with keyword advertising on search engines, bidding up the price of phrases like "penny stocks" to more than $2 a click, Nicosia said. Its e-mails generated the most stock buying in the industry, he said.
"The sheep that buy end up holding the bag and losing everything," said Randall Place, a lawyer who used to investigate penny stocks for a predecessor of the Financial Industry Regulatory Authority.
The promotion cited by the SEC involved America West Resources, a Salt Lake City coal company. AwesomePennyStocks and another list called PennyStocksUniverse sent messages promoting the company's shares on Feb. 23, 2012, according to the SEC. The stock rose as high as $1.80 from 29 cents as more than 7.8 million shares were traded, more than double the total volume in the prior year, the agency said. Babikian sold at least 1.3 million shares for $1.9 million, according to the SEC. America West filed for bankruptcy protection last year.