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Courtesy of PKdaddy
Interesting Read: Notice the name of the defendent.
EASTERN DISTRICT OF CALIFORNIA
SACRAMENTO DIVISION
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. GENDARME CAPITAL CORPORATION, IAN LAMPHERE, EZAT RAHIMI, and CASSANDRA ARMENTO, Defendants.
Civil Action No.: 2:11-cv-00053FCD -KJN
COMPLAINT
Plaintiff Securities and Exchange Commission (“Commission”) alleges:
SUMMARY OF THE ACTION
1. Since early 2008, defendant Gendarme Capital Corporation (“Gendarme”), through its principals Ezat Rahimi and Ian Lamphere, has engaged in an illegal stock distribution scheme. The defendants have illegally sold to the public billions of shares of stock without registering the transactions or having a valid exemption to registration, as the federal securities
COMPLAINT
laws require. Gendarme acquired the stock from small public companies at 30-50% discounts to the market price in transactions where it falsely represented to the issuers that it purchased the shares for investment purposes only (not for the purpose of resale). Typically within days or weeks of acquiring the shares, Gendarme resold most of the stock in the public markets. Gendarme profited more than $1.6 million on its unregistered and illegal public distributions of stock.
2.
Gendarme typically bought shares from companies whose stock price was quoted by Pink OTC Markets, Inc. (“Pink Sheets”), a private electronic inter-dealer quotation and trading system used in the over-the-counter market. Companies quoted on the Pink Sheets are not required to file periodic financial and disclosure statements with the Commission. Thus, when distributions are unregistered, little or no disclosure about the company may exist. In acting as a conduit to dump shares of Pink Sheets companies on the public markets, Gendarme engaged in a lucrative end-run around an important disclosure policy underlying the securities laws.
3.
Gendarme’s outside counsel for its stock acquisition transactions was Cassandra Armento. Since early 2008, Armento has issued more than 50 opinion letters to stock transfer agents for Pink Sheets companies whose stock Gendarme purchased. The opinion letters falsely claimed that Gendarme was not an “underwriter,” and thus did not intend to distribute the shares. The letters were required for Gendarme to obtain the stock without restrictions on the stock certificates, which allowed Gendarme to easily sell the shares on the public markets. Armento played a necessary and substantial role in Gendarme’s scheme, and thus also violated the securities laws.
4.
Defendants Gendarme, Lamphere, Rahimi, and Armento (“Defendants”) violated Sections 5(a) and (c) of the Securities Act of 1933 (“Securities Act”) by distributing stock in unregistered transactions for which no exemption applied, or by playing a necessary and substantial role in such distributions. The Commission seeks to enjoin Defendants from further violations of the securities laws, disgorgement of Gendarme, Lamphere, and Rahimi’s ill-gotten
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gains, payment of civil money penalties, and an order barring Gendarme, Lamphere, and Rahimi from participating in an offering of penny stock.
JURISDICTION AND VENUE
5.
The Commission brings this action pursuant to Section 20(b) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77t(b)].
6.
This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)]. Defendants, directly or indirectly, have made use of the means and instrumentalities of interstate commerce or of the mails in connection with the acts, transactions, practices, and courses of business alleged in this complaint.
7. Venue in this District is proper pursuant to Section 22 of the Securities Act [15
U.S.C. § 77v] because Defendants are found, inhabit, transact business, or engaged in acts or transactions constituting securities laws violations, within the Eastern District of California. In particular, Rahimi, Gendarme’s President and CEO, operated Gendarme from his home in Elk Grove, California, and his prior home in Galt, California, both of which were located within the Eastern District of California. Lamphere was an officer of Gendarme at all relevant times, and regularly communicated with Rahimi regarding the transactions at issue in this complaint. Armento represented Gendarme as its counsel, and communicated with Rahimi and Lamphere regarding the transactions alleged in this complaint. Also, in exchange for drafting the warrant agreements and opinion letters at issue in this complaint, Armento received money by several wire transfers from Gendarme’s bank in Galt, California. Assignment to the Sacramento Division is appropriate pursuant to Local Rule 3-120(d) because this case arises from acts, practices and courses of conduct that occurred within Sacramento County, California.
DEFENDANTS
8.
Defendant Gendarme Capital Corporation is a Minnesota corporation owned by Lamphere and Rahimi, with its principal places of business in Elk Grove, California and Lawrenceville, Vermont.
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9.
Defendant Ian Lamphere, age 33, resides in Lawrenceville, Vermont. Lamphere is Gendarme’s Vice President and Secretary and controls Gendarme along with defendant Ezat Rahimi.
10.
Defendant Ezat Rahimi, age 26, resides in Elk Grove, California. Rahimi is Gendarme’s President and Chief Executive Officer (“CEO”) and controls Gendarme along with Lamphere.
11.
Defendant Cassandra Armento, age 40, resides in Greenwich, New York. Armento is an attorney licensed in Vermont and Massachusetts and owns the Law Offices of Cassandra Armento. Armento represented Gendarme in its acquisitions of stock from companies quoted on the Pink Sheets.
FACTUAL ALLEGATIONS
12.
Section 5 of the Securities Act of 1933 (“Securities Act”) requires the sale of securities to be registered with the Commission, or qualify for a statutory exemption from registration. If the sales are unregistered, and if no statutory exemption applies, the sales violate Section 5. Registering the sales includes providing disclosures to investors of financial and business information about the company issuing shares.
13.
Rule 504 of Regulation D of the Securities Act exempts from registration certain limited offerings and sales of securities that do not exceed $1,000,000. But a person who has purchased shares from an issuing company with a view to distributing the securities is an “underwriter” under the Securities Act, and any public resales in the short term (within one year for shares of non-reporting issuers) by that purchaser are not exempt from registration.
14.
Gendarme claimed on its website to be an accredited investor that bought stock available for sale in offerings under Rule 504 of Regulation D of the Securities Act. In truth, Gendarme’s primary business has been buying stock in unregistered transactions from small publicly-quoted companies who could not directly issue the stock to the public without registration (and the required disclosure that goes with registration) then quickly dumping most of the shares on the public market.
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Companies that issue publicly-traded stock use transfer agents to keep track of the individuals and entities that own their stock. Transfer agents are regulated by the Commission and are required to be registered with the Commission. A transfer agent’s core function is to issue and cancel a company’s stock certificates to reflect changes in ownership. Generally, with certain exceptions, transactions in stock issued in a registered public offering are “unrestricted,” meaning that the shares can be traded without restriction. On the other hand, transactions in stock issued in an exempt offering may require restrictive language in the form of a stamped legend on the stock certificates. Stock certificates bearing restrictive legends cannot be traded as easily as stock without restrictive language. Before transfer agents will issue unlegended share certificates in the absence of registration, many require a lawyer’s opinion explaining why it would be legal for them to do so.
Gendarme was Incorporated in Minnesota to Facilitate Unregistered Distributions
16.
In approximately March 2007, Gendarme was founded as a Minnesota corporation by Lamphere and a former co-owner.
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Shortly after its founding, the co-owner sold his share of the business to Ezat Rahimi.
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Neither Gendarme’s founders nor Rahimi have lived in Minnesota. Rahimi has never even been to Minnesota. Gendarme purports to have a Minnesota “office,” which is actually a “virtual office” service that takes telephone messages and forwards company mail to Lamphere or Rahimi.
19.
Opinion letters issued by Armento to transfer agents asserted that Minnesota state law purportedly satisfies the requirements of Rule 504(b)(1)(iii) of Regulation D of the Securities Act, thereby supposedly permitting the issuance of “unrestricted” securities that can be freely resold, assuming Gendarme was not, among other things, an underwriter.
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Gendarme Generated Income by Purchasing Billions of Shares of Pink Sheets Stocks from the Issuers at a Discount to the Market Price and Quickly Distributing Them to the Public in Violation of the Securities Act
20.
From early 2008 to at least May 2010, Gendarme bought stock from many Pink Sheets companies at a 30-50% discount to the market price. Rahimi and Lamphere jointly developed and executed Gendarme’s business strategy. Sometimes jointly, and other times individually, they made the decisions to purchase stock on Gendarme’s behalf. Each signed numerous agreements on Gendarme’s behalf to purchase issuer stock. Most of the agreements gave Gendarme warrants for up to one year in which Gendarme could elect to purchase the company’s stock. Other agreements were outright purchases of issuer stock. Within days or weeks of purchasing the stock, Rahimi or Lamphere caused Gendarme to resell most of the stock on the public market.
21.
When it purchased shares from Pink Sheets issuers, Gendarme intended to, and did, sell shares to the public within a year. For those sales, Gendarme was an underwriter, and had no valid exemption from registration for the transactions.
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For example, from March to September 2008, Gendarme entered into at least 11 warrant agreements with WGL Entertainment Holdings, Inc. (“WEHI”), which gave Gendarme the right to buy WEHI shares at a 30% discount to the market price at the time of purchase. The warrants represented that Gendarme would buy the WEHI shares for “investment purposes.” For each warrant, Armento wrote an opinion letter to WEHI’s stock transfer agent. Among other representations, the opinion letters asserted that the shares were issued to Gendarme in “an offering exempt from registration” and that Gendarme was not “an underwriter of the issuer.” From March to September 2008, Gendarme paid WEHI more than $615,000 for more than 6 billion shares purchased under the warrants. As Gendarme obtained WEHI shares, it sold most of them within days or weeks for gross sales of more than $780,000 and a profit of more than $165,000 through September 2008.
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In March 2009, WEHI changed its name to Heathrow Natural Food & Beverage, Inc. (“HRNF”). From then until March 2010, Gendarme purchased more than a billion HRNF
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shares, and, during the same time, repeated the process of regularly dumping the shares on the market, for gross sales of more than $430,000 and a net profit of more than $230,000.
24.
From early 2008 to at least May 2010, Gendarme bought stock from at least 12 different issuing companies and distributed more than 15 billion shares in the public markets. None of the transactions was registered with the Commission. The transactions are summarized below.
a.
HRNF, formerly known as WEHI: From March to September 2008, Gendarme acquired WEHI shares from the issuer. During the same period, Gendarme sold more than 6 billion of these WEHI shares for more than $780,000. From March 2009 to March 2010, Gendarme acquired HRNF shares from the issuer. During the same period, Gendarme sold more than 1 billion of these HRNF shares for over $430,000.
b.
Macada, Inc. (“MCDA”), formerly known as Tri-Star Holdings, Inc. (“TSHL”), formerly known as Rapid Fitness, Inc. (“RPDI”): From June to August 2008, Gendarme acquired RPDI shares from the issuer. From July to September 2008, Gendarme sold more than 250 million of these RPDI shares for more than $145,000. From September 2008 through February 2009, Gendarme acquired TSHL shares from the issuer. Through August 2009, Gendarme sold more than 2.1 billion of these TSHL shares for more than $540,000. In September 2009, Gendarme acquired MCDA shares from the issuer. From September to December 2009, Gendarme sold more than 635,000 of these MCDA shares for more than $12,000.
c.
Magellan, Inc. (“MGLG”): From May to June 2009, Gendarme acquired MGLG shares from the issuer. During July 2009, Gendarme sold 500 million of these MGLG shares for more than $355,000.
d.
Perihelion Global, Inc. (“PHGI”): From March to June 2008, Gendarme acquired PHGI shares from the issuer. From March 2008 through March 2009, Gendarme sold almost 1.8 billion of these PHGI shares for more than $320,000.
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Bederra Corp. (“BEDA”): From May 2009 to March 2010, Gendarme acquired
BEDA shares from the issuer. Through April 2010, Gendarme sold more than 370
million of these BEDA shares for more than $610,000.
f.
Z Com Networks, Inc. (“ZCMN”): From September 2008 to January 2009,
Gendarme acquired ZCMN shares from the issuer. From September 2008 to June
2009, Gendarme sold more than 765 million of these ZCMN shares for almost
$260,000.
g.
RCC Holdings, Inc. (“RCCH”): From September 2008 through January 2009,
Gendarme acquired RCCH shares from the issuer. From September 2008 to June
2009, Gendarme sold more than 2.1 billion of these RCCH shares for more than
$210,000.
h.
141 Capital, Inc. (“ONCP”): From April 2009 to May 2010, Gendarme acquired
ONCP shares from the issuer. From April 2009 to February 2010, Gendarme sold
more than 710 million of these ONCP shares for almost $340,000.
i.
RBID.com, Inc. (“RBID”): In May 2009, Gendarme acquired RBID shares from
the issuer. From May 2009 to February 2010, Gendarme sold more than 400
million of these RBID shares for more than $65,000.
j.
Brownstone Resources, Inc. (“BWNR”): From March to April 2009, Gendarme
acquired BWNR shares from the issuer. From March to July 2009, Gendarme sold
more than 110 million of these BWNR shares for more than $110,000.
k.
Russell Industries, Inc. (“RUSL”): From May to June 2008, Gendarme acquired
RUSL shares from the issuer. From May to October 2008, Gendarme sold more
than 3 million of these RUSL shares for almost $19,000.
l.
TidalWave Holdings, Inc. (“TWVH”): From June to October 2008, Gendarme
acquired TWVH shares from the issuer. From December 2008 to January 2009,
Gendarme sold more than 1.6 million of these TWVH shares for more than
$30,000.
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In written communications, Rahimi revealed that the real purpose of Gendarme’s stock acquisitions was to quickly sell the shares. In negotiating a possible investment in one company, Rahimi represented to the company’s CEO that Gendarme would “try to find a life in your stock” and “help get the stock trading.” He also told the CEO that “if your stock starts trading with our help, you will have a liquid stock on your hands.” Once Gendarme acquired the shares at a 50% discount to the market price, it began selling them the next day. Within four months, Gendarme sold all of the company’s shares for a profit.
26.
From March 2008 through May 2010, Gendarme generated more than $1.6 million of profits on sales of shares acquired from issuing companies in unregistered transactions. During the same time period, Gendarme paid more than $1.3 million to Rahimi and Lamphere.
27.
Armento, Gendarme’s outside counsel throughout its activities, substantially participated in Gendarme’s illegal stock distributions. From at least early 2008 to at least mid2010, Armento drafted approximately 35 or more warrant agreements for Gendarme, which gave Gendarme the right to purchase an issuing company’s shares. The warrant agreements typically gave Gendarme the right to purchase up to a specified amount of an issuing company’s stock at a 30% or 50% discount to the market price for the company’s stock. The warrant agreements represented to issuers, among other things, that Gendarme was purchasing shares for investment purposes only – a term commonly understood to mean not for the purpose of resale. Armento expected Gendarme to exercise the warrants and purchase the shares, but drafted the warrant agreements without determining what Gendarme intended to do with the shares it would purchase.
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From at least early 2008 to at least mid-2010, Armento drafted more than 50 opinion letters for Gendarme. In the letters, Armento opined to transfer agents that Gendarme had acquired the shares in transactions exempt from registration under Rule 504 of the Securities Act and share certificates could be issued to Gendarme without a restrictive legend. Although Armento made no inquiry into whether Gendarme intended to hold the stock, the opinion letters falsely represented that Gendarme was not “an underwriter of the issuer with respect to the shares as defined in Section 2(11) [sic] of the Securities Act.” Armento sent the
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opinion letters to companies’ stock transfer agents, which relied on the opinion letters in issuing share certificates without restrictive legends to Gendarme.
29.
At the time she drafted and issued the opinion letters, Armento understood that a purchaser who bought shares from an issuer intending to distribute them to the public was an underwriter. In preparing and issuing the opinion letters, Armento did not ask Gendarme, or otherwise make any effort to determine, what it intended to do with the shares it was acquiring. Armento had no reasonable basis for opining that Gendarme was not an underwriter. Armento knew that, as a result of her opinion letters, Gendarme was obtaining shares without a restrictive legend, and thus would have the ability to quickly sell the shares to the public, even if doing so violated Section 5 of the Securities Act.
30.
In late 2008 and early 2009, Armento obtained and reviewed documents that showed it was likely that Gendarme was selling the shares of TSHL (f/k/a RPDI) shortly after it had acquired shares from the company. In fact, Gendarme was selling the shares. Before issuing additional opinion letters for Gendarme to purchase more of the company’s stock, Armento failed to determine if Gendarme was selling the shares.
31.
Since first representing Gendarme, Armento has also issued at least 35 similar opinion letters for purchasers other than Gendarme for other unregistered purchases of stock offered under purported Rule 504 exemptions.
CLAIM FOR RELIEF
(Violations of Securities Act
Sections 5(a) and 5(c) by all Defendants)
32.
The Commission incorporates and realleges here paragraphs 1 through 31, above.
33.
During the relevant period, Defendants, directly or indirectly, made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer and to sell securities through the use or medium of a prospectus or otherwise when no valid registration statement had been filed or was in effect as to such offers and sales of such securities and no exemption from registration was available.
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Defendants engaged in or participated in the unlawful distribution of
securities as described above.
35.
By reason of the foregoing, Defendants, directly or indirectly, violated, and unless enjoined will continue to violate, Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
I.
Permanently enjoin and restrain Defendants from, directly or indirectly, engaging in conduct in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c].
II.
Order defendants Gendarme, Lamphere, and Rahimi to provide an accounting and to disgorge their ill-gotten gains in an amount according to proof, plus prejudgment interest thereon. III.
Order Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)].
IV.
Impose a bar on defendants Gendarme, Lamphere, and Rahimi from participating in an offering of penny stock pursuant to Securities Act Section 20(g) [15 U.S.C. § 77t(g)].
V.
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
VI. Grant such other and further relief as this Court may deem just, equitable, and necessary.
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Dated: January 6, 2011 Respectfully submitted,
/s/ Jeremy E. Pendrey
Jeremy E. Pendrey
Attorney for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
Interesting Read: Notice the name of the defendent.
EASTERN DISTRICT OF CALIFORNIA
SACRAMENTO DIVISION
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. GENDARME CAPITAL CORPORATION, IAN LAMPHERE, EZAT RAHIMI, and CASSANDRA ARMENTO, Defendants.
Civil Action No.: 2:11-cv-00053FCD -KJN
COMPLAINT
Plaintiff Securities and Exchange Commission (“Commission”) alleges:
SUMMARY OF THE ACTION
1. Since early 2008, defendant Gendarme Capital Corporation (“Gendarme”), through its principals Ezat Rahimi and Ian Lamphere, has engaged in an illegal stock distribution scheme. The defendants have illegally sold to the public billions of shares of stock without registering the transactions or having a valid exemption to registration, as the federal securities
COMPLAINT
laws require. Gendarme acquired the stock from small public companies at 30-50% discounts to the market price in transactions where it falsely represented to the issuers that it purchased the shares for investment purposes only (not for the purpose of resale). Typically within days or weeks of acquiring the shares, Gendarme resold most of the stock in the public markets. Gendarme profited more than $1.6 million on its unregistered and illegal public distributions of stock.
2.
Gendarme typically bought shares from companies whose stock price was quoted by Pink OTC Markets, Inc. (“Pink Sheets”), a private electronic inter-dealer quotation and trading system used in the over-the-counter market. Companies quoted on the Pink Sheets are not required to file periodic financial and disclosure statements with the Commission. Thus, when distributions are unregistered, little or no disclosure about the company may exist. In acting as a conduit to dump shares of Pink Sheets companies on the public markets, Gendarme engaged in a lucrative end-run around an important disclosure policy underlying the securities laws.
3.
Gendarme’s outside counsel for its stock acquisition transactions was Cassandra Armento. Since early 2008, Armento has issued more than 50 opinion letters to stock transfer agents for Pink Sheets companies whose stock Gendarme purchased. The opinion letters falsely claimed that Gendarme was not an “underwriter,” and thus did not intend to distribute the shares. The letters were required for Gendarme to obtain the stock without restrictions on the stock certificates, which allowed Gendarme to easily sell the shares on the public markets. Armento played a necessary and substantial role in Gendarme’s scheme, and thus also violated the securities laws.
4.
Defendants Gendarme, Lamphere, Rahimi, and Armento (“Defendants”) violated Sections 5(a) and (c) of the Securities Act of 1933 (“Securities Act”) by distributing stock in unregistered transactions for which no exemption applied, or by playing a necessary and substantial role in such distributions. The Commission seeks to enjoin Defendants from further violations of the securities laws, disgorgement of Gendarme, Lamphere, and Rahimi’s ill-gotten
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gains, payment of civil money penalties, and an order barring Gendarme, Lamphere, and Rahimi from participating in an offering of penny stock.
JURISDICTION AND VENUE
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The Commission brings this action pursuant to Section 20(b) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77t(b)].
6.
This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)]. Defendants, directly or indirectly, have made use of the means and instrumentalities of interstate commerce or of the mails in connection with the acts, transactions, practices, and courses of business alleged in this complaint.
7. Venue in this District is proper pursuant to Section 22 of the Securities Act [15
U.S.C. § 77v] because Defendants are found, inhabit, transact business, or engaged in acts or transactions constituting securities laws violations, within the Eastern District of California. In particular, Rahimi, Gendarme’s President and CEO, operated Gendarme from his home in Elk Grove, California, and his prior home in Galt, California, both of which were located within the Eastern District of California. Lamphere was an officer of Gendarme at all relevant times, and regularly communicated with Rahimi regarding the transactions at issue in this complaint. Armento represented Gendarme as its counsel, and communicated with Rahimi and Lamphere regarding the transactions alleged in this complaint. Also, in exchange for drafting the warrant agreements and opinion letters at issue in this complaint, Armento received money by several wire transfers from Gendarme’s bank in Galt, California. Assignment to the Sacramento Division is appropriate pursuant to Local Rule 3-120(d) because this case arises from acts, practices and courses of conduct that occurred within Sacramento County, California.
DEFENDANTS
8.
Defendant Gendarme Capital Corporation is a Minnesota corporation owned by Lamphere and Rahimi, with its principal places of business in Elk Grove, California and Lawrenceville, Vermont.
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Defendant Ian Lamphere, age 33, resides in Lawrenceville, Vermont. Lamphere is Gendarme’s Vice President and Secretary and controls Gendarme along with defendant Ezat Rahimi.
10.
Defendant Ezat Rahimi, age 26, resides in Elk Grove, California. Rahimi is Gendarme’s President and Chief Executive Officer (“CEO”) and controls Gendarme along with Lamphere.
11.
Defendant Cassandra Armento, age 40, resides in Greenwich, New York. Armento is an attorney licensed in Vermont and Massachusetts and owns the Law Offices of Cassandra Armento. Armento represented Gendarme in its acquisitions of stock from companies quoted on the Pink Sheets.
FACTUAL ALLEGATIONS
12.
Section 5 of the Securities Act of 1933 (“Securities Act”) requires the sale of securities to be registered with the Commission, or qualify for a statutory exemption from registration. If the sales are unregistered, and if no statutory exemption applies, the sales violate Section 5. Registering the sales includes providing disclosures to investors of financial and business information about the company issuing shares.
13.
Rule 504 of Regulation D of the Securities Act exempts from registration certain limited offerings and sales of securities that do not exceed $1,000,000. But a person who has purchased shares from an issuing company with a view to distributing the securities is an “underwriter” under the Securities Act, and any public resales in the short term (within one year for shares of non-reporting issuers) by that purchaser are not exempt from registration.
14.
Gendarme claimed on its website to be an accredited investor that bought stock available for sale in offerings under Rule 504 of Regulation D of the Securities Act. In truth, Gendarme’s primary business has been buying stock in unregistered transactions from small publicly-quoted companies who could not directly issue the stock to the public without registration (and the required disclosure that goes with registration) then quickly dumping most of the shares on the public market.
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Companies that issue publicly-traded stock use transfer agents to keep track of the individuals and entities that own their stock. Transfer agents are regulated by the Commission and are required to be registered with the Commission. A transfer agent’s core function is to issue and cancel a company’s stock certificates to reflect changes in ownership. Generally, with certain exceptions, transactions in stock issued in a registered public offering are “unrestricted,” meaning that the shares can be traded without restriction. On the other hand, transactions in stock issued in an exempt offering may require restrictive language in the form of a stamped legend on the stock certificates. Stock certificates bearing restrictive legends cannot be traded as easily as stock without restrictive language. Before transfer agents will issue unlegended share certificates in the absence of registration, many require a lawyer’s opinion explaining why it would be legal for them to do so.
Gendarme was Incorporated in Minnesota to Facilitate Unregistered Distributions
16.
In approximately March 2007, Gendarme was founded as a Minnesota corporation by Lamphere and a former co-owner.
17.
Shortly after its founding, the co-owner sold his share of the business to Ezat Rahimi.
18.
Neither Gendarme’s founders nor Rahimi have lived in Minnesota. Rahimi has never even been to Minnesota. Gendarme purports to have a Minnesota “office,” which is actually a “virtual office” service that takes telephone messages and forwards company mail to Lamphere or Rahimi.
19.
Opinion letters issued by Armento to transfer agents asserted that Minnesota state law purportedly satisfies the requirements of Rule 504(b)(1)(iii) of Regulation D of the Securities Act, thereby supposedly permitting the issuance of “unrestricted” securities that can be freely resold, assuming Gendarme was not, among other things, an underwriter.
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Gendarme Generated Income by Purchasing Billions of Shares of Pink Sheets Stocks from the Issuers at a Discount to the Market Price and Quickly Distributing Them to the Public in Violation of the Securities Act
20.
From early 2008 to at least May 2010, Gendarme bought stock from many Pink Sheets companies at a 30-50% discount to the market price. Rahimi and Lamphere jointly developed and executed Gendarme’s business strategy. Sometimes jointly, and other times individually, they made the decisions to purchase stock on Gendarme’s behalf. Each signed numerous agreements on Gendarme’s behalf to purchase issuer stock. Most of the agreements gave Gendarme warrants for up to one year in which Gendarme could elect to purchase the company’s stock. Other agreements were outright purchases of issuer stock. Within days or weeks of purchasing the stock, Rahimi or Lamphere caused Gendarme to resell most of the stock on the public market.
21.
When it purchased shares from Pink Sheets issuers, Gendarme intended to, and did, sell shares to the public within a year. For those sales, Gendarme was an underwriter, and had no valid exemption from registration for the transactions.
22.
For example, from March to September 2008, Gendarme entered into at least 11 warrant agreements with WGL Entertainment Holdings, Inc. (“WEHI”), which gave Gendarme the right to buy WEHI shares at a 30% discount to the market price at the time of purchase. The warrants represented that Gendarme would buy the WEHI shares for “investment purposes.” For each warrant, Armento wrote an opinion letter to WEHI’s stock transfer agent. Among other representations, the opinion letters asserted that the shares were issued to Gendarme in “an offering exempt from registration” and that Gendarme was not “an underwriter of the issuer.” From March to September 2008, Gendarme paid WEHI more than $615,000 for more than 6 billion shares purchased under the warrants. As Gendarme obtained WEHI shares, it sold most of them within days or weeks for gross sales of more than $780,000 and a profit of more than $165,000 through September 2008.
23.
In March 2009, WEHI changed its name to Heathrow Natural Food & Beverage, Inc. (“HRNF”). From then until March 2010, Gendarme purchased more than a billion HRNF
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shares, and, during the same time, repeated the process of regularly dumping the shares on the market, for gross sales of more than $430,000 and a net profit of more than $230,000.
24.
From early 2008 to at least May 2010, Gendarme bought stock from at least 12 different issuing companies and distributed more than 15 billion shares in the public markets. None of the transactions was registered with the Commission. The transactions are summarized below.
a.
HRNF, formerly known as WEHI: From March to September 2008, Gendarme acquired WEHI shares from the issuer. During the same period, Gendarme sold more than 6 billion of these WEHI shares for more than $780,000. From March 2009 to March 2010, Gendarme acquired HRNF shares from the issuer. During the same period, Gendarme sold more than 1 billion of these HRNF shares for over $430,000.
b.
Macada, Inc. (“MCDA”), formerly known as Tri-Star Holdings, Inc. (“TSHL”), formerly known as Rapid Fitness, Inc. (“RPDI”): From June to August 2008, Gendarme acquired RPDI shares from the issuer. From July to September 2008, Gendarme sold more than 250 million of these RPDI shares for more than $145,000. From September 2008 through February 2009, Gendarme acquired TSHL shares from the issuer. Through August 2009, Gendarme sold more than 2.1 billion of these TSHL shares for more than $540,000. In September 2009, Gendarme acquired MCDA shares from the issuer. From September to December 2009, Gendarme sold more than 635,000 of these MCDA shares for more than $12,000.
c.
Magellan, Inc. (“MGLG”): From May to June 2009, Gendarme acquired MGLG shares from the issuer. During July 2009, Gendarme sold 500 million of these MGLG shares for more than $355,000.
d.
Perihelion Global, Inc. (“PHGI”): From March to June 2008, Gendarme acquired PHGI shares from the issuer. From March 2008 through March 2009, Gendarme sold almost 1.8 billion of these PHGI shares for more than $320,000.
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Bederra Corp. (“BEDA”): From May 2009 to March 2010, Gendarme acquired
BEDA shares from the issuer. Through April 2010, Gendarme sold more than 370
million of these BEDA shares for more than $610,000.
f.
Z Com Networks, Inc. (“ZCMN”): From September 2008 to January 2009,
Gendarme acquired ZCMN shares from the issuer. From September 2008 to June
2009, Gendarme sold more than 765 million of these ZCMN shares for almost
$260,000.
g.
RCC Holdings, Inc. (“RCCH”): From September 2008 through January 2009,
Gendarme acquired RCCH shares from the issuer. From September 2008 to June
2009, Gendarme sold more than 2.1 billion of these RCCH shares for more than
$210,000.
h.
141 Capital, Inc. (“ONCP”): From April 2009 to May 2010, Gendarme acquired
ONCP shares from the issuer. From April 2009 to February 2010, Gendarme sold
more than 710 million of these ONCP shares for almost $340,000.
i.
RBID.com, Inc. (“RBID”): In May 2009, Gendarme acquired RBID shares from
the issuer. From May 2009 to February 2010, Gendarme sold more than 400
million of these RBID shares for more than $65,000.
j.
Brownstone Resources, Inc. (“BWNR”): From March to April 2009, Gendarme
acquired BWNR shares from the issuer. From March to July 2009, Gendarme sold
more than 110 million of these BWNR shares for more than $110,000.
k.
Russell Industries, Inc. (“RUSL”): From May to June 2008, Gendarme acquired
RUSL shares from the issuer. From May to October 2008, Gendarme sold more
than 3 million of these RUSL shares for almost $19,000.
l.
TidalWave Holdings, Inc. (“TWVH”): From June to October 2008, Gendarme
acquired TWVH shares from the issuer. From December 2008 to January 2009,
Gendarme sold more than 1.6 million of these TWVH shares for more than
$30,000.
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In written communications, Rahimi revealed that the real purpose of Gendarme’s stock acquisitions was to quickly sell the shares. In negotiating a possible investment in one company, Rahimi represented to the company’s CEO that Gendarme would “try to find a life in your stock” and “help get the stock trading.” He also told the CEO that “if your stock starts trading with our help, you will have a liquid stock on your hands.” Once Gendarme acquired the shares at a 50% discount to the market price, it began selling them the next day. Within four months, Gendarme sold all of the company’s shares for a profit.
26.
From March 2008 through May 2010, Gendarme generated more than $1.6 million of profits on sales of shares acquired from issuing companies in unregistered transactions. During the same time period, Gendarme paid more than $1.3 million to Rahimi and Lamphere.
27.
Armento, Gendarme’s outside counsel throughout its activities, substantially participated in Gendarme’s illegal stock distributions. From at least early 2008 to at least mid2010, Armento drafted approximately 35 or more warrant agreements for Gendarme, which gave Gendarme the right to purchase an issuing company’s shares. The warrant agreements typically gave Gendarme the right to purchase up to a specified amount of an issuing company’s stock at a 30% or 50% discount to the market price for the company’s stock. The warrant agreements represented to issuers, among other things, that Gendarme was purchasing shares for investment purposes only – a term commonly understood to mean not for the purpose of resale. Armento expected Gendarme to exercise the warrants and purchase the shares, but drafted the warrant agreements without determining what Gendarme intended to do with the shares it would purchase.
28.
From at least early 2008 to at least mid-2010, Armento drafted more than 50 opinion letters for Gendarme. In the letters, Armento opined to transfer agents that Gendarme had acquired the shares in transactions exempt from registration under Rule 504 of the Securities Act and share certificates could be issued to Gendarme without a restrictive legend. Although Armento made no inquiry into whether Gendarme intended to hold the stock, the opinion letters falsely represented that Gendarme was not “an underwriter of the issuer with respect to the shares as defined in Section 2(11) [sic] of the Securities Act.” Armento sent the
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opinion letters to companies’ stock transfer agents, which relied on the opinion letters in issuing share certificates without restrictive legends to Gendarme.
29.
At the time she drafted and issued the opinion letters, Armento understood that a purchaser who bought shares from an issuer intending to distribute them to the public was an underwriter. In preparing and issuing the opinion letters, Armento did not ask Gendarme, or otherwise make any effort to determine, what it intended to do with the shares it was acquiring. Armento had no reasonable basis for opining that Gendarme was not an underwriter. Armento knew that, as a result of her opinion letters, Gendarme was obtaining shares without a restrictive legend, and thus would have the ability to quickly sell the shares to the public, even if doing so violated Section 5 of the Securities Act.
30.
In late 2008 and early 2009, Armento obtained and reviewed documents that showed it was likely that Gendarme was selling the shares of TSHL (f/k/a RPDI) shortly after it had acquired shares from the company. In fact, Gendarme was selling the shares. Before issuing additional opinion letters for Gendarme to purchase more of the company’s stock, Armento failed to determine if Gendarme was selling the shares.
31.
Since first representing Gendarme, Armento has also issued at least 35 similar opinion letters for purchasers other than Gendarme for other unregistered purchases of stock offered under purported Rule 504 exemptions.
CLAIM FOR RELIEF
(Violations of Securities Act
Sections 5(a) and 5(c) by all Defendants)
32.
The Commission incorporates and realleges here paragraphs 1 through 31, above.
33.
During the relevant period, Defendants, directly or indirectly, made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer and to sell securities through the use or medium of a prospectus or otherwise when no valid registration statement had been filed or was in effect as to such offers and sales of such securities and no exemption from registration was available.
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Defendants engaged in or participated in the unlawful distribution of
securities as described above.
35.
By reason of the foregoing, Defendants, directly or indirectly, violated, and unless enjoined will continue to violate, Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
I.
Permanently enjoin and restrain Defendants from, directly or indirectly, engaging in conduct in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c].
II.
Order defendants Gendarme, Lamphere, and Rahimi to provide an accounting and to disgorge their ill-gotten gains in an amount according to proof, plus prejudgment interest thereon. III.
Order Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)].
IV.
Impose a bar on defendants Gendarme, Lamphere, and Rahimi from participating in an offering of penny stock pursuant to Securities Act Section 20(g) [15 U.S.C. § 77t(g)].
V.
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
VI. Grant such other and further relief as this Court may deem just, equitable, and necessary.
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Dated: January 6, 2011 Respectfully submitted,
/s/ Jeremy E. Pendrey
Jeremy E. Pendrey
Attorney for Plaintiff
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