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By Moshe Silver

The SEC trumpets its latest investor protection enforcement actions (Litigation Release 23303 / July 14) charging 34 individuals and entities with manipulating microcap stocks. Among the alleged perpetrations, the activities of one Harold Bailey “B.J.” Gallison II caught our eye. 

Call us cynical, but we’ve been around this industry a long time.  In fact, we were already seasoned professionals back in 2000 when the SEC brought fraud charges that resulted in said B.J. Gallison being sentenced to five years in prison. 

The SEC Tweets – Relentless Pursuit - z eye

This week’s SEC 67-page complaint describes Gallison as “a repeat securities law violator,” citing his “extensive regulatory history” back to 1996.  Gallison, now 57, is charged with running a brokerage operation out of Costa Rica that facilitated fraud by providing “anonymity to customers who sought to manipulate the market for microcap stocks in the US,” including shares in a company with the imposing name of Warrior Girl.

Details of the alleged fraud include such Hollywoodesque monkeyshines as having US-based fraudsters posting fake background photos on their Skype accounts to give the impression they were located in Costa Rica – rather than sitting in an apartment in Spokane, WA, where they were not registered and therefore not eligible to run stock orders for US customers.  The press release alleges some $5 million in purported illicit gains from only two of these activities; the full extent of customer losses may never be determined.

The bottom line is that every dollar fraudulently obtained by such activities is an after-tax dollar taken right out of the pocket of a private investor.  And, given that these frauds have been around for decades, it continues to be the least sophisticated investors who get caught in them – read: the least well educated and the least affluent.  The $5 million or so referenced in today’s press release likely represents serious pain for families who can ill afford the losses.

Once there were two people who decided to go into business together: one of them had money, the other had experience.  A year later, the positions were reversed.  Welcome to our world.

For all the Commission’s turning up the heat, we find it not so comforting to know that a convicted stock fraudster continues to ply his trade over a decade after his last case came to light.  The prosecutor in the 2000 case told news media at the time that Gallison showed open contempt for regulatory efforts to block his activities, and he predicted that Gallison would continue to run his illicit activities from his prison cell (Take that, El Chapo!)  It is not clear whether any measures were put in place to hinder or even surveil Gallison’s activities subsequent to his being released from prison.  We’d guess not.

It is worth quoting verbatim from the SEC release:

“ ‘This case demonstrates the Commission’s resolve to relentlessly pursue the villains behind these microcap fraud schemes wherever in the world they may be hiding,’ said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force, added: ‘This case presents an excellent example of the capacity the Microcap Fraud Task Force has developed to pierce the layers of sham entities and nominee accounts that predators employ to harm investors and evade detection by law enforcement.’ ”

We are not aware of any serious effort either by law enforcement or by academics to calculate how much money is lost by small investors who get caught up in these scams, but our best estimate is: lots and lots.  It may be a cheap shot to go after the Commission for cases such as this, but with Gallison on their radar as far back as 1996 – and with him having done jail time for essentially the same activities – we wonder where the Justice Department is on such cases – not to mention apparent lack of international coordination, though it is well known that such frauds are routinely perpetrated from offshore – and we wonder equally what yardstick the SEC is using to measure their “relentless resolve.”

The SEC is asking for the usual: disgorgement and restitution.  We’re not sure where that money is supposed to come from, nor how far the law will punish Gallison and his cronies if they are convicted.  If you had the opportunity to buy shares in Warrior Girl and didn’t, this would be a good moment to wipe your brow and praise Divine Providence.  If you did buy shares in Warrior Girl, we suggest you seek solace in the relentless resolve of the federal agency.

And don’t do it again.

Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.