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In the Courts
UK Founder of Swiss Asset Management Firm Pleads Guilty in $164 Million Global Securities Fraud Scheme
On Jan. 13, 2020, Roger Knox, 47, a UK citizen and the former founder and operator of Swiss asset management firm Silverton SA, plead guilty to one count each of securities fraud and conspiracy to commit securities fraud before U.S. District Court Judge Nathaniel Gorton in federal court in Boston. The charges against Knox, who was arrested in 2018, relate to a global market manipulation scheme involving so-called "pump and dump" frauds that generated proceeds of approximately $164 million.
According to prosecutors, Knox, together with others, illegally sold massive quantities of microcap securities via Silverton SA (later renamed to Wintercap SA), on behalf of investor "control groups" who secretly owned the stock through nominee shareholders (being fake shareholders that held the stock in name only). The "microcap" or "penny" stocks involved are publically traded U.S. companies that have a low market capitalization and are most often priced below $1 per share. They are particularly susceptible to price manipulation because large blocks can be controlled by a small number of individuals while also being subject to fewer reporting requirements than larger companies. Using nominee shareholders allowed the true investors to hide the actual depth of their ownership, avoiding regulatory disclosure requirements including the U.S. Securities and Exchange Commission's (SEC) so-called "5% rule" that requires disclosure when a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company's registered securities.
To carry out the scheme, a stock promoter would artificially inflate the value of the stock via release of exaggerated information promoting the false appearance of interest and activity (the "pump") so that the control group could then sell their large positions for a profit (the "dump"), all the while remaining hidden behind nominee shareholders and Silverton SA. According to the FBI, in this way Knox funneled the proceeds from the sales of more than 100 different publicly traded companies to various co-conspirators in the U.S. and overseas via a complex money transfer system concealing the source and nature of the funds. In total the scheme diverted an estimated $164 million out of the U.S. market illegally since June 2015. As payment for his role in orchestrating the scheme on behalf of the investor control groups, Knox received a 6% commission based on the proceeds of the stock sales.
Knox was the fifth person to plead guilty or agree to do so in relation to the scheme. The others include Richard Targett-Adams, a French national who helped to run Silverton SA alongside Knox and Morrie Tobin, a Los Angeles resident who invested in publically traded companies to further the arrangement. International tax attorneys Milan Patel and Matthew Ledvina also plead guilty for their role in hiding Tobin's ownership in two companies linked to the scheme while Partners at Switzerland-based law firm Anaford AG. Tobin, Patel and Ledvina are all described, under pseudonym, as cooperating witnesses in Knox's indictment by the FBI. One of the attorneys (unnamed by the FBI) also agreed to covertly record several phone calls with Knox, in which he discussed various aspects of the scheme in detail and his reluctance to visit the U.S. due to concerns around potential law enforcement scrutiny. All co-defendants are currently awaiting sentencing and are also facing civil securities fraud charges from the SEC. A further Swiss national, Daniel Lacher is included in the related the SEC Complaint, but has not been criminally charged.
Examples of the fraudulent manipulation of securities traded through Silverton SA were provided with Knox's indictment, including one relating to a company called Environmental Packaging Technologies, Inc. (EPTI). According to prosecutors, in June 2017, Ledvina and Patel, knowing that EPTI stock was controlled by Tobin, helped create the sham nominee entities to hold his stock prior to its transfer into a Silverton account. In Knox's communications with a third party broker around this time he effectively acknowledged that if his clients had to disclose the true beneficial owner of the shares they would have no reason to use his (or Silverton SA's) services, "as I would be unable to add value." A direct mail campaign was then commenced directed to investors in all 50 states stating that if investors "act[ed] now … [they] could grab quadruple digit gains!" In the wake of the campaign, the price and average trading volume of EPTI increased dramatically over a six month period, from a high of $1.05 with average daily trading volume of approx. 2,300 shares to $2.18 per share with an average daily volume of close to 500,000 shares. Approximately $1.5 million worth of EPTI stock was sold via the pump-and-dump scheme before trading was halted by the SEC in mid-2017.
Knox's sentencing has been scheduled for April 23, 2020, when he faces up to 25 years in prison on the two charges. In a parallel action that was unsealed after his arrest in October 2018, Knox has also been charged with civil securities fraud by the SEC in connection with the scheme.
The criminal case is U.S. v. Roger Knox, No. 1:18-mj-06268 (U.S. District Court for the District of Massachusetts). The civil case is Securities and Exchange Commission v. Knox et al., No. 1:18-cv-12058 (U.S. District Court for the District of Massachusetts).
— Juliet Gunev, Mayer Brown
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