Kentucky business owner fraudulently inflated company stock price, complaint says
Federal regulators have accused an Eastern Kentucky man of being part of a scheme to artificially inflate the value of a company stock so he could cash it out, burning investors in the process.
By the end of the scheme, the stock price had dropped to 22 cents a share, resulting in significant losses to investors who had paid up to $8.83 a share, according to the complaint filed by the U.S. Securities and Exchange Commission.
The SEC filed the complaint last week against Anthony Michael Baker, 54, of Pike County; Justin Wallace Herman, 51, who lives in Pennsylvania; Ian Horn, 67, an attorney in Florida; and Island Capital, a company that had its main place of business in Pikeville.
Baker is president and chief executive officer of Island Capital and Herman was vice-president at one time, while Horn provided opinion letters about issuing the stock involved in the alleged scheme, according to the complaint.
The complaint is a civil matter, not a criminal charge.
The alleged scam took place in 2017 and involved stock of a shell company, NxGen Brand, that was formerly known as Pyramidion Technology Group Inc., or PYTG.
At one point, the company was in the business of selling an energy storage system, but by 2016, a company official said PYTG had no assets and he planned to dissolve it, according to the complaint.
However, an agent offered to find a buyer, a process that ultimately ended up with Island Capital and Herman owning PYTG stock.
At the end of 2016, PYTG filed a disclosure saying it was evaluating several technologies to potentially market, but had no assets, revenue, contracts or technology licenses.
‘Nothing in them’
Baker then facilitated a sham purchase of two companies by PYTG to make it appear PYTG had assets and business opportunities, the SEC alleges.
Baker had an associate create the two other companies. The associate, who was not named in the complaint, later said they were “just private shells, nothing in them,” according to the SEC complaint.
PYTG then announced in April 2017 that it had paid $2.2 million and 50,000 shares for a majority stake in the two companies.
The purchase agreement said PYTG was buying an interest in the two companies from Baker’s nephew, but the nephew told investigators that at the time of the supposed sale, he’d never heard of the companies or PYTG, didn’t make a deal with PYTG and never got any money, the SEC said in its complaint.
Horn provided an opinion letter that falsely stated PYTG was not a shell company, enabling Herman and Baker’s company, Island Capital, to obtain unrestricted shares of the company, the SEC alleged.
In April 2017, after months of PYTG having no trading volume, Herman began buying shares of the company through multiple brokerage accounts in his name, the name of Island Capital and others, according to the SEC.
Herman allegedly bought and sold the stock several times a day to create the appearance of activity in order to drive up the stock price, the complaint alleges.
On May 25, 2017, for example, two accounts tied to Herman made up 49% of all the trading activity for PYTG stock, which had the effect of boosting the share price from $6.76 when the market opened to $7.30 at closing, the complaint said.
Those accounts had a net loss that day, but by using orders to sell its PYTG stock at a certain price, Island Capital realized profits of $44,891 that day, according to the SEC.
‘Ill-gotten gains’
Herman also used operations called “boiler rooms” to help fraudulently market the stock, with sales agents cold-calling potential investors, and also worked with a trader to offload PYTG stock through coordinated trades, the complaint said
Over several months in 2017, Herman sold most of his converted shares of PYTG and profited at least $810,830, while Island Capital made a profit of at least $353,855, the SEC complaint said.
Baker allegedly spent at least $106,040 of the money Island Capital made on the stock for personal expenses.
Horn made false statements and Baker, Island Capital and Herman “employed devices, schemes, and artifices to defraud,” the SEC alleges.
The lawsuit seeks an order barring Baker, Herman and Island Capital from violating securities laws.
It also seeks to have them give up all “ill-gotten gains or unjust enrichment” and pay a fine. It didn’t specify the amount.
Efforts to reach Baker were not successful. Horn said he did not want to comment.
Herman told the Herald-Leader he didn’t intend to take part in a “pump and dump” — a term that refers to inflating the value of a stock and then dumping it.
“I never had an intent to do anything wrong,” Herman said. “I will say that for the rest of my life.”
Herman said he believed the same was true of Horn, “but that’s where that stops.”
