Anatomy of a Fraud: An Investment Group, A Brokerage Firm and the Loss of a Lot of Money

In my career, I have seen a lot of frauds, some of which are prosecuted by the authorities and many of which are not.  One of the more interesting fraud schemes we have come across lately combines a standard type of securities fraud—a “pump and dump” scheme—with the operations of a discount broker. The result is that a lot of people have lost a lot of money, and a federal judge in Texas has shielded the perpetrators of this scheme from criminal prosecution.

Here’s what happened.

Several years ago, a group of people formed a chat community on Discord known as “Atlas Trading”. These individuals, Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey, posed as experienced investors there to help people achieve success in investing. It is important to note that none of the individuals involved were licensed as investment advisors, and Atlas Trading was not a registered brokerage firm. This should have been a red flag for investors, but many unsophisticated investors are unfamiliar with legal requirements, and a social media presence was all that was necessary for Atlas Trading and its founders to achieve a significant social media following.

It was the social media presence of Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey that no doubt created their social media following. Their posts were filled with pictures of expensive sports cars, and they listed the amounts of money they made in trades. Anyone who believed these posts would conclude that these were people who really knew what they were doing.

And the fact is, they did know what they were doing. They were running a “pump and dump” scheme with low value investments. Basically, they would find a stock that was trading for a very low amount of money and then buy significant numbers of the shares available—they would also encourage their followers to buy shares as well. These purchases would cause the share price to increase unreasonably, and once they hit a certain threshold, the Atlas owners would sell their shares, making extraordinary profits.

The problem was, once Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey sold their shares, the price of the stock would collapse leaving all the other investors with steep losses, hence the terms “pump”—the purchasing of a large number of shares—and “dump”—the sale of a large number of shares. Pump and dump schemes are illegal because they are a form of market manipulation.

When the Securities and Exchange Commission (SEC) became aware of the Atlas Trading scheme, Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey were all sued for violations of securities laws. Shortly thereafter, the U.S. Attorney’s Office in the Southern District of Texas indicted Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey. Although some of the co-conspirators pled guilty, the District Court judge overseeing the case dismissed the Indictment against some defendants because of a supposed pleading error. The U.S. Attorney appealed the dismissal, but for now, at least, the dismissal stands. The SEC case continues.

Two things are obvious from this scheme. First, investors who believed the Atlas Trading owners and followed their investment recommendations have lost many millions of dollars. By the time the SEC case is finished (and the U.S. Attorney obtains a reversal of the District Court’s dismissal), it is unlikely that there will be much money to collect and distribute to the victims. A rich lifestyle focused upon spending money as quickly as possible rarely leads to the accumulation of any wealth.

Left in the wake of this financial destruction are the ruined lives of the people who followed Atlas Trading and believed the lies of Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey. In many cases, people have invested all that they had in what turned out to be a fraud. Some of these people will not be able to recover the money they lost from the people who lied to them, stole from them, and lived extraordinary lives for at least a short period of time.

How can one know if an investment recommendation is part of a pump and dump scheme? Here are a few points to consider:

• Who is making the investment recommendation? Is it a licensed investment professional? Of course, licensed investment professionals do become involved in pump and dump schemes (as well as many other types of securities and other fraud), but if the person making the recommendation is a licensed securities professional, it is possible to check their background on the Financial Industry Regulatory Authority (FINRA) “Broker Check” to see if they have had any disciplinary history.
• Is the stock a “penny stoke”? A penny stock is normally defined as any stock having a value of $5.00 or less and is typically traded Over the Counter (OTC) on the New York Stock Exchange (NYSE) OTC Bulletin Board. These stocks normally have low values because they are not worth much. On the other hand, an increase in the value of a stock of a dollar or more is significant. A relatively small investment can therefore “pump” the value of the stock significantly.
• Why is the stock increasing or supposed to increase in value? Sometimes recommendations from a reputable stock advisor are based upon sophisticated research, but even then, the recommendation is based upon a prediction that can turn out to be wrong for any number of reasons. The important thing for an investor to understand is: why is the stock increasing in value? The biggest thing here is don’t believe the fraudster. Due diligence is necessary.
• What is the investment advisor’s history? History is not determined by pictures of Ferraris or Lamborghinis, or a new mansion filled with young women around a pool. It consists of knowing who has invested with this individual before and whether they have made money.

There are other things to consider when evaluating whether a stock is a pump and dump stock. The SEC has information about pump and dump stocks here. These schemes are common and can go on for extended periods of time. Be careful when investing, and when things appear too good to be true, they nearly always are.

What Can be Done if a Person is a Victim of a Pump and Dump Scheme?

It is easy to say that these are the things that need to be done to avoid a pump and dump scheme, but the unfortunate reality for many people is that they did not know what a pump and dump scheme was until they became victims. Is there anything that can be done to help the unfortunate soul who believed the fraudster?

The answer to this question is: it depends. Sometimes suing a fraudster makes sense—they sometimes have assets that can be levied against. However, it takes time and costs a lot of money to pursue the fraudster, and the assets are often dissipated before the suit becomes final. Most states have Fraudulent Conveyance statutes that allow for the recovery of assets that were conveyed to a friend or family member without payment of adequate compensation, but, again, locating the asset and entering into litigation over it is costly. Many victims lack the resources to pursue the funds they lost, and the victim often lacks funds because of the theft of their assets. Nevertheless. It is always something that should be considered.

There may be other companies or individuals, however, who assisted the fraudsters or played a pivotal role in the loss of funds, and it may be possible to pursue these entities in some circumstances. In the Atlas Trading matter discussed above, Constantinescu, Matlock, Knight, Rybarczyk, Deel, Hrvatin, Cooperman, and Hennessey entered into an agreement with a Chinese owned brokerage firm known as Webull. This agreement, known as a “Social Media Influencer Program” paid social media influencers for referring Atlas followers to Webull, thereby allowing Webull to make money from the Atlas Trading followers.

Fraudsters do not exist in a vacuum. They usually require the assistance of others to perpetuate the fraud, and when the fraud involves the sale of securities, it is useful to have the assistance of a brokerage firm to complete the fraud. So, in this case, the fraudsters recommended their victim’s use Webull because they knew Webull would process the sales the fraudsters were recommending. In other words, they were assisting the fraudsters in pumping the stock while at the same time charging the victims for each purchase. When the stock ultimately collapses, they again charge investors to sell the stock. From Webull’s perspective, they make money no matter what, so they really don’t care what happens to the individual investor.

Webull feels secure in its position because it is a “discount broker”—meaning that it administratively processes orders for the sale or purchase of securities but does not provide any advice or recommendations concerning the purchase or sale of securities. Since it makes no recommendations, it believes it cannot be held responsible for any “bad advice”. Other brokers, referred to as “full-service brokers” do provide advice, and they market their services to customers. So, to Webull, it is a quintessential discount broker.

Except it isn’t in its dealings with Altas and its followers. Atlas does provide investment advice, and it is that investment advice that attracts its followers. It is those followers that Webull seeks to have use its investment services. Webull is therefore relying upon investment advice to sell its services, just as a full-service broker would. However, unlike full-service brokers, Webull does not monitor Atlas’ investment advice. In fact, it appears to not even understand the advice being given by Atlas. To be clear, to a sophisticated investment professional, Atlas appears to be running a pump and dump scheme, and if Webull looked at what Atlas was marketing, it would have known that Atlas was running a pump and dump scheme.

So either Webull never looked, or it saw the scheme and decided to work with Atlas anyhow. In fact, FINRA recently fined M 1 Finance $850,000 for failing to supervise social media influencers’ posts concerning M 1 products and returns. This action and a number of other actions taken by FINRA require that a firm that uses a social media influencer be familiar with that influencer’s posts. In the case of Atlas Trading, Webull, at a minimum, was not familiar with the posts.

So, is Webull liable? We don’t know yet; however, based upon the M 1 action, it may be.

The important thing to understand in every case where a fraudster has victimized an investor is that there may be other entities or individuals involved in the fraud, and it may be possible to collect all or part of a fraud loss from these entities or individuals. At Boyle & Jasari, we represent victims of fraud—if you or a friend or relative have been victimized by a fraudster, we may be able to help. Give us a call, and we can discuss the loss.