Gregg Mulholland’s case, which involved money laundering and the violation of Sections 5(a) and 5(c) of the Securities Act of 1933 has been selected for the present case. The case revolved around a pump and dump scheme through which Mulholland misled investors to buy the shares of thinly capitalized companies at inflated prices. He would then dispose his shares in such companies at their inflated values and launder the proceeds through offshore banks and other businesses. The three stages of money laundering, which are placement, layering, and integration were present in Mulholland’s case. He placed the money into the financial system in the form of unlegended common shares of various companies. The proceeds of the sale of the shares were layered through offshore businesses that were not legally bound to follow all record keeping and reporting requirements. Finally, he injected some of the proceeds of the criminal activities into the shares of more pump and dump schemes, and the cycle began all over again.
Forensic Accounting Case Study Week 6
Definition of the Major Problems
Gregg Mulholland’s $250 million pump-and-dump scheme case has been selected for the present project. The scheme involved the manipulation of the shares of over 40 companies. The perpetrator used thousands of shell companies to falsely tout and pump up the shares of thinly traded public companies, thereby misleading investors to buy the stocks of such companies. He would then dump his shares in such companies at inflated values. Therefore, the sudden rise and the subsequent fall in the value of the shares of the companies involved were the primary symptoms of the fraud. Cynk Technology Corp. was one such company. Its shares rose by approximately 24,000% in two months for apparently no good reason. The company had no revenue or assets. However, its shares soared from 6 cents to $21.95 in two months.
The fraud involved two major problems, which are money laundering and the violation of Sections 5(a) and 5(c) of the Securities Act of 1933.according to Hopton (2012) money laundering refers to the process through which criminals hide the origins and ownership of the proceeds of their criminal activities. It provides them with control of and covers for their income and wealth. Section 5 of the Securities Act of 1933 relates to the prohibitions to interstate commerce and the mails. According to SEC (2012), Section 5 (a) prohibits ‘use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise.’ Additionally, the Section also prohibits the ‘carrying or causing to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.’ Section 5 (c) states that ‘It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8’ (SEC, 2012).
Analysis of the Problems
As stated in the preceding paragraph, money laundering is the process of transforming the proceeds of illegal activities into clean and legitimate capital. According to McCoy (2016), Mulholland was charged with money laundering in May 2016. He pled guilty and is still awaiting sentencing. The money laundering process, and the manner in which it relates to Mulholland’s case is analyzed in the present part. Hopton (2012) states that the process comprises of three states, which are placement, layering, and integration.
Placement refers to the process through which criminal funds are placed into the financial system, either directly or indirectly. According to Madinger (2011), placement relies on businesses that deal heavily in cash and financial institutions of all types. Criminals direct most of their placement mechanisms at positioning their funds in banks or financial institutions. Mulholland’s scheme involved the placement of 100 million unlegended shares of common stock in a foreign bank. The foreign bank then deposited all the shares of the Depository Trust Company. The shares were then positioned to be sold to the public market. It is important to note that all the activities mentioned above took place within a month.
Layering is the process of separating the proceeds of criminal activities from their source by using complex layers of financial transactions designed to hide the audit trail and provide anonymity. Cash transactions and the use of offshore banks and businesses that are not legally bound to follow all record keeping and reporting requirements are the two most popular methods of layering (Madinger, 2011). Mulholland used various foreign law firms to hide his anonymity. According to McCoy (2016), he hired an unidentified lawyer in the US to help in the layering process. Additionally, the scheme used the accounts of five foreign law firms to distance Mulholland from the money trail.
Integration is the process of placing the laundered money back into the legitimate economy in such a way that it appears to be normal business capital. The apparent source of the money is the main focus of the money. Mulholland injected some of the proceeds of his criminal activities into more pump and dump schemes.
Mulholland was also charged with the unregistered distribution of the Securities of Vision Plasma Inc., a company he had acquired in 2012. He was accused of utilizing the services of an offshore company that set up international business corporations (IBCs) with complicated legal structures to hide the fact that he was the ultimate owner of the IBCs and the securities that they held. Specifically, he was charged with the violation of Sections 5(a) and 5(c) of the Securities Act. Specifically, he offered and sold the shares that were not registered (SEC, 2017). Additionally, the offer and sale of the shares were executed in interstate commerce. Mulholland also carried or caused the unregistered securities to be carried by means of instruments of transportation through interstate commerce or mails for the purposes of delivery after sale. The court found Mulholland guilty as charged and ordered him to restrain from conducting similar activities which may violate Sections 5(a) and 5(c) of the Securities Act. It also ordered him to prepare sworn accounting statements to provide an accurate measure of the unjust income, including all the income from the sale of Vision Plasma. Additionally, the court ordered him to pay disgorgement and pre-judgment interest of $24,659,355.57 (SEC, 2017).
The preventive and detective controls that can be put in place to prevent money laundering are discussed in the following part of the present essay. As stated elsewhere in the essay, Mulholland used offshore banks and law firms to accomplish the layering stage of his fraud. According to the Office of the Comptroller of the Currency (2002), banks and other financial institutions need to implement various measures to help detect and prevent money laundering. They are establishing effective Bank Secrecy Act compliance programs to ensure proper record keeping and reporting and establishing effective customer due diligence systems and monitoring programs such as Know Your Customer (KYC) and the verification of the identity of customers. Others include screening against the Office of Foreign Assets Control (OFAC) and other government lists, establishing effective processes to monitor and report suspicious activities, and developing risk-based anti-money laundering programs. The above measures would decrease money-laundering activities. However, they would increase the operational costs of financial institutions as they are expensive to implement and maintain. Additionally, the measures would only resolve money laundering activities that use financial institutions in their layering stage. Therefore, the solutions would have little effect on money launderers that use cash transactions in the layering stage.
- Hopton, D. (2012). Money Laundering: A Concise Guide for All Business (2nd ed., pp. 1-4). Gower Publishing, Ltd.
- Madinger, J. (2011). Money Laundering (1st ed., pp. 5-8). Hoboken: CRC Press.
- McCoy, K. (2016). Guilty plea in $250M pump-and-dump scheme. USA TODAY. Retrieved from http://www.usatoday.com/story/money/2016/05/09/broker-pleads-guilty-250m-pump-and-dump-scheme/84138184/
- Office of the Comptroller of the Currency,. (2002). Money Laundering: A Banker’s Guide to Avoiding Problems (1st ed.). Washington, DC. Retrieved from https://www.occ.treas.gov/topics/bank-operations/financial-crime/money-laundering/money-laundering-2002.pdf
- SEC,. (2012). SECURITIES ACT OF 1933 (1st ed., p. 30). Retrieved from https://www.sec.gov/about/laws/sa33.pdf
- SEC,. (2017). Litigation Release No. 23719 /January 13, 2017 (1st ed., pp. 1-12). SEC. Retrieved from https://www.sec.gov/litigation/complaints/2015/comp-pr2015-129.pdf