Death-Spiral Whiz Kid Joshua Sason Sued by SEC for Penny Stock Fraud

(Bloomberg) -- Joshua Sason, a financier who made a fortune on penny stocks while he was in his 20s, was sued by the Securities and Exchange Commission for fraud.

Sason and his company Magna Group allegedly participated in elaborate schemes to illegally obtain free-trading shares of penny stock companies which it could quickly unload on individual investors, the SEC said. The transactions generated more than $25 million. The SEC also sued Magna’s former head of research and two other people involved in the deals.

"Magna Group and its co-defendants used fake debt instruments to unlawfully obtain shares in microcap companies, which they then dumped on unsuspecting retail investors,” said Sanjay Wadhwa, senior associate director of the SEC’s New York office. “This action demonstrates the resolve of the SEC in pursuing fraudsters who use elaborate financing schemes to engage in securities fraud.”

Sason, now 31, was the subject of a 2015 profile in Bloomberg Businessweek, which described how he’d gotten rich by making loans to desperate penny-stock companies and was using the money to try to turn himself into an entertainment mogul. Sason made a cameo in the boxing movie “Bleed For This,” which he produced with Martin Scorsese.

Critics call loans like his "death-spiral financing" because they drive stocks into the ground. Sason said in an interview for the Businessweek story that his deals were intended to help companies.

“The SEC’s claims against Magna and its founder, Josh Sason, are without any factual or legal basis,” Michael Ference, a lawyer for Sason and Magna, said in an email. “While these unfounded claims should never have been filed, Magna and Mr. Sason will vigorously contest them in court, and are confident they will prevail.”

David Axelrod, a lawyer for the former Magna research head, Marc Manuel, said the SEC’s allegations are untrue. “We look forward to challenging the SEC’s evidence,” he wrote in an email.

Simple Trick

Death-spiral financing relies on a simple trick. A financier lends a penny-stock company money, then gets repaid in discounted shares. No matter where the stock is trading, the lender gets it for less, all but ensuring a profit. The business can be done legally, but it’s too sketchy for most Wall Street banks and hedge funds. Several other penny-stock financiers have been sued by the SEC in recent years for breaking the rules around dumping shares.

The SEC’s case against Sason centers on deals in which his company claimed to be buying existing debts and settling them for stock. According to the SEC, the debts were fake -- made up to justify issuing the shares. The losers were the existing investors in the company, who were caught off guard when the market was flooded with new shares that drove down the price, the SEC said.

Greek shipping company NewLead Holdings Ltd. was one of the companies that did deals with Magna. That company’s stock has dropped so far that if you’d bought $3 million of shares in March 2013, just before Magna invested, you would have been left with holdings worth just 10 cents two years later. Adjusted for reverse splits, the shares traded at that time for 20 billionths of a penny -- $0.0000000002.

The case is Securities and Exchange Commission v. Sason, 19-cv-01459, U.S. District Court, Southern District of New York (Manhattan).

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