Michael Morris, a registered broker and managing director of a firm expelled by FINRA, entered a guilty plea for his role in a 2013 market manipulation scheme.
Michael Morris, a registered broker and managing director of New York-based Halcyon Cabot Partners, Ltd., has pled guilty in Brooklyn federal court to one count of conspiracy to commit securities fraud for his participation in a 2013 $86 million market manipulation scheme involving the publicly traded company CodeSmart Holdings, Inc.
Morris faces a maximum of five years in prison.
Morris and his co-conspirators were originally charged in 2015, accused by the U.S. Department of Justice (DoJ) of “selling to elderly investors worthless stock of a company that purported to provide medical coding training required by the Affordable Care Act.”
At that time, the Financial Industry Regulatory Authority (FINRA) expelled Halcyon Cabot Partners and barred Morris, then its CEO, and Ronald Heineman, the firm’s chief compliance officer (CCO), from the securities industry, for “fraud, sales practice abuses, and widespread supervisory and anti-money laundering failures.” FINRA called their scheme an attempt to “conceal a kickback of private placement fees.”
Morris’s 2013 scheme, of a type known informally as a “pump-and-dump,” involved a reverse merger of CodeSmart, a private company, with a public shell company.
“After gaining control of CodeSmart’s three million purportedly unrestricted shares, Morris and his co-conspirators fraudulently inflated CodeSmart’s share price and trading volume, and then sold their shares at a profit when the price reached desirable levels,” the DoJ says in a statement.
The DoJ specifies that the “first pump and dump occurred between approximately May 13, 2013 and August 21, 2013. During this period, Morris’s co-conspirators manipulated CodeSmart’s stock price by raising it from $1.77 to a high of $6.94, before causing it to drop to $2.19.
“The second pump and dump occurred between approximately August 21, 2013 and September 20, 2013. During this period, Morris and his co-conspirators manipulated CodeSmart’s stock price by raising it from $2.19 to a high of $4.60, before causing it to drop to $2.13.
“On July 12, 2013, when CodeSmart’s inflated share price was at its highest, CodeSmart’s market capitalization was $86,347,800,” according to the DoJ. “However, that same day, CodeSmart filed with the U.S. Securities and Exchange Commission an amended Form 10-K, in which it listed only $6,000 in total assets, $7,600 in revenue, and a net loss of $103,141. By December 30, 2013, CodeSmart’s stock was trading at merely $0.66 per share and, on July 9, 2014, its stock closed at $0.01 per share.”
The 2015 FINRA investigation, conducted by its departments of enforcement and member regulation, found that “Halcyon, Morris and Heineman, along with a previously barred registered representative, Craig Josephberg, agreed to conceal the discount the issuer provided to a venture capital firm when it purchased a private placement in a cancer drug development company. The scheme was effected through a bogus placement fee agreement that was entered into after the venture capital firm had already agreed to purchase the entirety of the offerings. Halcyon did not perform any work, as there was already a buyer in place, but rather returned almost all of its $1.75 million placement fee to the investor through sham consulting agreements. This fraudulent scheme allowed the drug company to conceal that it was selling its shares at a discount.”
In addition, FINRA determined that Halcyon and Morris “enabled a now-expelled broker-dealer, Felix Investments, LLC, to collect undisclosed commissions. Pursuant to an agreement between Halcyon and Felix, Felix charged buyer commissions and Halcyon charged seller commissions on a transaction, despite the fact Halcyon did not provide any services to the sellers. Halcyon then secretly shared the sellers’ commissions with Felix.”
Furthermore, according to FINRA, “Morris falsified Halcyon’s books and records to conceal Josephberg’s sales of securities in states where he was not registered, including Florida, Texas and Colorado. Halcyon also failed to supervise Josephberg, who churned retail customer accounts and effected unauthorized trades.”
At the time, Halcyon Cabot Partners, Morris and Heineman “neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.” Now that Morris has admitted to the fraud, he faces the likelihood of imprisonment.
In March, Josephberg entered a guilty plea before U.S. District Judge Eric Vitaliano in Brooklyn, admitting to securities fraud, wire fraud and conspiracy charges.
FTF News contacted Morris’s attorney for comment and for a sense of why Morris defrauded elderly investors in particular, selling them worthless stock. There was no reply.
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