On August 22, 2012, the U.S. Securities and Exchange Commission (“SEC”)charged a New York-based firm and its owner with conducting a penny stock scheme in which they bought billions of shares of stock from small companies and illegally resold those shares in the public market. The charges reflect the SEC’s apparent commitment to policing investment fraud. Unfortunately, as often is the case, the charges are not brought until after the damage has been done to investors.

The SEC alleges that Edward Bronson and E-Lionheart Associates LLC reaped more than $10 million in unlawful profits from selling shares they bought at deep discounts from approximately 100 penny stock companies. On average, Bronson and E-Lionheart were able to generate sales proceeds that were approximately double the price at which they had acquired the shares. These sales were in violation of federal securities laws, however, because no registration statement was filed for the shares and there was no valid exemption from the registration requirements. As a result, investors purchasing thee shares did not have access to all of the information that a registration statement would have provided, including in many instances important information concerning the issuance of millions of new shares by the companies to Bronson and E-Lionheart.

According to the SEC’s complaint, Bronson lives in Ossining, N.Y. E-Lionheart, which also does business under the name Fairhills Capital, is located in White Plains. At Bronson’s direction, E-Lionheart personnel “cold called” penny stock companies to ask if they were interested in raising capital. If the company showed interest, E-Lionheart would offer to buy stock in the company at a deeply discounted price per share. Typically, Bronson and E-Lionheart would resell the shares to the investing public within days, at significantly higher prices than they had paid for the shares.

The SEC seeks disgorgement of more than $10 million in ill-gotten gains, penalties. The complaint also names another entity owned and controlled by Bronson – Fairhills Capital Inc. – as a defendant for the purpose of recovering the illegal proceeds.

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