Delaware prosecutors say that Matthew Brown, operator of the Investors Hub website, should be held liable for the entire $4.78-million in profits from an illegal pump-and-dump scheme he aided, even though he personally received just a fraction of the money. (All figures are in U.S. dollars.) A substantial penalty is necessary, given the gravity of the overall offence, the government contends.

The penalty stems from a scheme in which Mr. Brown, 28, and others manipulated stocks with prearranged trades and posts on Investors Hub. The companies included in the investigation were Ontario-based pink sheets listing Playstar Corp. Mr. Brown pleaded guilty to the charges and, on May 18, 2011, received a sentence of four years in jail. The judge, in handing down the sentence, also entered a $4.78-million asset forfeiture order against Mr. Brown, which he has since argued was unfair.

In a motion filed on May 27, Mr. Brown said the forfeiture order amounted to a "financial death sentence." His understanding of his guilty plea was that he would only forfeit his personal gains from the scheme, which were $117,000. He did not know that he would be subject to a "monumental financial burden," he argued. Mr. Brown further contended that the government held him liable for profits made by those who were not even charged with anything. Those individuals netted $3-million from the scheme, he said.

Judge should uphold fine

In their response to Mr. Brown's motion, filed on June 8, 2011, prosecutors say the judge should uphold the $4.78-million forfeiture order because it accurately reflects the plea agreement. As the government sees it, when Mr. Brown pleaded guilty he agreed to forfeit all proceeds from the scheme, and not just the portion that he received. Moreover, he received notice of the forfeiture amount six days before his sentencing. The time to raise a dispute was before the judge imposed the penalty, and not days later, the response states.

Prosecutors also argue that there was nothing to indicate the forfeiture was excessive, given the substantial harm Mr. Brown and others inflicted on investors. In one of the manipulations, he and others caused a stock to rise more than 150 per cent in hours, and sold shares worth $747,609. The government points out that the judge could have ordered him to forfeit as much as $9.4-million, or twice the amount he and his co-conspirators made.

The judge has not yet set a date to decide the matter.

Brown's indictment

Prosecutors initially indicted Mr. Brown on May 21, 2009, in the District of Delaware. They claimed that he and others ran a scheme in 2006 and 2007 in which they dumped hundreds of millions of shares in pink sheets companies they were manipulating. While the overall investigation included four stocks, the charges against Mr. Brown were limited to two companies.

The first was an anti-aging promotion called GH3 International Inc. In December, 2006, Mr. Brown helped with several prearranged trades that were timed to coincide with boosterish news releases, the indictment stated. Among other things, the company claimed that it had revenue of $3-million in 2006, and that its revenue would be over $6-million in 2007. The stock went from 0.06 cent to 1.8 cents, before falling back to 0.01 cent. Its daily volume went to nearly 300 million shares as Mr. Brown and others sold stock they had previously acquired in improper Rule 504 offerings.

The second manipulation that Mr. Brown pleaded guilty to was that of Asia Global Holdings Inc., a company that claimed to have the rights to the show "Who Wants to be a Millionaire" in China. During three periods in which they manipulated the company, Mr. Brown and others dumped 60 million shares, grossing at least $4-million, prosecutors claimed. The stock, which had a 41-cent high in 2006, was last at 0.18 cent.

The government claimed that Mr. Brown and the others planned the promotions using the America Online messaging service. Their messages, which the indictment quoted, included information on the timing of news releases and on how the men were touting the companies on-line. One communication, dated Nov. 1, 2006, stated, "u have all the prs [press releases] right, except the first one, which im going to work on tomorrow for sure, we need a plan on line up of events and i need to see the damn prs to see which rumor to spread and how to start the damn thing ... ."

The indictment also described an unusual interstate money transfer, in which Mr. Brown paid a driver $10,000 to take $146,000 in cash from California to Delaware. (Documents in a related asset forfeiture case stated that the driver, who knew Mr. Brown from high school, was to deliver the cash to a Polish citizen named Pawel Dynkowski. The delivery went awry when a Texas police officer stopped the car and discovered the cash. Police had the driver deliver the money to Mr. Dynkowski's home in Delaware. They then searched the home and discovered evidence of the market manipulations.)

While the case against Mr. Brown is mostly complete, the charges against some of his co-conspirators remain outstanding. These include Mr. Dynkowski, who has not yet been arrested and is listed as a fugitive. Two others, Marc Riviello and Jacob Canceli, both from California, have pleaded guilty but have not yet been sentenced. Another defendant, Florida resident Gerard D'Amaro, 39, received three years in jail and was ordered to forfeit $1.49-million.

SEC case

In addition to the criminal charges, Mr. Brown and the others are facing a parallel civil suit from the U.S. Securities and Exchange Commission. The SEC claims that they made $6.2-million pumping and dumping Playstar, GH3 International, Asia Global and Xtreme Motorsports of California Inc. That case has mostly been on hold while the criminal cases complete.

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