A $35 Billion Stock, an SEC Halt and Suspicions of Manipulation

Neuromama Ltd. might be the most prominent example, but it’s unlikely to be the only one.

On Monday, the Securities and Exchange Commission halted its shares, which trade on over-the-counter markets in the U.S., over “potentially manipulative transactions” and concerns about the “identity of the persons in control.”

There were red flags over the years. But Neuromama, which has ambitions to license “heavy ion fusion technology patents” among its many projects, began to draw more scrutiny this year after its paper value more than quadrupled to $35 billion on scant volume. Before its suspension, the market cap of Neuromama, which was based in southwest Siberia before moving to a beach community near Tijuana, Mexico, was greater than even Tesla Motors Inc.

How an obscure search engine with no reported financials since 2013 was able to become a multi-billion-dollar company is an all-too-familiar tale in the murky, largely unregulated OTC market. Filled with penny stocks that don’t meet listing requirements of the New York Stock Exchange or the Nasdaq Stock Market, it’s long been a place ripe for exploitation by fraudsters, who manipulate shares of shell companies to make illegal profits through “pump-and-dump” schemes. When it halted Neuromama this week, the SEC cited false statements from the company that it had applied to list on Nasdaq.

“Shell companies have been a problem for decades because the agency has lacked the resources to police them,” said Stephen Crimmins, a former SEC enforcement lawyer who now works for Murphy & McGonigle. “It’s absolutely something that needs attention.”

Even after the SEC’s push to remove more than 800 such companies over the last few years in an operation dubbed “Shell Expel,” hundreds more still trade. Several like Neuromama, have reported little or no sales, yet also have billions in market value.

Judy Burns, an SEC spokeswoman, didn’t immediately respond to a request for comment.

Cynk Technology

Neuromama’s situation has echoes of a little-known company called Cynk Technology Corp. The Belize-based firm, which had virtually no assets or revenue, briefly surged past $6 billion in market value in 2014 in what U.S. authorities said was a pump-and-dump scheme. The man behind it all, Gregg Mulholland, pleaded guilty to money laundering conspiracy in May.

To read more about the saga of Cynk, click here.

A telephone call seeking comment from Neuromama’s chief executive officer, Igor Weselovsky, Chief Financial Officer Karapet Gevorgyan and Dante Pedroza Mendez, the chief operating officer, went unanswered at the company’s headquarters. Neuromama hasn’t formally been accused of wrongdoing. Its stock doesn’t trade every day, and when it does volume is less than 500 shares a day, meaning few investors are probably affected.

Steven Zubkis, the chief marketer according to the company’s website, has a history of run-ins with the law. Also known as Steven Schwartzbard, he was sentenced in 2007 to five years in prison for defrauding investors in a $1.8 million scheme through misrepresentations tied to the renovation of a Las Vegas casino. The Ukrainian immigrant was sued by the SEC in the 1990s for orchestrating a $12 million penny stock scam. He was ordered to pay more than $21.6 million in disgorgement and penalties.

Side Effects

Zubkis didn’t directly respond to questions about Neuromama’s $35 billion market value or its financials, but said in an e-mail that the high price of its stock and the relative lack of trading made it an easy target for regulators. He also said Neuromama is in an industry with typically high valuations. The shares last traded at $56.25, far above your typical penny stock.

“We’re suffering from a negative side effect caused by our success,” Zubkis said in an e-mail Monday. “Up to this moment there has been less liquidity than any of us would like. But that’s not a bad thing, … it’s like a negative side effect from a prescription drug. So the drug saves your life and in the process gives you a dry mouth or a headache. A good trade-off, your life for a dry mouth.”

“Our attorney has contacted the SEC and asked them if there is anything we can do to clear up this matter,” he added. Dean Law Corp., Neuromama’s legal counsel, didn’t return phone or e-mail requests seeking comment.

The over-the-counter market continues to thrive partly because investors are lured by the jackpot appeal of ultra-low-priced stocks that could easily double or quadruple in value by rising a few cents. And in the U.S., it’s fairly easy for people to incorporate shell companies and get them up and trading in the OTC market. Contrast that to companies with ambitions to list on the NYSE or Nasdaq, which often entails years of planning and millions of dollars in legal expenses -- not to mention having an actual business.

Paper Values

Like Neuromama, several other OTC-listed companies have reported little or no sales, yet also have billions in market value.

AJ Greentech Holdings Ltd., which says it’s a green energy company, is valued at $5.3 billion. TRHF Co. says it is “a provider of platforms supporting relaxed and replenishing life in a beautiful ecological countryside” and has a $5.1 billion market cap. Image Chain Group Ltd., formerly “Have Gun Will Travel Entertainment Inc.,” changed its business plan from reality television to the branded tea business and is currently worth $4 billion. And all of them are in incorporated in Nevada, which allows companies to be created anonymously.

AJ Greentech, TRHF, and Image Chain Group didn’t immediately respond to phone and e-mail requests for comment outside normal business hours.

Neuromama’s website says it has a broad range of businesses and investments. They include a social network, oceanfront property, as well as plans to license Cirque-du-Soleil-style performances in Tijuana.

“NEUROMAMA, LTD. IS A FAST GROWTH COMPANY TODAY .... AND ..... THE BLUEST OF THE BLUES ... A REAL ASSET PLAY OF TOMORROW!” is how the company describes itself. “We are convinced that all of our ideas are great. However, in case we had made some mistakes, they’ll make a switch for another idea, and partners will make money one way or the other.”

“Exchanges have extremely stringent requirements and compliance mandates that you can’t overlook,” said Sang Lee, an analyst at Aite Group. “On over-the-counter markets, you’re more open to abuses.”