Penny Stock Promoter's Magic Made Fake Shares Real

Finance shares with art and magic the ability to invest otherwise meaningless bits of the world -- scraps of paper, blocks of computer memory -- with value and power. Sometimes by fraud though.

Finance shares with art and magic the ability to invest otherwise meaningless bits of the world -- scraps of paper, blocks of computer memory -- with value and power. And financial fraud, which in practice consists mostly of bewildering retirees over the telephone, sometimes seems to have some of the glamour of art forgery, at least when you read Securities and Exchange Commission settlements with an open mind and a pure heart.

Today the SEC announced a settlement with Curt Kramer, a penny stock promoter, and his companies Mazuma Corporation and affiliates. Kramer and Mazuma bought penny stocks in private transactions, and then re-sold them to public investors in unregistered transactions, which is a no-no, albeit a boring no-no. And the settlement plods boringly along until it falls, at paragraph 10, into magic:

From about April 2009 through about June 2010, Mazuma Holding Corporation ("Mazuma Holding") and Kramer acquired over 1 billion shares of Bederra Corporation ("Bederra") in 21 separate transactions from the principal of Bederra's transfer agent, who had misappropriated the Bederra share certificates.

Umm wait what? True! Here is the 2012 SEC settlement with that transfer agent, Steven Bethke:

from January 2009 through May 2010, Bethke misappropriated share certificates from Bederra Corporation (now known as Zicix Corporation) while he controlled Bederra's stock transfer agent, First National Trust Company. Bethke used the stolen certificates, which had been pre-printed with the signatures of Bederra officers and directors, to secretly issue over a billion Bederra shares, which he then sold in exchange for payments into his personal bank account of over $350,000.

In other words: Bethke did not own any stock in Bederra. What he did have was a stack of paper with Bederra's name and some signatures on it. So he thought to himself, well, this paper is pretty much worthless, but it sure looks like Bederra stock. 1 Indeed other identical paper is Bederra stock, because someone at Bederra had uttered the appropriate incantations over it. "I dub thee stock," said Bederra's board, and lo, the pieces of paper became stock and represented a fractional undivided ownership interest in the business of Bederra Corporation.

Bethke did not have access to the appropriate incantations, since he was not an authorized officer of Bederra; he was just the guy who held on to the paper for safekeeping. But he did have some inappropriate incantations, which consisted basically of calling up Kramer 2 and saying "hey I've got some Bederra stock, do you want to buy it?"

The SEC's complaint against Bethke is frustratingly incomplete but it seems like they believe that Bethke actually managed to sell some stock in Bederra by just pretending real hard that what he had was stock:

Bethke's secret issuance of over a billion shares defrauded investors by greatly depressing Bederra's stock price. By the time the third party had sold all of the shares, Bederra shareholders had lost nearly half the value of their shares. The secret issuance also caused a massive understatement of Bederra's public float, or the number of outstanding shares in the open market, an important measure of Bederra's liquidity. Bederra publicly reported a float of approximately 400 million shares, but, unbeknownst to investors, Bethke's unauthorized issuances more than tripled Bederra's actual float to approximately 1.5 billion shares.

Notice the word "actual" there. Bederra was telling people that it had 400 million shares outstanding, because it had issued 400 million shares. But the SEC thinks it actually had 1.5 billion shares outstanding, because in addition to those 400 million shares that Bederra had issued, the SEC thinks that those 1.1 billion shares that Bethke issued on his own initiative, and without any corporate approval, were also outstanding. His fraudulent sales of fake stock somehow made that fake stock real.

Presumably nobody worries about this too much with Bederra -- now Zicix, and apparently trading at somewhere between $0.0000 and $0.0001 a share 3 -- but it'd be pretty weird if I could print and sell shares of, like, Berkshire Hathaway, and if they were printed on good enough paper with good enough forged signatures they would actually be recognized as real Berkshire shares by the SEC. 4

The SEC doesn't really get far into the metaphysics here. Nor do they get into the obvious question, which is: Did Kramer know that his stock was fake? Or did he just know that it was unregistered? He was buying it at a steep discount to public prices, so surely something shady was going on, but the bare-bones complaints are not enough to distinguish exactly what the shadiness was and who was fooling whom about what.

Which is fair enough. One purpose of the securities laws is to make cases like this easy for the SEC: If you don't register a public offering, and it's not exempt from registration, you are In Trouble, regardless of whether you're selling shares in a solid valuable company, or shares in a tiny unprofitable company, or, as here, fake shares in a tiny unprofitable company. The SEC doesn't need to prove what Kramer or Bethke or anyone else thought about what they were doing; the unregistered sales are all they need.

The magic of what these guys did here -- turning worthless paper into ownership of a company, without that company's knowledge -- isn't really a concern of the SEC. But it is surprisingly magical.

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  1. Which incidentally was also pretty much worthless! By April 2009 it was trading below a penny a share, but I guess you make it up in volume. He sold over 1.1 billion shares, according to the SEC, for $350,000, over 20 transactions. Presumably each transaction was one sheet of paper -- e.g. the first trade, for 2.5 million shares, was presumably one certificate for 2.5 million shares -- so you avoid the "not worth the paper they're printed on" problem. And then, per today's complaint, "Mazuma Holding and Kramer resold the shares to the public for a profit of $934,404."

  2. Kramer is not named in the Bethke complaint but from the Kramer complaint it's obviously him.

  3. Incidentally, neither Bloomberg nor Google Finance will give me a number of shares outstanding or a market cap for Zicix, so it's hard to see how popular the SEC's theory is. But, yeah, Zicix's share count remains confusing.

  4. I mean, I'd go to jail, but that's not the point. My creation would become real shares. In the world of non-tiny companies, share certificates aren't really a thing, so the stuff about paper is a bit metaphorical. But like if you worked at the transfer agent and created some book-entry shares and allocated them to someone, and then that someone sold them on an exchange to an innocent purchaser, and then that innocent purchaser sold them, etc. -- I mean, those are now real shares, right? How do you decide which anonymous innocent purchaser on an exchange has real shares and who has fake shares?

To contact the author on this story:
Matthew S Levine at

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