FBI Plays Hedge Fund To Nail Penny-Stock Fraudsters

Jul 8 2014 | 5:22am ET

When it comes to catching crooks, the Federal Bureau of Investigation has found that playing a corrupt hedge fund works.

As part of a massive sting operation aimed at tackling fraud in the penny-stock market, the FBI set up a phony hedge fund, manned by a phony hedge fund manager looking for help in luring penny-stock companies willing to pay kickbacks in exchange for a large investment, The Wall Street Journal reports. Operation Pennypincher, which went on for more than a year, nabbed 22 people, including four middlemen who introduced pink-sheet executives to SeaFin Capital, the hedge fund created by the FBI. Eighteen have since pleaded guilty.

At the center of the sting was John Keelan, or John Kelly to his marks. Keelan, an FBI agent, set up a small office behind an auto-parts supplier outside Boston, telling his interlocutors that he needed to steer clear of his bosses in New York to allow his scam to continue.

Keelan as Kelly offered penny-stock companies investments of up to $5 million from SeaFin, which he said managed $3 billion in assets. Prosecutors said Kelly made very clear that he would effectively be stealing from clients in exchange for a kickback.

“My hedge fund doesn’t know… and they don’t need to know,” Keelan said in one of the videotaped meetings.

Occasionally, Keelan almost made things too clear: One former stockbroker said he was so brazen that he feared it “could be an FBI sting.” But that did not stop Edward Henderson from taking $12,650 in exchange for introducing Kelly to several penny-stock executives, leading to his arrest three years ago—and his admission to a past, undetected bit of insider-trading. It also led to his cooperation.

Indeed, the FBI’s own fears that it had made the sting too obvious were allayed as word spread rapidly of Keelan's operation. “We should have set up a turnstile,” one person close to the operation told the Journal.


In Depth

Hedge Fund Veteran Peter Borish Talks Trading

Dec 17 2014 | 9:32am ET

Peter Borish says 2014 was “tricky” from a trading perspective. “The best...

Lifestyle

Cohen Donates $1.5M To GOP Governors Association

Dec 10 2014 | 7:13am ET

The Republican Governors Association raised close to $25 million from October 1...

Guest Contributor

Q&A With Daniel Gallancy: Institutional Interest In Bitcoin Is Growing Steadily

Dec 12 2014 | 7:54am ET

Daniel Gallancy is founder and CEO of SolidX, a provider of total return swaps for...

 

Sponsored Content

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

December 2014 Cover

Futures 2014 person of the year

Jeff Sprecher was simply looking for a platform to trade energies when launching ICE 14 years ago but it has grown to reach the pinnacle of both the listed futures and equities world.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.