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.


Lifestyle

Survey: Wall Street Banks Still Top Silicon Valley, Hedge Funds for Freshly-Minted MBAs

Jun 21 2016 | 9:01pm ET

Contrary to concerns that Wall Street isn't as appealing to new graduates as it...

Guest Contributor

The Future of the Blockchain in Financial Services Communications

Jun 17 2016 | 1:05pm ET

Over the past year, a large portion of the financial services industry has awakened...