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

An Interview With Harvest Volatility Management's Rick Selvala

Mar 23 2017 | 5:39pm ET

Several years of extremely low interest rates have pushed some investors into equities...

Lifestyle

'Tis the Season: Wall Street Holiday Parties Back In Fashion

Dec 22 2016 | 9:23pm ET

Spending on Wall Street holiday parties has largely returned to pre-2008 levels...

Guest Contributor

SEI: Private Debt Coming Into Its Own

Mar 8 2017 | 9:24pm ET

The explosive growth of private debt over the past few years has caused the lines...

 

From the current issue of