SEC Gains Final Judgment Against Co-Defendant Fabrizio Di Carlo In Microcap Fraud Scheme

2024-05-05

The SEC obtained a final judgment from the U.S. District Court for the Eastern District of New York against Canadian resident Fabrizio Di Carlo (“Di Carlo”) on March 27, 2024. Di Carlo was one of the co-defendants against whom the SEC had filed charges for his role in a microcap fraud scheme targeting retail investors between August 2019 and September 2020. The final judgment orders Di Carlo to pay over $140,000 for disgorgement, prejudgment interest, and civil penalty in addition to stopping him from future violations under the relevant securities laws.

Facts Of The Case

On September 27, 2022, the SEC filed a complaint against Defendants Matthew Nicosia (“Nicosia”), William (“Rocky”) Reininger (“Reninger”), Fabrizio Di Carlo, and Ronald Touchard (“Touchard”) for their involvement in fraudulent schemes to sell publicly traded stock to retail investors. 

The Defendants acted in concert with one another to fraudulently sell penny stocks to retail investors in the public United States securities markets. The Defendants sold penny stocks of one or more of the following companies between August 2019 and September 2020 (the “Relevant Period”) by making misleading statements during high-pressure sales calls and email promotions: 

  • Odyssey Group International, Inc. (“Odyssey”)
  • Scepter Holdings, Inc. (“Scepter”)and 
  • CannaPharmaRx, Inc. (“CannaPharmaRx”)

According to the SEC complaint, Reininger and Nicosia sold shares of companies they controlled significantly to retail investors without revealing their control. Besides this, Reininger and Nicosia concealed their control of nearly all the stock they deposited with brokerage firms and made it available for public trading (the “float”).

To hide their control partly, Reninger and Nicosia arranged for an intermediary whom they asked to acquire and sell shares on their behalf without registering the sales or complying with legally mandated sale limitations. 

On the other hand, Reininger and Nicosia liquidated their shares by funding false promotional campaigns. The promotional campaigns enabled Reininger and Nicosia to artificially generate sufficient demand for their shares while concealing from prospective buyers that the stocks were being sold, in bulk, by people who controlled the companies.

SALE OF ODYSSEY SHARES

To sell Odyssey shares, Nicosia and Reininger worked with Charlie Abujudeh, an individual sued by the SEC in a previous action, asking him to purchase 2.5 million Odyssey shares from one of Nicosia’s associates on their behalf. The 2.5 million shares constituted about 98 percent of the Odyssey float. 

Also, Nicosia and Reininger, who were both significant shareholders of Odyssey and were involved in the management and operations of the company, tasked Abujudeh with hiring stock promoters to promote Odyssey to potential investors over the phone. 

The three agreed that Abujudeh would sell their 2.5 million Odyssey shares once the promotion they were funding was underway (sometimes referred to as selling the shares “into” a stock promotion) and split the profits.

Then, Touchard introduced Abujudeh to Defendant Di Carlo. Di Carlo ran a stock promotion organization “Investor’s Quarterly” and used high-pressure and false tactics to target unsuspecting retail investors. 

Abujudeh, working on behalf of Nicosia and Reininger, hired Di Carlo to promote Odyssey shares to potential investors, primarily by phone. Both Abujudeh and Di Carlo agreed that Di Carlo would earn a 30 percent commission on all sales generated by his organization (which Abujudeh and Touchard referred to as a “phone room”); Touchard and his business partner would each earn a 2.5 percent commission on those sales; and Nicosia, Reininger, and Abujudeh would split the profits, with half going to Abujudeh, and half to Nicosia and Reininger.

Di Carlo and his “Investor’s Quarterly” associates began soliciting investors to buy Odyssey shares in or around January 2020. Defendants Nicosia, Reininger, and Touchard knew or were reckless in not knowing that Di Carlo and his organization engaged in deceptive conduct in promoting Odyssey shares, including by making false and misleading statements to investors and concealing material facts regarding, among other things. These include: 

  • Abujudeh, Nicosia, and Reininger’s control of almost the entire Odyssey float; 
  • Abujudeh, Nicosia, and Reininger’s control over at least 17 percent of the total outstanding shares of Odyssey; 
  • Nicosia and Reininger’s involvement in Odyssey’s management and operations; 
  • Nicosia, Reininger, and Abujudeh’s funding of the phone room; 
  • Nicosia, Reininger, and Abujudeh’s intention to sell Odyssey shares into the demand the phone room generated; 
  • Nicosia, Reininger, and Abujudeh’s coordination of the promotional campaign; and 
  • Nicosia, Reininger, and Abujudeh plan to share profits from their Odyssey stock sales

Thus, using these false tactics, Di Carlo’s phone room convinced unwitting investors to purchase thousands of shares of Odyssey stock. However, the volume of trading failed to meet the expectations of Nicosia, Reininger, Abujudeh, and Touchard.

So Nicosia, Reininger, Abujudeh, and Touchard fired Di Carlo and hired another individual.  The Defendants believed that the individual they hired ran a different phone room based in Colombia and could convince investors to purchase hundreds of thousands of shares every week. 

Further, Touchard introduced Abujudeh to the individual the Defendants hired and presumed was running the Colombian phone room. However, Abujudeh and Defendants Nicosia, Reininger, and Touchard were unaware that the individual they were seeking to hire was a cooperating witness (“CW”) working undercover on behalf of the Federal Bureau of Investigation (“FBI”). 

Thus, the CW recorded numerous phone calls and captured numerous encrypted text communications with Touchard and Abujudeh. 

Then, to compensate the CW for promoting shares to retail investors, Abujudeh, Nicosia, and Reininger agreed to pay him a 35 percent commission. The commission was paid to the CW on all the Odyssey purchases that he generated through his phone room.

As can be observed, Nicosia, Reininger, Abujudeh, and Touchard could not hire the CW because neither the CW nor the FBI was running a phone room to promote penny stocks. 

So to implement their scheme successfully, Nicosia, Reininger, and Abujudeh funded and controlled an email and web-based campaign for promoting Odyssey shares to investors.

Similar to their phone campaign, their digital campaign was part of their fraudulent scheme to sell Odyssey shares. The digital promotions carried various disclaimers. But, it failed to disclose material information concerning the penny stocks, just as the phone room had done.

Despite concealing the material information, the false phone and digital promotional campaigns were successful. Nicosia, Reininger, and Abujudeh generated approximately $2.6 million in illicit proceeds by selling Odyssey stocks through Abujudeh to investors during the promotional campaigns. Further, Abujudeh distributed proceeds from those sales to himself and each of the Defendants.

SALE OF SCEPTER AND CANNAPHARMARX SHARES

Nicosia and Reininger’s scheme to sell shares of Scepter and CannaPharmaRx functioned similarly. 

As far as Scepter is concerned, Nicosia, Reininger, and Abujudeh controlled over 60 percent of Scepter’s total outstanding shares and over 87 percent of Scepter’s float. 

Further, Nicosia consistently advised Scepter’s chief executive officer about business development and corporate matters. In a way, Nicosia, Reininger, and Abujudeh were affiliates of Scepter. 

Like Odyssey, Nicosia, and Reininger asked Abujudeh to acquire Scepter shares. They used Abujudeh as an intermediary and sold shares into the market through Abujudeh without registering those sales or complying with legally mandated sale limitations. At the same time, the Defendants concealed from prospective buyers that Scepter’s stock was being sold, in bulk, by those who controlled the company. 

Further, Nicosia, Reininger, and Abujudeh secretly funded a digital promotional campaign to generate demand for their shares. The digital campaign enabled the Defendants to generate sufficient demand for Scepter’s stock. As a result,  the Defendants sold their shares through Abujudeh into that artificially generated demand.

The digital campaign promoting Scepter’s stock was similar to the one promoting Odyssey shares described above. The digital campaign promoted Scepter without revealing that people who controlled the company were funding the campaign and dumping their shares into the demand it generated. 

The digital campaign was a huge success and generated approximately $3.2 million in gross sales of Scepter shares. The profits generated by selling Scepter’s shares were split between Abujudeh, Reininger, and Nicosia.

For CannaPharmaRx shares, the scheme operated similarly, except that Nicosia and Abujudeh agreed to split the profits between themselves, leaving Reininger out of the deal. 

Nicosia was CannaPharmaRx’s board member and the company’s largest shareholder. Again, he arranged for Abujudeh to purchase 3,125,000 CannaPharmaRx shares from a third party affiliated with CannaPharmRx’s CEO. 

Thus, through Abujudeh, Nicosia controlled major shareholding of the CannaPharmaRx float. 

Further, Nicosia profited by selling $3.3 million worth of CannaPharmaRx shares. He achieved this by arranging for Abujudeh to acquire the company’s shares and sell them on Nicosia’s behalf,  again without registering the sales or complying with legally mandated sale limitations. 

To generate demand for these shares, Nicosia and Abujudeh funded yet another false digital campaign like those described above. The digital campaign promoted CannaPharmaRx stock while concealing from investors the fact that an individual who controlled the company was dumping shares into a promotion he was funding.

At the time that Abujudeh sold Odyssey, Scepter, and CannaPharmaRx stock on behalf of himself, Reininger, and Nicosia, there was no registration statement for those sales on file with the Commission or in effect as to those transactions, as required by the relevant securities laws described herein. No exemption from the registration requirement also applied.

Charges Against Fabrizio Di Carlo

  • The final judgment obtained by the SEC against Di Carlo stops him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. 
  • The final judgment orders Di Carlo to pay disgorgement and prejudgment interest of more than $43,970, a civil penalty of $100,000.
  • The final judgment also imposes a penny stock bar on Di Carlo.

Key Takeaways For Investors

As an investor, you must read the offer documents carefully before investing in securities and conduct thorough research on the companies and investment opportunities before making any decisions. Further, you should look into the company's financial statements, business model, management team, and any recent news or developments.

Also, you should be wary of high-pressure sales tactics, unsolicited investment offers, and promises of guaranteed returns. Specifically, you must watch out for exaggerated claims, overly complex investment strategies, and inconsistencies in the information provided.