The Securities and Exchange Commission today charged four individuals and their companies, including a securities fraud recidivist, with scheming to issue free-trading shares of two penny stock companies through the use of bogus documents in court proceedings and backdated promissory notes.

The SEC's complaint names as defendants New York-based CF3 Enterprises, LLC and its owner Clarence Fitchett, Texas-based Silverback Promotions, LLC and its manager Robert Gandy, Kathy Givens-Gandy, and Billy Chang. The SEC charged Robert Gandy with securities fraud in an earlier case, where he consented to an injunction against future violations of the antifraud and other securities law provisions.

The SEC alleges that, between 2017 and 2018, Fitchett and Robert Gandy abused the judicial system to obtain unrestricted or "free-trading" securities of two microcap issuers pursuant to Section 3(a)(10) of the Securities Act of 1933. This provision provides an exemption from registration when a company issues securities in exchange for one or more bona fide debts when the terms and conditions of the transaction are approved by a court.

The complaint alleges that the Section 3(a)(10) scheme worked as follows: first, Robert Gandy and Fitchett allegedly created fake documents to support fictitious debt CF3 purportedly purchased from creditors of two public issuers. Next, Robert Gandy and Fitchett allegedly caused CF3 to file fraudulent lawsuits against each issuer based on the false documents and fictitious debt. Then, CF3 allegedly filed with the court bogus settlement agreements and proposed judgments, which the court approved without further analysis. Robert Gandy and Fitchett then presented these judgments to the issuers' transfer agents, who issued them more than $7 million worth of unrestricted, free-trading shares.

In addition to the Section 3(a)(10) scheme, the complaint alleges that Robert Gandy and Fitchett fabricated backdated promissory notes that were convertible into unrestricted shares of the issuers' stock. According to the complaint, Chang and Givens-Gandy knowingly sold the notes to unwitting third parties, who exercised the conversion option and sold the shares into the public market. The defendants received more than $100,000 from these transactions.

The SEC's complaint, filed in the Southern District of Texas, charges the defendants with violating the antifraud provisions of Sections 17(a)(1) and (a)(3) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder. The SEC seeks permanent injunctive relief, a conduct-based injunction against Robert Gandy and Fitchett, disgorgement of ill-gotten gains, civil penalties against all defendants, and a penny stock bar against Fitchett.

The SEC's investigation was conducted by Derek Kleinmann and Ty Martinez, and supervised by Barbara L. Gunn, Sarah S. Mallett, and Eric R. Werner of the SEC's Fort Worth Regional Office. The SEC's litigation is being conducted by Janie Frank and supervised by B. David Fraser.