Banking & Finance  December 12, 2014

Scheme takes Ecrypt stock on wild ride

BOULDER — Data security firm Ecrypt Technologies Inc. has seen its stock price take a wild ride over the past couple of weeks as the result of what appears to be a paid stock pump-and-dump scheme.

Ecrypt (OTCQB: ECRY) is a 7-year-old development-phase company with registered and legal offices in Boulder whose executives are spread throughout the United States and Canada.

The company’s co-founder, Brad Lever, contends that the company is an innocent bystander in the activities that have helped drive its stock price up fourfold since Nov. 20.

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“There’s not a lot we can do,” said Lever, the company’s chief operations officer, in a phone interview. “We’re working with the exchange commission. Obviously we’re just incredibly forthcoming. They ask questions, and we’re trying to respond to them.”

OTC Markets Group, the operator that oversees the marketplaces for over-the-counter stocks, or those securities that trade off of the New York Stock Exchange or Nasdaq exchange, on Dec. 9 placed a “Caveat Emptor” warning on Ecrypt’s stock to alert investors that there may be reason to exercise extra care and due diligence when making decisions related to the security.

Ecrypt, which plans to take its Ecrypt One product to market early in 2015, is trying to use the newfound attention – negative or otherwise – to get the word out about itself.

“We’re happy to get the attention,” Lever said. “We just wish it didn’t come along with some of the crap, if you will.”

Ecrypt’s share price, which hadn’t closed above 26 cents over the past year, closed Nov. 20 at 13 cents per share. That’s the same Thursday afternoon that the website Hotstocked.com reports (http://www.hotstocked.com/article/88623/ecrypt-technologies-inc-otcmkts-ecry-explodes.html) that stock-promotion site StockTips.com began an email campaign aimed at pumping up Ecrypt shares.

Ecrypt shares opened the next day at 26 cents and leaped as high as 39 before closing at 33. Trading volume leaped from 99,000 shares on Nov. 20 to 29.4 million on Friday, Nov. 21. The share price rose again the following Monday, Nov. 24, closing at 36 cents per share with a trading volume of 6.2 million shares.

The next day, Tuesday, Nov. 25, Ecrypt released a statement trying to distance the company from the scheme.

“The Company has been advised by the British Columbia Securities Commission that the Company is the subject of a promotional campaign by at least one newsletter writer making unsupported, highly promotional, statements about the Company’s future share price (“the Promotion”),” Ecrypt’s statement read. “The company and its officers and directors did not authorize the Promotion in any way and do not endorse it. The Company and its officers and directors did not participate in, or benefit from, trading in the Company’s shares during the Promotion period.”

The release seemed to at least temporarily bring Ecrypt’s share price back into check. It closed Nov. 25 at 26 cents and dipped to 19 cents the next day. But it’s been rising again since, closing at 51 cents per share on Dec. 8. Volume was at 5.3 million shares, still well above its recent historical average.

In its most recent quarterly earnings report filed with the Securities and Exchange Commission, Ecrypt reported total assets of less than $32,000, no revenue and a net loss of $164,129, or less than 1 cent per share. The company had roughly 127.3 million shares outstanding.

In the company’s Nov. 25 statement, Ecrypt officials said the promoter of the pump-and-dump possibly was being compensated by an entity called Laluna Services Inc. Contact information is not available on the StockTips.com website.

“The Company and its officers and directors do not know who beneficially owns, controls or represents Laluna, or what interest Laluna has in promoting the company’s shares,” the statement read. “The Company and its officers and directors are unaware of any business reason for the sudden increase in market activity for its shares.”

Roughly 10,000 securities are traded on over the counter markets in the United States. Stock pump-and-dump schemes are illegal and generally involve those behind them making false or exaggerated claims about micro- or small-cap stocks in order to drive up trading and share price dramatically. When the stock has risen, the perpetrators dump their shares for a major profit before the share price drops back down and leaves other investors suffering the consequences.

Jim Carroll, an attorney with expertise in securities at the Boulder office of law firm Faegre Baker Daniels, said anyone who owns stock in a company – whether insiders or outsiders – could try such a scheme to make a profit. Micro-cap stocks are thinly traded, and thus it’s easy to manipulate the price.

But Carroll also said regulatory agencies are pretty good at sniffing out such fraud when insiders are involved. Third parties trying to pull off such schemes, he said, might accumulate small amounts of stock over time at low prices through various dummy or offshore accounts before conducting the pump to drive up the price quickly.

An OTC Markets Group spokesperson said the Caveat Emptor placed on Ecrypt’s stock is an indication that the company is subject to a spam promotion that appears to have affected volume and price. She said OTC Markets Group hasn’t made a determination on who the source of the promotion is. She said the organization has reached out to Ecrypt officials but has yet to hear back.

The SEC declined to comment for this story. Colorado securities commissioner Jerry Rome said he couldn’t comment on specific cases or whether the state was investigating Ecrypt trading.

But Rome said in general that his office doesn’t constantly track over-the-counter stocks.

“We don’t troll over-the-counter stocks or anything like that,” Rome said. “Someone would have to identify for us problems going on with stocks they own. Generally that’s how we would open a case on something like this.”

That’s how Lever said Ecrypt first learned of its share price leap, from an investor on the East Coast who noticed the sudden jump in trading activity. Lever said the company was contacted by the BCSC by Nov. 24 and asked to release the Nov. 25 statement.

He said that there’s no indication at this point that trading on the company’s stock will be shut down by the BCSC, and he said the SEC hasn’t made inquiries yet with company officials.

In June, Ecrypt hired Thomas Cellucci to serve as chief executive. Cellucci formerly served as chief commercialization officer at the U.S. Department of Homeland Security for both the Bush and Obama administrations.

Lever said skepticism about whether insiders are involved should be quelled by the company’s transparency with its business plan.

Lever said Ecrypt, which began trading publicly in 2009, went through an episode similar to this about three years ago with odd fluctuations in its stock price, but not to the same extent.

“We conducted ourselves in an ethical fashion, and it went away and we kept doing our thing,” Lever said.

The list of penalties for the perpetrators of pump-and-dump schemes can range from civil to criminal to administrative. But even for companies that are innocent victims of such schemes, there can be repercussions.

Carroll, the Boulder attorney, said this could hurt a legitimate company if it is trying to raise funds in the future and potential investors are spooked.

“It could be kind of a black eye that sticks to the company even if the company didn’t have anything to do with it,” Carroll said.

Lever, who co-founded Ecrypt in 2007, said he isn’t worried about negative repercussions, especially once the company goes to market next year, targeting government, military and large enterprise customers.

He said the company intends to open a home office in the United States at some point but declined to say where.

“The worst thing we can do for our shareholders is scale back (because of the scheme),” Lever said.

BOULDER — Data security firm Ecrypt Technologies Inc. has seen its stock price take a wild ride over the past couple of weeks as the result of what appears to be a paid stock pump-and-dump scheme.

Ecrypt (OTCQB: ECRY) is a 7-year-old development-phase company with registered and legal offices in Boulder whose executives are spread throughout the United States and Canada.

The company’s co-founder, Brad Lever, contends that the company is an innocent bystander in the activities that have helped drive its stock price up fourfold since Nov. 20.

“There’s not a lot we can do,”…

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