Markets

California Man Arrested for Alleged $9 Million Penny-Stock Fraud

SAUL LOEB | AFP | Getty Images
  • A California man was arrested on federal securities fraud charges after making more than $9 million by manipulating penny-stock prices and targeting retail investors, according to prosecutors and the SEC.
  • Charlie Abujudeh and his associates used deceptive promotional campaigns and aggressive sales tactics to falsely inflate stock prices and unload shares for profit, according to criminal and civil complaints.
  • The man's alleged market manipulation tactics highlight how stocks traded on the over-the-counter market and their investors are vulnerable to fraud schemes. 

A California man was arrested on federal securities fraud charges after making more than $9 million by manipulating penny-stock prices and targeting retail investors, according to prosecutors and the U.S. Securities and Exchange Commission.

Charlie Abujudeh, 48, and his associates used deceptive promotional campaigns and "high-pressure sales tactics" from August 2019 to at least September 2020 to falsely inflate stock prices and unload shares for profit, according to a civil complaint filed Thursday by the SEC in Brooklyn federal court.

Federal prosecutors in a separate criminal complaint and arrest warrant charged Abujudeh with employing devices and schemes to defraud, and engaging in practices to deceive investors and potential investors.

Abujudeh was arrested Thursday in California, a Brooklyn U.S. Attorney's Office spokesperson confirmed to CNBC.

The man's alleged market manipulation tactics highlight how stocks traded on the over-the-counter market and their investors are vulnerable to fraud schemes. 

In August 2019, Abujudeh purchased 2.5 million shares of a company called Odyssey Group International, according to authorities. Odyssey is purported to be a medical product and health technology company. Its shares trade publicly on the over-the-counter market for less than a dollar.

Abujudeh bought the Odyssey shares for a total of about $100,000, the complaints said. At the time, he reportedly controlled about 98% of shares available for trading.

"The linchpin of Abujudeh's schemes was his control of nearly all of the stock that was deposited with brokerage firms and available for public trading (the 'float') for each of these securities. This control enabled him to manipulate the market for these securities using a variety of deceptive tactics," the SEC said.

By late July 2020, Abujudeh sold all of those Odyssey shares, making about $2.6 million in proceeds, according to the complaints.

In addition to Odyssey shares, Abujudeh also operated similar schemes with at least two other microcap companies called Scepter and CannaPharmaRx, according to the SEC. The man generated $3.2 million in proceeds from selling his Scepter stock and another $3.3 million from unloading his CannaPharmaRx stock.

The Federal Bureau of Investigation used informants to obtain phone calls and text messages exposing Abujudeh's market manipulation practices with Odyssey stock, an affidavit from an FBI special agent said.

According to the affidavit, Abujudeh and his conspirators hired individuals he believed had access to a call room — an operation that identified prospective investors and contacted them via phone or email to convince them to buy shares. However, the individuals purported to be connected to the call room were actually cooperating with the FBI, the special agent said.

The call room made "false and misleading statements to investors and potential investors," according to the affidavit.

In one example, the call room operation used "aggressive and deceptive sales tactics" to convince a victim-investor to liquidate his holdings in a diversified, target-date retirement fund and buy Odyssey shares with the money, the FBI agent said. The victim-investor reportedly lost more than $39,000 from the ordeal.

In addition to the call room, Abujudeh funded a digital marketing campaign to promote Odyssey shares to potential investors through newsletters and websites with deceptive statements or omissions, according to the complaints.

Abujudeh and his associates also coordinated matched trades to inflate the stock price, the complaints said. Matched trades are prearranged purchases and sales of shares that fraudulently inflate the trading volume of a stock, creating a false demand for the stock that sends the share price higher. Sellers typically agree to pay the buyer a cut of the profit from the matched trade.

The accused fraudster reportedly sold shares to the FBI and wired thousands of dollars to the agency, which he believed to be a kickback payment in exchange for a matched trade.

Abujudeh's LinkedIn account identifies him as the owner of Lake Forest Bodycentre. The Orange County Register reported that Abujudeh in 2007 lost his license to operate a spa called Lake Forest Bodycentre in California due to prostitution allegations.

He could not be reached for comment.

—CNBC's Dan Mangan contributed reporting.

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