The United States Securities and Exchange Commission (“SEC”) has filed charges Cardinal Energy Group, Inc. (“Cardinal”), a Texas-based oil and gas company, as well as and its former CEO Timothy W. Crawford (“Crawford”). The SEC charges defendants with fraudulently concealing the loss of Cardinal’s major source of revenue.
In mid-2017, Cardinal reportedly lost control of its interest in two oil-and-gas leases that accounted for nearly all (approximately 90%) of the company’s revenue, according to the SEC’s complaint. However, according to the SEC complaint, instead of revealing these issues, Cardinal and Crawford filed quarterly reports with the SEC that misrepresented to investors that the leases were still expected to be part of the company’s future business plans.
During this period, while allegedly concealing the setback to the business, Cardinal also allegedly raised additional money from investors, misreported stock ownership, and failed to make the required disclosures that its Crawford had sold millions of shares of Cardinal stock.
Cardinal is what is sometimes referred to as a penny stock- a publicly traded company with a low stock price per share and low market capitalization. Penny stocks, also known as microcap stocks, in general have a history of involvement with fraud and market manipulation. Penny stocks are securities issued by a small company that trade for less than $5/share. Penny stocks are always a risky investment, as there may not be enough publicly available information concerning the companies for investors to make a proper investment (due to their relatively small nature and most likely new status), and the stocks often trade in a relatively illiquid market. Penny stocks in general have historically been subject of manipulation scheme such as so-called “pump and dumps.”
Cardinal was formed in 2014 for the purpose of purchasing, developing, and operating oil and gas leases. Cardinal touts itself as an environmentally responsible oil and gas company focused on “reclaiming the vast, remaining reserves from our Nation’s producing oil fields.” The company trades over-the-counter under the ticker “CEGX” and had a last reported price of $0.0009 a share.
Brokerage firms have a duty to ensure that their business activities surrounding speculative low-priced securities are conducted in accordance with a reasonable compliance system which includes specific written supervisory procedures. Further, any recommendation by a financial advisor to invest in a speculative penny stock must conform to NASD Rule 2310 and FINRA Rule 2111 – the so-called suitability rule – which is premised on the brokerage firm and financial advisor obtaining information about the customer in order to ascertain that investor’s profile, including the investor’s age, other investments, financial situation and needs, tax status, investment experience and risk tolerance. In instances when brokerage firms fail to adequately supervise their registered representatives, they may be held liable for losses sustained by investors.
Investors in speculative microcap and nanocap securities may have arbitration claims to be pursued before FINRA, in the event that the recommendation to invest lacked a reasonable basis, or if the nature of the investment, including its risk components, was misrepresented to the investor. Both FINRA and the SEC have issued ample guidance with regard to the numerous risks associated with investing in speculative microcap (or “penny”) stocks, including the potential for fraudulent schemes and market manipulation due to the lack of public information concerning the companies’ underlying business and management, as well as verifiable financials.
Attorneys at Law Office of Christopher J. Gray, P.C. have successfully resolved many cases on behalf of investors who have sustained investment losses, including losses associated with fraud and manipulation, microcap stocks and unsuitable investment recommendations. Investors who wish to discuss a possible claim may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at firstname.lastname@example.org for a no-cost, confidential consultation.