NEW YORK, April 21 (Reuters) - The U.S. Securities and Exchange Commission won a preliminary injunction against a Montreal man it accused of running a penny stock fraud known as “scalping,” and who regulators say enjoyed a lifestyle of multiple homes and expensive cars before he became a fugitive.
U.S. District Judge Paul Crotty in Manhattan on Monday refused to disturb an asset freeze he had imposed on March 13 against the defendant John Babikian, and again ordered him to account for his assets and respond to the SEC’s allegations. Babikian was 26 at the time of the freeze.
“The evidence establishes a strong likelihood that Babikian committed securities fraud through the alleged pump and dump scheme,” Crotty wrote. “There is also a high risk that, unless enjoined, Babikian may commit the alleged fraudulent acts again, given his control of penny stock websites and his aptitude at using anonymous email accounts, alter-ego front companies, and mass email distribution systems.”
Crotty also said that while “there is substance” to the defendant’s argument that the SEC had overreached by tying up too many assets, the regulator’s action could be justified on “equitable” grounds.
Stanley Morris, a lawyer for Babikian, declined to comment.
In a court filing on Saturday, Babikian, through his lawyers, declined to address some SEC claims, invoking his right against self-incrimination under the U.S. Constitution.
Babikian was accused by the SEC of reaping an illegal $1.9 million profit by selling nearly 1.4 million shares of coal mining company America West Resources Inc after his emailed touts had boosted their price.
The SEC said Babikian sent the touts on Feb. 23, 2012, to about 700,000 email addresses through the AwesomePennyStocks.com and PennyStocksUniverse.com websites.
As other investors bought the stock and drove up the price, he sold his holdings at an average price more than quadruple the level where it had traded previously, the SEC said.
Among the assets subject to the freeze are two Los Angeles homes, property in The Dalles, Oregon, which according to The Oregonian newspaper Babikian hoped to develop as a vineyard, and proceeds from the sale of a stake in an airplane.
The SEC has said Babikian left Canada in 2012 following tax evasion allegations.
Revenu Québec, a tax authority, has said it had won a judgment last year to recoup millions of dollars of back taxes from Babikian, and frozen assets including a home in Laval, Québec, a Bugatti Veyron, a Bentley Continental and a BMW X6.
America West is not a defendant in the SEC case and was not accused of wrongdoing.
The case is SEC v. Babikian, U.S. District Court, Southern District of New York, No. 14-01740. (Reporting by Jonathan Stempel in New York; Editing by Mohammad Zargham)