by T. GormanPosted on Posted in SECActions

  

Aryeh Goldstein thought he had found the holy grail. After forming Adar Bays, LLC in 2014 and later Adar Alef, LLC in 2018, business was lending money to penny stock companies. Those issuers were small with a stock price below $5 and often much less. Frequently, these firms needed cash.

Beginning in 2014 Mr. Goldstein loaned the small issuers money through Adar Bays and later Adar Alef. The loans were extended to the companies using convertible debt agreements. If the issuer could not keep up with the payments, the loan provisions stipulated that the lender – here Mr. Goldstein and one of his entities – could convert the notes into shares of the borrower. The prices were favorable – about 30% to 50% below market. The shares could then be sold into the market, realizing significant profits.

The process seemed to be good for the small issuers involved – loans could be had that helped fund operations. The loans seemed to be good for Mr. Goldstein and his firms – they made money on the loans if they were repaid. They made even more money if the issuer failed to make the payments – the loans were called and converted into shares of the borrower at heavily discounted prices. That translated into significant profits for Mr. Goldstein when the shares were sold.

The lending business was solely Mr. Goldstein’s operation. He created the business. He funded the lending business. But in selling the shares while he was acting for his own account he was doing exactly what securities dealers do. The Exchange Act requires that such dealers register with the Commission even if the business is all one person using only his or her cash to invest.

Absent registration Mr. Goldstein violated Exchange Act Section 15(a). Mr. Goldstein and his businesses were named as defendants in an SEC enforcement action. SEC v. Goldstein, Civil Action No. 1:24-cv-20261 (S.D.Fla. Filed January 23, 2024. The complaint named as defendants Mr. Goldstein and each of his entities.

The action was settled. Each Defendant consented to the entry of a permanent injunction that prohibits future violations of Exchange Act Section 15(a). In addition, the order requires the payment of disgorgement in the amount of $1,044,252 plus prejudgment interest of $100,748 and the payment of a penalty of $105,000. In addition, a 5 year penny stock bar was imposed. See, Lit. Rel. No. 25930 (January 23, 2024).

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by T. GormanPosted on Posted in SECActions

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The Commission filed five new cases last week. Two centered on offering frauds, one on a market manipulation, another on the block trading rules and one focused on the whistleblower protection rules.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 3 new civil injunctive action and 2 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Offering fraud: SEC v. Prosper E Beyond Moore, Civil Action No. 1:24-cv-00242 (N.D. Ga. Filed January 18, 2024) is an action which names as defendants: a resident of Loganville, Georgia who did business as Prosperity Investment & Solutions, LLC, and the firm. Over a two-year period, beginning in late 2021, Defendants raised over $1.4 million from over 60 individuals. Potential investors were told that the firm was a large, reputable financial organization that could generate profits of 50% per month through a diverse range of investments. In fact, Defendants use the money for other investments and personal expenses. Defendants created false documents showing investor returns of over 10% per week and 40% per month. To the extent investor funds were invested, there were losses of over $67,000. The complaint alleges violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants resolved the action by consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, Mr. Moore is barred from participating in the issuance, purchase, offer or sale of securities except for his personal account and an officer/director bar. The court will determine monetary penalties. See Lit. Rel. No. 25928 (January 18, 2024).

Manipulation: SEC v. Farber, Civil Action No. 1:24-cv-00273 (S.D.N.Y. Filed January 12, 2024) is an action which names as defendants: Jonathan Farber, Aarif Jamani and Brian Keasberry. Over a four year period, beginning in September 2017, Defendant engaged in a scheme to manipulate the shares of a small California based company with little trading in its stock named County Line Energy Inc. To implement the scheme Defendants took the following steps: 1) they placed close associates or figureheads in senior manage positions at the firm; 2) they created the false appearance of investor interest in the shares; and 3) after the share price increased, they were sold. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Sections 9(a)(2) and 10(b) along with Rule 10b-5(a) & (c). The case is in litigation. See Lit. Rel. No. 25926 (January 16, 2024).

Offering fraud: SEC v. Medsis International, Inc., Civil Action No. 1:21-cv-11356 (D. Mass. ). The previously filed action named as defendants: the technology company, Joshua Cabrera and Paul Hess. The complaint alleged that over a five-year period Defendants raised over $12.9 million from about 150 investors. The solicitations were based on selling unregistered shares of the company, beginning in 2015, by making a series of misrepresentations. A default judgment was entered against the company, prohibiting future violations of Securities Act Sections 5(a) & (c). The judgment also ordered the payment of disgorgement in the amount of $11,842, 015, prejudgment of $2,943,045 and a penalty of $1,116, 140. A final judgement had been entered against Defendant Paul Hess. It directs the payment of disgorgement in the amount of $527,000, prejudgment interest of k$109,205 and a penalty of $1,116, 140. See Lit. Rel. No. 25925 (January 16, 2024).

Trading: In the Matter of Pawan Kumar Passi, Adm. Proc. File No. 3-21826 (January 12, 2024) names as Respondent the Managing Director of Morgan Stanley & Co.’s Syndicate Desk during the relevant period. Over a three-year period, beginning in June 2018, Mr. Passi disclosed to select buy-side investors non-public, potentially market-moving information concerning impending block trades that the firm had been invited to bid on or was in the process of negotiating with the selling shareholders. This permitted the investors who received the information to preposition or take a short position in the stock that was about to become the subject of the block trade. Those disclosures violated the applicable confidentiality provisions regarding the treatment of confidential information. The Order alleges violations of Exchange Act Section 10(b). Respondent resolved the proceedings by consenting to the entry of a cease-and-desist order based on the Section cited in the Order. Respondent will be barred from the securities business and from participating in any penny stock offering. Respondent can apply for readmission after one year. Respondent is also subject to certain limitations on his activities. In addition, he will pay a penalty of $250,000. See also In the Matter of Morgan Stanley & Co. LLC, Adm. Proc. File No. 3-21825 (January 12, 2024 (proceeding naming as Respondent the firm which employed Respondent Passi; it failed to enforce written policies designed to prohibit the wrongful conduct; the Order alleges violations of Exchange Act Sections 10(b) and 15(g); resolved with entry if a consent decree based on the Sections cited, a censure and the payment of disgorgement in the amount of $138,297,046 and prejudgment interest of $28,057,775. Those amounts are offset amounts paid as forfeiture or restitution for the benefit of victims in the parallel non-prosecution agreement with the USAO for SDNY.

Whistleblowers: In the Matter of J.P. Morgan Securities LLC, File No. 3-21829 (January 16, 2024). From 2020 through July 2023 the firm engaged in conduct that violated the whistleblower protection provisions of the Exchange Act. Specifically, brokerage and brokerage clients to whom a credit or settlement of over $1,000 were asked to sign a confidential release agreement. It required clients to keep confidential the Release and all information relating to the specified account at the firm. The prohibition included all information relating to the specific account. The Release did permit clients to respond to inquiries from the Commission. It did preclude voluntary communications with the agency concerning potential securities law violations. The Order alleged violations of Exchange Act Rule 21F-17(a). To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Rule cited in the Order. The firm was also censured. In addition, the firm will pay a penalty of $18 million.

Offering fraud: SEC v. Barbera, Civil Action No. 1:20-cv-10353 (S.D.N.Y.) is an action which named as defendant Carl Smith. The action centered on a sale of shares in Nanobeak Biotech, Inc. by its former CEO Jeremy Barber, using a series of false statements. Mr. Smith resolve the matter by consenting to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also requires the payment of disgorgement of $173,875 and prejudgment interest of $23,470.59. See Lit. Rel. No. 25927 (January 18, 2024).

BaFin

Standards: The Federal Supervisory Authority announced on January 19, 2024 its views on the EU Green Bond requirements, bringing greater clarity to those provisions which are required to be effective as of December 21, 2024. The EU standards stem from the Paris Climate Agreement of 2015 and are part of the EU Green Deal due 2050. The EU considers the sustainable bonds to be one of the most important instruments for financing sustainable investments. With greater clarity the idea is to foster more investment in the green bonds (here).

Hong Kong

Enforcement: The Hong Kong Securities and Futures Commission has teamed with Radio Television Hong Kong to produce a new series, SFC in Action. The series illustrates investment scams to educate the public using actual cases, according to the January 10, 2024 announcement (here).

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