by T. GormanPosted on Posted in SECActions

Directional note: Each Monday has typically features a post titled This Week in Securities Litigation. The article generally reviewed each of the cases filed the previous week by the SEC. Today we are trying a different presentation. Each day this week will feature one or more of the cases filed last week along with other related items as appropriate. All of the cases filed last week will be covered by week end along with other significant items that occur this week. Next week the traditional This Week In Securities Litigation format will return to this space. Comments on the presentation appreciated.

Manipulation: This topic has long been a focus of the Commissions enforcement division. Typically, the cases filed involve penny stock issuers. A good example of these cases is SEC v. Nutra Pharma Corp., Civil Action No. 2:18-cv-5459 (E.D.N.Y.).

The action named as defendants: Erik Deitsch, former CEO of microcap issuer Nutra Phama Corporation, and Sean McManus, a consultant for Nutra Phama. The firm purports to make pain relief drugs based on cobra venom. Press releases issued by the company and Defendant Deitsch implied that the company had engaged a firm to distribute its product internationally. The releases also suggested that the firm was expanding its cobra venom facilities. The claims were false.

The press releases were published while Mr. Deitsch and Nutra Pharma were conducting an unregistered offering of company shares. Defendant Deitsch engaged in a manipulation of the firm’s shares while the press releases were being distributed, according to the claims. The complaint as to Mr. Deitsch alleged violations of Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Sections 9(a)(2), 10(b), 13(a) and 16(a). Mr. McManus was charged with violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).

On August 31, 2022, the court granted summary judgement on claims that Mr. Deitsch violated Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 9(a)(2), 13(a), 13(d) and 16(a).

The court concluded that Mr. Deitsch had violated the Sections charged as to him. The Commission dropped an aiding and abetting charge as to Mr. McManus.

Subsequently, the Court concluded that Mr. Deitsch had violated the Sections charged on a motion for summary judgment. The Commission dropped the aiding and abetting claim tied to the company as to Mr. Deitsch. On March 19, 2024, the court entered partial consent judgments against each individual Defendant based on the charged Sections. Mr. Deitsch agreed to a three-year officer and director bar and penny stock bar.

The action concluded last week on May 13, 2024. The court entered consent judgments as to each Defendant. Each agreed to be permanently enjoined based on the Sections charged. Mr. Deitsch was ordered to pay disgorgement in the amount of $44,046.28 and prejudgment interest of $5,013.49 as well as a penalty of $30,000. Mr. McManus was ordered to pay disgorgement of $5,500 and prejudgment interest of $625.03 and a penalty of $5,500. He also agreed to a two-year penny stock bar. See Lit. Rel. No. 26007 (May 15, 2024).

by T. GormanPosted on Posted in SECActions

Offering fraud actions seem to be everywhere. These schemes prey on people looking for good investments and frequently take advantage of the investor’s zeal to find a good, profitable investment for his or her funds. In the end, of course, it the investor who looses much if not all of his or her money since typically the scheme is all to often nothing but a fraud.

The reverse of these kinds of deals is a free riding scheme. There, a market professional such as a broker-dealer is often the victim. The scheme begins with a broker offering new clients “instant credit.” This happens when a new client claims he or she will transfer assets from an existing account to a new account at the brokerage firm. Once the transfer is supposedly made – all on paper — the broker permits the new client to trade in the newly opened account using the proceeds from the just made paper transfer.

The problem is the transferred assets have not yet arrived. In fact, under normal circumstances the assets may not actually arrive for a short period. Accordingly, the new client is actually trading on credit extended by the broker. If the trades are successful the new client attempts, and often does, take the assets out and leave; if the trades are a loss, the new client vanishes. The new client wins, or at least leaves, with no loss. The broker takes the loss. The Commission’s latest case in this area is SEC v. Lacy, Civil Action No. 24-cv-1145 (M.D. Fla. Filed May 13, 2024).

Named as a defendant in this case is Tyrone Johnny Lacy, Jr., a 25 year-old resident of Seffner, Florida. He was employed as a warehouse and backroom employee for several retailers and a consumer electronics distributor.

Over a short period in October 2022 Mr. Lacy engaged in what was essentially a free riding scheme with two brokers. With each broker Mr. Lacy first initiated electronic deposits from his bank accounts into the two brokerage firms where he had established an account. For example, with one broker Mr. Lacy falsely represented his profession, salary and the amount of cash he had. He then made a $270,000 unfunded deposit with the broker. Based on the so-called deposit, he purchased $330,000 of equity, exchange-traded securities. The trade was a loss – the firm had a loss of over $1,500 on the unfunded trade; Mr. Lacy, however, withdrew $1,600 before the phony unfunded money transfer was reversed. Similar conduct was undertaken with the other broker. One broker had a loss of about $1,500. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 26004 (May 13, 2024).

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