FIRST SEC ACTIONS BASED ON PRE-IPO MARKET
Shares of privately held high tech companies, such as Facebook and Twitter, have attracted significant investor interest. Many have sought to purchase shares in anticipation of the initial public offering of securities in these companies. As a result, since at least the middle of 2009, a secondary marketplace has emerged. Several investment funds were formed to pool investor money and acquire the securities of these firms.
Following a year long investigation the SEC brought three actions involving the sale of shares in these funds. The first is SEC v. Mazzola, CV-12-1258 (N.D. Ca. Filed March 14, 2012). The defendants are Frank Mazzola, a registered representative who is the principal and owner of defendant Felix Investments, LLC, a registered New York City broker. A third defendant is Facie Libre Management Associates, LLC, an investment adviser for two pooled investment vehicles affiliated with Felix Investments. The two funds invested primarily in the shares of Facebook. As of January 2011 Face Libre managed more than $41 million for hundreds of investors in the two funds.
A series of false representation are alleged to have been made in connection with soliciting investors to purchase fund shares including:
- Omitting the fact that Facebook blocked the transfer of shares to Facie Libre in several transactions from May 2010 to May 2011;
- Beginning in November 2010 the full amount of compensation received by Mr. Mozzola for his work related to the funds exceeded the disclosed 5%;
- In October 2010 Felix and Mr. Mazzola told investors that Facie Libre was about to complete a new purchase of Facebooks shares when in fact they lacked any reasonable basis for the claim; and
- In March 2010 Felix and Mr. Mazzola falsely told potential investors that Facie Libre was â€œFacebook-approvedâ€ and thus more likely than other funds to acquire pre-IPO Facebook shares.
Defendant Mazzola also formed funds to acquire interests in other pre-IPO companies such as Zynga and Twitter. In connection with the sale of interests in those funds Mr. Mazzola and Felix falsely stated that they had acquired shares of Zynga when in fact they had not. They also misrepresented the financial results of Twitter.
The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Section 206(4). The case is in litigation.
A second action is In the Matter of Laurence Albukerk, Adm. Proc. File No. 3-14801 (Filed March 14, 2012). It is a settled administrative proceeding against registered representative Laurence Albukerk and his company, EB Financial Group, LLC, which served as an investment adviser to funds holding Facebook shares. The action alleged that Respondents failed to properly disclose the fees they earned in connection with the sale of the shares. The matter was settled with Respondents consenting to the entry of a cease and desist order based on Securities Act Section 17(a)(2) and Advisers Act Section 206(4) in addition to paying disgorgement and prejudgement interest of $210,499 and a penalty of $100,000).
The third is In the Matter of Sharespost, Inc., Adm. Proc. File No. 3-14800 (Filed March 14, 2012), also a settled administrative proceeding. The Respondents are the company and its founder and president Greg Brogger. The Order alleges that Respondents facilitated the sale of pre-IPO shares without registering as a broker dealer. The action was resolved with Respondents consenting to the entry of a cease and desist order based on Exchange Act Section 15(a) and the company agreeing to pay a penalty of $80,000 while Mr. Brogger paid $20,000.