Offering Fraud Cases Continue as Key SEC Staple
Climate change, ESG and SPACs are at the top of the list for discussion these days. It seems everyone wants to talk about climate change, ESG and how the Commission might consider writing new regulations and disclosure requirements in this area. Another key topic is SPACs. A critical point here is IPOs and the disclosure obligations around what were once called blank check companies. Yet the day- to-day work of the Enforcement Division policing the markets does not center on either of these topics. To the contrary, offering fraud actions continue to be the largest group of cases being initiated – those in which main street investors are duped into fraudulent transactions. Two actions announced this week by the agency are typical examples of these cases. One involved a claimed “super computer” while another is tied in part to a so-called phone app.
SEC v. Profit Connect Wealth Services Inc., Civil Action No. 2:21-cv-01298 (D. Nev. Filed July 8, 2021) is an action which names as defendants: the Las Vegas company which claims to place investor funds in various investments selected by a “supercomputer” using artificial intelligence; Joy Kovar, the president and a director of Profit Connect; and Brent Kovar, the president and treasurer of the firm and the son of Ms. Kovar. In 2010 the Commission obtained a permanent injunction, penny stock bar and officer and director bar against Mr. Kovar in a fraud action. SEC v. Sky Way Global LLC, Civil Action No. 09-cv-455 (M.D. Fla. March 13, 2009).
Over a three-year period, beginning in May 2018, Defendants raised about $12 million from over 277 investors using Profit Center. Potential investors were told that their funds would be put into various types of investments. Those included securities, bitcoin and other cryptocurrencies selected by the Profit Center supercomputer using artificial intelligence. Investors were told that they would have a Wealth Builder Supercomputer Seat APR account. The investments were made through the firm’s website and targeted at parents, grandparents, and family and friends that wanted to give the gift of success. Those investments were guaranteed to result in fixed income returns ranging from 20% to 30% per year.
In fact, Profit Center was a fraud. Over 90% of the firm’s funds came not from investments but from investors. Most of the investor capital was diverted to the personal use of the people operating it, Ms. Kovar and her son. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The Commission requested an emergency freeze order. The case is pending.
SEC v. Govil, Civil Action No. 1:21-cv-06150 (S.D.N.Y. Filed July 19, 2021) names as a defendant Aron Govil, the controlling shareholder of two firms, Telidyne Inc. and Cemtrex Inc. The former is the developer of mobile phone applications, one of which was a money transfer app that supposedly had crypto capabilities. The other was represented to be a diversified industrial and technology company based on Long Island.
The action is based on a fraud involving each firm. First, in 2019 and 2020, Mr. Govil, as the CEO of Telidyne, made a series of false statements in connection with an offering of the firm’s shares. For example, potential investors were told that the firm’s money transfer app had cryptocurrency and lending capabilities. Investors were also told that an app was under development to detect COVID-19. Both claims were false.
Earlier, beginning in 2016, Mr. Govil used Cemtrex to conduct offerings of securities which raised about $2.5 million. The money was for general corporate purposes which included product development and acquisitions. In fact, significant portions of the investor funds were diverted to the personal use of Defendant Govil.
Mr. Govil also engaged in scalping the shares of Cemtrex and trading on inside information about the company. To scalp the shares, Mr. Govil paid individuals to promote the stock and drive up the share price. As the price rose he secretly sold his shares.
At times Defendant Govil had knowledge of forthcoming events and earnings for the firm. For example, in February 2018 Defendant traded in advance of a firm earning announcement, ultimately obtaining illegal profits of over $360,000. The sales were made thorough a series of nominee accounts. He also issued a press release denying that he sold any shares in the firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 16(a).
Mr. Govil resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to the entry of an officer and director bar and a penny stock bar. In addition, Mr. Govil will pay disgorgement of $626,782, prejudgment interest of $76,693 and a penalty of $620,000. The judgment also authorizes the court to impose additional disgorgement and penalties if deemed appropriate.