The SEC continued to focus largely on traditional areas for enforcement last week. New cases filed focused largely on insider trading and offering frauds. There were also actions centered on the failure to disclose related party transactions, crypto assets, and a pyramid scheme.
Be careful, be safe this week
SEC Enforcement – Filed and settled actions
Last week the Commission filed 8 civil injunctive actions and 1 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.
Offering fraud: SEC v. Airborne Wireless Network, Civil Action No. 21-civ-01772 (S.D.N.Y.) is a previously filed action centered on a fraudulent scheme created by Defendant Kalistratos Kabilafkas who acquired control of Airborne Wireless. He enlisted Defendant Eric Scheffey to participate in the scheme by depositing shares of the company with broker-dealers to clear them for public sale. Last week final judgment was entered as to Mr. Scheffey. That judgment enjoined future violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and directed Defendant Scheffey to pay a penalty of $75,000. It also imposed a penny stock bar. See Lit. Rel. No. 25476 (August 18, 2022).
Offering fraud: SEC v. Mastroianni, Civil Action No. 22-civ-5080 (D.N.J. Filed August 17, 2022). Named as defendants in the action are: Anthony Mastroianni, Jr. and Global Business Development and Consulting Corp. Mr. Mastroianni is the sole owner of the Defendant Global. He is a barred broker – FINRA barred him in December 2016. Over a five year period, beginning in February 2017, Defendants sold Global Notes to investors. The funds raised from selling the notes were to be used to make loans to other businesses. Profits from the sale were supposed to be used to repay investors. The notes had a 50% to 175% interest rate. As a result, 11 investors purchased notes. Defendants received at least $1.2 million. Unfortunately, investors were not repaid. The reason — Defendants misappropriated much of the investor money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney for the District of New Jersey announced parallel criminal charges against Mr. Mastroianni. See Lit. Rel. No. 25477 (August 18, 2022).
Insider trading: SEC v. Daniel, Civil Action No. 3:22-cv-4711 (N.D. Ca. Filed August 17, 2022) is an action which names as defendant Nicholas Daniel, the owner of a Florida business that sells sun glasses. On May 29, 2019, Mr. Daniel read a rumor in the paper that Cypress Semiconductor Corporation might be a takeover target. At the time Mr. Daniel’s mother was living with a close family member of Defendant. The close family member was an employee at Chypress. Shortly after reading the article Defendant learned in confidence that the close family member was working that morning at home on an urgent matter related to the article and that Cypress was likely to be acquired soon. He immediately borrowed $50,000 from his mother based on a false story and purchased Cypress options. Before the open of the market on June 3, 2019, Cypress announced it would be acquired. The share price increased by 27.9%. The sale of the options yielded a profit of $349,588, nearly a 700% return. The complaint alleges violations of Exchange Act Section 10(b). Defendant settled, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement of $349,588, prejudgment interest of $38,829 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 25473 (August 17, 2022).
Front running: SEC v. Polevikov, Civil Action No. 25475 (August 17, 2022) is a previously filed action against Sergei Polevikov, a quantitative analyst. Defendant conducted a frontrunning scheme that generated profits of about $8.5 million over a period of five years beginning in 2014. The scheme was run based on information about stock transactions obtained from his employer. That information was then used to front run the employer. The matter was resolved with Defendant consenting to the entry of a permanent injunction based on Exchange Act Section 10(b), Securities Act Section 17(a) and Investment Company act Section 17(j). Disgorgement is deemed satisfied by the forfeiture ordered in the parallel criminal case. Defendant was also barred from the securities business. In the parallel criminal case Defendant’s criminal conviction was entered along with a forfeiture order. See Lit. Rel. No. 25475 (August 17, 2022).
Pyramid scheme: SEC v. CKB168 Holdings, Ltd., Civil Action No. 1:13-cv-5584 (E.D.N.Y.) is a previously filed action which named as defendants 11 individuals and entities. Previously, each defendant settled with the Commission. This week the Court entered final judgments as to each defendant in accord with the previously entered settlements. Those settlements, and a brief description of the case, are discussed here. See Lit. Rel. No, 254474 (August 17, 2022).
Unregistered crypto offering: SEC v. Dragonchain, Inc., Civil Action No. 2:22-cv-01145 (W.D. Was. Filed August 16, 2022) is an action which names as defendants: the company, which markets Dragonchain technology and its ecosystem; Dragonchain Foundation, a nonprofit which owns intellectual property; The Dragon Company which markets and supports the ecosystem; and Joseph Roets, the founder of the brand. In 2017 Dragonchain minted and marketed DRGNs – crypto coins. The two-step unregistered offering raised about $14 million. The coins are tied to a peer-to-peer databased spread across computers. It was designed to be incorporated into daily activities. Defendants engaged in various marketing efforts which noted that the offering proceeds would be used to develop the ecosystem. Service providers were also paid with the coins over a three year period beginning in 2019. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is pending. See, Lit. Rel. No. 25468 (August 16, 2022).
Investment fraud: SEC v. Bentley, Civil Action No. 4:22-cv-2772 (S.D. Tx. Filed August 16, 2022) is an action which names as defendants Christopher Bentley and Bellatorum Resources LLC. Over a three-year period, beginning in February 2019, Mr. Bentley orchestrated a fraud centered on the sale of limited partnership interest in three funds he formed – Bellatorum Phalanx Investments, LP, Bellatorum Land & Minnerals, LP and Sentinel Energy Investments. Defendant Bentley raised about $31.5 million from 149 investors. The funds were supposed to purchase oil and gas interests and similar mineral rights. To conceal the fact that he failed to generate deal flow: Mr. Bentley purchased rights at inflated prices and misappropriated the inflated amounts; acquired interests in self-dealing transactions; manipulated sales transactions to generate fake profits; and altered documents. In addition, Defendant Bentley pledged the assets to obtain a $6.6 million loan that was not disclosed to investors. The complaint alleges violations of Advisers Act Sections 206(1) and (2), Exchange Act Section 17(a) and Exchange Act Section 10(b). Defendants resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. Mr. Bentley also agreed to the entry of an officer/director bar. Each Defendant agreed to pay disgorgement, prejudgment interest and penalties in amounts that will be determined by the Court at a later date. The U.S. Attorney’s Office for the Southern District of Texas filed related criminal charges against Mr. Bentley. See Lit. Rel. No. 25472 (August 17, 2022).
Related party transaction: In the Matter of Eagle Bankcorp, Inc., Adm. Proc. File No. 320963 (August 16, 2022) is a proceeding which names as respondent the bank holding company for Eagle Bank, a Bethesda, Maryland firm. Over a three year period, beginning in March 2015, the firm failed to disclose a number of loans that had been extended to family trusts affiliated with Ronald D. Paul, Eagle’s former Chairman, CEO and President. Commission regulations and US GAAP require that related party loans be disclosed. Nevertheless, the firm repeatedly refused to disclose them despite a report from a short seller about the loans and repeated inquiries from investors. Indeed, when faced with the inquiries the company issued press releases claiming the loans were essentially exempt from disclosure. Finally, in a report filed with the Commission, the firm disclosed the transactions, increasing its related party loan balances to $238 million as of December 31, 2017 from the prior balance of $61 million and to $138 million as of December 31, 2016 from the balance of $53 million previously reported. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). Respondent resolved the matter, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, Respondent will pay disgorgement of $2.6 million along with prejudgment interest of $750,493 and a penalty of $10 million. A Fair Fund will be created under Section 308(a) of SOX. See also SEC v. Paul, Civil Action No. 1:22-cv-06985 (S.D.N.Y. Filed August 16, 2022)(suit against former CEO of the firm based on similar allegations; settled with permanent injunctions based on the same Sections cited above, a two year officer and director bar and the payment of disgorgement of $109,000, prejudgment interest of $22,216 and a penalty of $300,000). The Federal Reserve Board also announced parallel settled actions against Eagle and Mr. Paul. See Lit. Rel. No. 25471 (August 17, 2022).
Insider trading: SEC v Dishinger, Civil Action No. 2:22-cv-03258 (N.D. Ga. Filed August 15, 2022) is an action which names as defendants: Ann Dishinger, a senior finance manager at PR firm; Lawrence Palmer, a vice president of mortgage lending at a mortgage firm; Jerrold Palmer; and Lawrence Palmer, a vice president for another mortgage firm. This action centers on a data breach at Equifax. announced on September 7, 2017. When the data breach at the firm was discovered PR firm was retained to assist. Defendant Dishinger learned about the matter while working at the firm. She did not trade but did pass the information to L. Palmer who contacted a business client that traded in his account. Later L. Palmer reimbursed the business client for the cost of most of the positions. L Palmer disclosed the information to his brother and office co-worker, J. Palmen who then tipped a friend that traded. The day after the incident was disclosed the share price for Equifax dropped 14%. The conduits used by L. Palmer and J. Palmer sold their positions resulting in profits, respectively, of $34,848.90 and $73,398.74. The complaint alleges violations of Exchange Act Section 10(b). Defendants L. Palmer and J. Palmer settled, consenting to the entry of permanent injunctions based on the Section cited in the complaint. In addition, L. Palmer agreed to pay disgorgement of $9,000 plus prejudgment interest of $2,026 and a penalty of $88,698. J. Palmer agreed to pay disgorgement of $28,000, prejudgment interest of $6,303 and a penalty of $73,399. In a separate action filed in 2018 two other Equifax employees were charged with insider trading. See Lit. Rel. No. 25470 (August 16, 2022).
Fraudulent trading: SEC v. Barish, Civil Action No. 20-cv-6437 (S.D.N.Y.) is a previously filed action against registered representative Ross Barish. The complaint alleges that Mr. Barish engaged in a costly in-and-out trading strategy in customer accounts that was not based on due diligence but did generate commissions of over $400,000. Defendant resolved the matter, consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay disgorgement of $171,150.63, prejudgment interest of $16,683.20 and a penalty of $171, 150.53. See Lit. Rel. No. 25467 (August 15, 2022).
Manipulation: SEC v. Mohamed, Civil Action No. 1:22-mi-9999 (N.D. Ga. Filed August 15, 2022). The complaint names as defendants 18 individuals. The international group essentially divided into two overlapping groups to implement the manipulation. The plan focused on the shares of two microcap companies – Bio-Technology Development Corp. or LBTD and Good Gaming, Inc. or GMER. Each group acquired large positions in one of the stocks. The groups then teamed with others to hack a series of brokerage accounts. Those accounts were forced to purchase shares of either LBTD or GMER at inflated prices. Defendants ultimately sold the shares, reaping about $1.3 million. Much of the scheme focused on concealing the identity of the manipulators by taking certain steps over a period of about one year beginning in 2017. For example, as the groups acquired blocks of the two securities, they failed to file reports such as those required by Exchange Act Section 13(d). They also moved the shares back and forth among the groups, changing ownership and using dummy names. The complaint alleges violations of each subsection Securities Act Sections 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25469 (August 16, 2022).
Hong Kong
Report: The Securities and Futures Commission of Hong Kong issued its quarterly report on August 16, 2022 (here).
Singapore
Remarks: Ravi Menon, Managing Director, Monetary Authority of Singapore, delivered remarks titled “How To Get to Net Zero,” on August 17, 2022 (here).
