The retail investor focus of the Commission is yielding one microcap fraud case after another. Typically, the cases have been offering fraud actions that start with the sale of unregistered securities and end with those soliciting the investments pocketing chunks of the investor cash.

Despite filing numerous cases and repeated education efforts by the Office of Investor Education and Advocacy, the actions keep being filed. The Commission’s latest in this area was so successful at raising money – but not generating returns — after advertising on Sirius Satellite Radio that the Commission filed its complaint as an emergency action to halt the operations. SEC v. Todays Growth Consultant Inc., Civil Action No. 1:19c-cv-08454 (N.D. Ill. Filed Dec. 27, 2019).

Defendant Todays Growth is a private Illinois company co-owned by Defendant Kenneth Courtright and his wife. The firm does business as The Income Store. Over the last two years, beginning in 2017, Defendants raised at least $75 million from over 500 investors. Investors were solicited to purchase what was called a Consulting Performance Agreement. Under that agreement the investor paid an upfront fee and gave the Income Store passwords to websites that Defendants built to generate income.

Essentially, the solicitation was to purchase what looked like an annuity. Investors were guaranteed a minimum return on their investment, supposedly generated by the websites. Specifically, they were entitled to receive in perpetuity a month payment equal to 50% of the revenues generated by the website. The agreement contained a specified minimum amount that would be made by the investor regardless of the actual income generated. For example, while the terms varied in different agreements, in one case the upfront was $150,000. The guaranteed minimum for the investor was $2,500 per month (18% of the investor’s upfront fee divided by 12). The guarantee was backed by a contract provision representing the Income Store is debt free and in good financial condition.

Over the two-year period of the scheme, the Income Store website that generated about $9 million in revenues from the sale of third-party products. Payments to investors during that period, however, equaled at least $30 million, according to the Commission’s complaint. To cover the obvious shortfall, the Income Store had to raise more funds from selling additional agreements and diverting the funds to the earlier investors.

Beginning in October 2019 the firm added a second source of income. The revenue from that operation was comingled with funds from the Consulting Performance Agreements. In addition, Defendants also appear to have obtained funds from loans secured from firms that specialize in distressed lending. During this period Mr. Courtright used funds to pay for his personal expenses. Ultimately, by December 2019 a moratorium on investor payments was declared. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The Court entered a TRO and a freeze order shortly after the complaint was filed. See Lit. Rel. No. 24717 (Jan. 15, 2020).

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As 2019 drew to a close a father and son resolved an insider trading case with the Manhattan U.S. Attorney’s Office. The action centered on trading while in possession of inside information about a pharmaceutical company. Congressman Christopher Collins, who sat on the board of the company, tipped his son who, avoiding losses. U.S. v. Collins, No. 18 Crim 567 (S.D.N.Y.); SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y.).

Yesterday another father and son insider trading case centered on events at a pharmaceutical company was at least partially resolved. Telemaque Lavidas was found guilty by a jury in Manhattan of having repeatedly tipped his friend Georgios Nikas with inside information supplied by Mr. Lavidas’ father, a director at Ariad Pharmaceuticals, Inc. U.S. v. Lavidas, No. 1:19-cr-00716 (S.D.N.Y. Verdict Jan. 15, 2020).

Mr. Lavidas is the son of a prominent Greek business man who serves as a director of Ariad. The firm, based in Cambridge, Massachusetts, developed and marketed leukemia medication Iclusig. In three instances over a two-year period Mr. Lavidas transmitted inside information about the company to friend Nikas. The first occurred in October 2013. There Mr. Lavidas learned from his father that the FDA was concerned about potential adverse health effects from the leukemia drug. The information was transmitted to Mr. Nikas who had a large position in the stock. The shares were sold and Mr. Nikas established a substantial short position. When the firm released the information about the FDA’s concerns, the share price dropped 62%. Mr. Nikas closed the short position, realizing profits of over $3.2 million. He also avoided a loss of about $800,000.

The second occurred later in the same year. In the last two months of 2013 Mr. Nikas was told by his friend, Telemaque Lavidas, that the pharmaceutical company was making good progress on returning Iclusig to market. The information had been given to Mr. Lavidas by his father. Mr. Nikas established a long position in the stock. When the company announced the drug was returning to market the share price increased. Mr. Nikas had profits of over $1.3 million.

The third happened during the summer of 2015. At that time Ariad learned that an unsolicited takeover offer from another drug firm would be made. Mr. Lavidas obtained the information from his father. He passed it on to Mr. Nikas who purchased shares. When the bid was announced Araid’s stock price rose. Mr. Nikas had profits of over $2 million.

Mr. Nikas received other tips from Mr. Lavidas. In each instance he traded. Overall, he had trading profits of over $15 million.

Mr. Lavidas was found guilty by the jury following a one-week trial. Specifically, the jury returned guilty verdicts on one count of conspiracy to commit wire and securities fraud and three counts of securities fraud. Sentencing is scheduled for April 17, 2020.

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