by T. GormanPosted on Posted in SECActions

Offering frauds have become the key staple of the Enforcement Division. The focus fits well with the Main Street investor theme frequently cited by the agency. Recently, however, there are indications that the focus may be branching out into pyramid schemes, a variation of the typical offering fraud. The Commission’s latest case in this area seems to combine the two ideas – offering frauds and pyramid schemes — with the popular theme of mindfulness. SEC v. McLane, Civil Action No. 2:20-cv-00122 (N.D. KY. Filed August 31, 2020).

The action centers on Mindset 24 Global, LLC, a personal development company themed to the current interest in mindfulness. The firm was created by co-founders, John McLane and Paul Nash. Mr. McLane was the CEO of the firm; Mr. Nash served as the chief technical officer. Each is named as a defendant in the complaint.

The firm traces to 2017 when it began offering personal development services through different levels of online self-help instructional packages on a website. The packages came in four levels, each offered at a different price. The information in the packages was composed of various videos and workbooks. One group was based on an entrepreneur and TV personality who appeared on “Shark Tank.” The higher packages offered more personal material and tied to a greater share in the Compensation Plan of the firm. Packages were sold in a number of states.

The Compensation Plan was crafter to offer participants the opportunity to earn commissions at different levels. The top end the program offered the participant 70% of the sale proceeds. In that case 30% of the proceeds went to the Defendants. In addition, there was an opportunity to earn what was called a “coded bonus” tied to sales. The greater the sales, the greater the compensation.

Beginning in July 2017, and continuing through at least May 2018, Defendants offered the Series Packages and actively promoted Mindset 24 through a website. The program was also aggressively promoted on social media. During the period Defendants raised over $1 million, mostly in bitcoin from participants. Although the program was set up so that sales could be made to either those who were participating in the program or customers, virtually all the sales were made to those in the program – participants.

The vast majority of the participants lost money. Of the 735 participants who paid for a series package, for example, 92% suffered losses that averaged over $1,000. In addition, Defendants misappropriated about $51,000 of investor funds. About $20,000 was misallocated to a small minority of participants.

The complaint alleges violations of Securities Act Sections 5(a) and 5(c) – the interests purchased are investment contracts or securities. The complaint also alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24880 (August 31, 2020).

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by T. GormanPosted on Posted in SECActions

Binary options are either a form of gambling or very risky investments. The characterization depends on who is asked. In the U.S. the options are permitted but viewed as a very high-risk investment. In some countries they are viewed as gambling and banned. When the Commission brings an action centered on binary options, the charges typically center on fraud. That was the focus in a case the agency recently settled that was filed last year. SEC v. Senderov, Civil Action No. 19-cv-5242 (E.D. WA. Settled August 31, 2020).

The action named as defendants Anto Senderov and Lior Babazar, both citizens residents of Israel. Defendants own or control two unregistered internet offering binary options brokerages and a call center that solicits investors. The solicitations took place over a three-year period, beginning in January 2014. The two brokerage firms described binary options as profitable investments for all investors, including those with little or no experience.

Investors were told by the call center that they could make large profits working with its experienced professionals. In fact, those at the call center were instructed to lie. Defendants also failed to disclose that the option firms had an interest in investors failing to make money. Through these solicitations Defendants obtained millions of dollars from investors. The complaint alleged violations of Securities Act Section 5 and Exchange Act Section 20(a) tied to violations of Exchange Act Sections 15(a) and 10(b).

To resolve the case each Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b) and Securities Act Section 5. The judgment directs that the two Defendants, jointly and severally, pay disgorgement and prejudgment interest in the amount of $560,000. Each Defendant was also directed to pay a penalty of $350,000. And, each Defendant agreed to be enjoined from selling binary options in the U.S. The Court entered the judgments as to each Defendant. See Lit. Rel. No. 24879 (August 31, 2020).