by T. GormanPosted on Posted in SECActions

Stock sale fraud schemes are one of the Commission’s long standing targets. Typically the cases center on the acquisition of a penny stock issuer, the accumulation of large numbers of shares for a few cents each and then the resale of those shares to a target group or the public after inflating the prices. The Commission’s latest case in this area is SEC v. Zhabilov, Civil Action No. 1:24-cv-07362 (S.D.N.Y. filed Sept. 30,, 2024).

The case names as defendants six individuals: Harry Zhabilov, Billy Ray, Jr., Charles Dilluvio, Stephen Apolant, Dannie Zhabilov and Jonathan Farber. In addition, four entities were named as defendants. SEC v. Zhabilov, Civil Action No. 1:24-cv-07362 (S.D.N.Y. filed September 30, 2024).

Defendants collectively took steps to take control of the publicly traded shares of Enzolytics, Inc., a Delaware based firm. In doing so, the group took steps to conceal their identity.

In 2018 Defendants Zhabilv and Ray made a series of misrepresentations in the course of selling Enzolytics shares to transfer agents, attorneys, and the public. This allowed them to sell the shares. It also permitted them to sell the debt supposedly owned by Enzolytics to Apolant and Dilluvio’s associate for $100,000. Defendants Ray and Zhabilov shared those payments. In return, Enzolytics issued over half a billion unrestricted shares to Dilluvio’s associate.

In 2020 the Control Group –Defendants Zhabilov, Ray, Diluvio and Apolant – obtained unrestricted Enzolytics shares it could sell to the public through agreements for consulting services with Dilluvio and Defendant Zhabilov’s daughter, Dannie. The Control Group then used a series of misrepresentations relating to Dilluvio and Dannie’s affiliate status. That permitted them to convert the debt from unpaid consulting agreements they could and did sell.

Subsequently, Defendant Zhabilov and his daughter created false documents furnished to the transfer agent to facilitate stock transactions. About 231 million unrestricted shares of Enzolytics were transferred to Dannie. The misrepresentations were used to circumvent transfer restrictions. The shares were then transferred to Defendant Farber for sale. Defendant Ray was paid a brokerage fee for his participation. Defendant Farber then sent Dannie $7.125 million for the transferred shares. She used the funds for personal items.

While Defendant Farber was selling the stock of the Control Group, that Group funded a stock promotion campaign for Enzolytics stock. The control group also used a sham consulting agreement to get Charles Dilluvio 200 million unrestricted Enzolytics shares. He in turn sold those shares to the public through an intermediary.

Defendants Apolant and Dilluvio subsequently converted the Enzolytics debt into about 400 million unrestricted Enzolytics shares. Those shares were issued without restriction but under a false attorney opinion which incorrectly stated that Apolant and Dilluvio were not affiliates of Enzolytics.

Finally, Defendant Farber transferred at least 350 million Enzolytics shares from the Control Group and sold most of the shares to the public. Mr. Farber then transferred about $62 million in stock sale proceeds back to Control Group. When Control Group sold Enzolytics stock there were no registration statements for the sale and no exemption. Defendants shared about $92 million in stock sale proceeds generated by the scheme. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and Rule 10b-5 as well as Section 15(a)(1). See Lit. Rel. No. 26144 (Sept. 30, 2024).

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by T. GormanPosted on Posted in SECActions

Relationships are often centeral focus. Relationships with family and friends are typically at the center of many matters and events. There are times, however, when relationships can cause issues and even difficulties. In one case recently settled by the Commission, for example, a relationship was critical. The failure of a senior executive at a company to disclosure a relationship ended with a settled enforcement action. SEC v. Craigie, No. 1:24-cv-7382 (S.D.N.Y. filed Sept. 30, 2024).

Defendant James R. Craigie served as the CEO of public company Church & Dwight Co. Inc., for eleven years, beginning in 2004. He also served as a non-independent member of the Board of Directors beginning in 2007 and continuing until 2019. He was, in addition, a director of several other public companies.

To become an independent director the Board had to assess if Mr. Craigie had any material relationship with the firm. To make this assessment the Board relied primarily on Mr. Craigie. After considering information provided by Mr. Craigie the Board determined in January 2019 that he was independent, effective at the 2020 annual shareholder meeting.

In fact, Mr. Craigie did not disclose that he maintained a close personal friendship with a firm Executive. He also asked Executive not to disclosure their relationship.

In early 2023 the firm learned that Mr. Craigie had a close personal relationship with Executive. The Board determined that he had violated his obligation of candor and confidentiality under the company Code of Conduct. In 2021 and 2022 the firm had represented in its proxy materials that Mr. Craigie was an independent director – it was unaware of his relationship with Executive. The complaint alleges violations of Exchange Act Section 14(a) and Rule 14a-9.

To resolve the matter Defendant Craigie consented to the entry of a permanent injunction based on the Section and Rule cited in the complaint. He also agreed to pay a penalty of $175,000 and the entry of a five-year officer director bar. See Lit. Rel. No. 26145 (Sept. 30, 2024).

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