by T. GormanPosted on Posted in SECActions

All things virtual currency or crypto continue to draw significant investor interest. The SEC’s most recent case in this area combines many of the elements of earlier actions as well as those on the “Howeycoin” website recently created by the agency to warn investors – an ICO, white papers, relationships with well known companies and even the Federal Reserve, endorsements and intellectual property. None of it was true. Nevertheless, $21 million in investor cash was raised in a few weeks in the U.S. and abroad. SEC v. Titanium Blockchain Infrastructure Services, Civil Action No. CV18-4315 (C.D. Cal. Unsealed May 29, 2018).

Named as defendants are two firms and the owner, Michael Stollery. The firms are Titanium Blockchain Infrastructure Services, Inc. or TBIS and EHI Internetwork and Systems Management, Inc. or EHI.

By late October 2017 Defendant Stollery, calling himself the “blockchain evangelist,” was using social media to tout The Titanium BAR Token for an ICO to commence in January 2018. The idea was to essentially “crowdfund” and raise money to create products and services for the TBSI platform.

As a precursor to the ICO a pre-sale campaign was launched. On November 24, 2017, for example, a “special offer” was made under which TBIS was waiving the minimum purchase amount of $5,000 and allowing BAR purchases in any amount, although supplies were limited. The next day Mr. Stollaire tweeted that over $100,000 had been raised in less than 24 hours.

One distinguishing feature of this offering was supposed to be that the funds were going to develop an IT platform. Investors would share in TBIS’ future earnings and in the appreciation of the BAR digital assets. Investing in the BAR was comparable to buying Google stock at a very early stage in the history of that firm, according to Mr. Stollery.

The White Papers for the ICO – there were several versions – stated that the supply of BAR would be 60 million digital assets. Funds raised by the company – somewhere between $1 million and $35 million – would be pooled and used to develop the platform. A key to future success which supposedly distinguished the offering here were the relationships of TBIS’s sister company which would be leveraged to bring success. A list 25 firms was included in the White Papers. The firms identified were all well known and included Apple, General Electric, Pfizer and The Federal Reserve. Logos for a number of the firms were depicted.

The claims regarding these firms were bolstered by testimonials listed on the website. The representations about the relationships with the firms were false. By February 2018 Mr. Stollaire began receiving cease and desist letters from the companies cited. The claimed testimonials were false.

The White Papers, and other marketing materials, also claimed that the firm owned intellectual property. Detailed descriptions of the trademarked property were furnished with the symbol TM. None of the trademarks belonged to the defendants. Indeed, none of the claimed trademarks has an application pending with the U.S. Patent and Trademark Office with one exception.

Shortly after the completion of the ICO, TBIS announced that 16 million BAR digital assets had been “taken” from TBIS digital wallets – an “illegal theft.” TBIS then created a second digital asset called TBAR to replace the original BAR on a 1:1 ratio.

By late April 2018 Defendants shifted to trading. They announced the retention of a person who would promote TBIS as one of the world’s “largest crypto markets.” In May 2018 TBIS noted that they expected TBAR to be listed on a “well known exchange soon.” The assets were never registered with the SEC.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The court granted a freeze order and appointed a receiver for the firms at the time the complaint was unsealed.

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by T. GormanPosted on Posted in SECActions

The Commission’s focus on retail investors seems to be resulting in a series of microcap manipulation cases where those involved acquire what are or become public shells that have no real business. Following the acquisition the promoter and/or his or her group issue what amount to sham press releases about some business activity and perhaps engage in manipulative trading. After months and/or years of effort some share price results that the promoter profits from after selling millions of shares, presumably over a long period so as not to crush the artificially inflated market price. The Commission’s latest effort in this regard in SEC v. Nielson, Civil Action No. 18-cv-1217 (D.D.C. Filed May 24, 2018).

Defendant Niel Nielson, a U.S. citizen residing in London, became the president of E-Waste Systems, Inc. or EWSI in June 2011. He is also the firm’s majority shareholder. EWSI, supposedly based in Las Vegas, Nevada, has the usual shell history. At one time it was in a different business with another name. In early May 2011 the firm’s name was changed to E-Waste Systems. In mid-April, 2012. Mr. Nielson became the majority shareholder. EWSI became a reporting company under Exchange Act section 12(g). Less than two years later, the firm ceased whatever business operations it had.

Mr. Nielson and EWSI announced a reorganization and a new business focus at the end of June 2011. The firm intended to enter the global e-waste recycling and electronic asset recovery business through a series of high-quality acquisitions. The acquisition targets would have strong management teams, according to the announcement.

The investing public learned about its first deal by late October, 2011. All of the capital stock of Tech Disposal, Inc., a Columbus, Ohio based firm, would be acquired. The acquisition never became profitable. EWSI reached a deal to transfer the business and its assets back to the former owners for $50,000 by the end of July 2012.

In early 2013 EWSI announced a one-year teaming agreement with Cinco Electronics, Inc. of Austin, Texas, in a Commission filing. At about the same time a deal was announced with Village Green Global Inc. of Huntington Beach, California. Two months later, on March 4, 2013, a one year teaming agreement was announced with Isidore Electronics Recycling of Los Angeles, California. The announcement of a similar deal with Forex Trading LLC of San Diego California followed two weeks later. Each of these agreements lacked any economic substance, according to the complaint. To the contrary, the “teaming agreements and announcements were part of Nielson’s strategy to create the impression that EWSI had a growing network of affiliates. . .”

As the U.S. acquisitions were being announced, EWSI expanded overseas. A late February 2013 press release announced an exclusive agreement with E-Waste Systems, Ltd. a private U.S. firm. Under the terms of the agreement EWSI acquired a Master License to process e-waste under its name in the U.K. and the Republic of Ireland for two years. That deal was followed by an April 2013 announcement — just after the press release of the other U.S. based deals – in which EWSI disclosed a Strategic Branding Alliance Agreement with a Huston based firm that would permit entry into the market in India under the EWSI name. Two months later the company informed investors about an EWSI subsidiary, EWS (Bharat) Ltd, and an alliance that would permit the firm to “establish [its] EWaste brand into South Asia and the north-eastern hemisphere.” The complaint claims that there was no business activity in India and no real revenue from these arrangements. Nevertheless, the volume of trading in the stock increased.

During the same period Mr. Nielson executed a set of agreements on EWSI’s behalf with a Chinese company. While the filings made with the Commission described the arrangements as requiring EWSI to furnish management services to the Chinese firm, in fact that company was a shell with no operations. Rather, Mr. Nielson agreed to pay the owners of the China firm to provide EWSI with financial data on its operations at the end of each quarter. EWSI would then report those numbers in its financial statements. Those numbers were included in quarterly financial statements for EWSI. Ultimately two audit firms resigned over this tactic while the refusal of a third to go along with the approach prompted a removal of the entries in 2014.

Despite these difficulties in July 2013 EWSI signed a letter of intent to acquire WWS Associates, Inc. with facilities in Cincinnati, Ohio and Geneva, New York. The release regarding the deal claims that it was expected to add over $5 million in revenue. The closing of the transaction was announced in December 2013. At the time of the announcements, Mr. Nielson had no reasonable basis for the claims, according to the complaint. One year after the closing the firm was evicted from its facility in Cincinnati.

Throughout the period of these announcements Mr. Nielson had been acquiring firm shares. In December 2011 he became the majority shareholder of the firm after acquiring 62.5 million shares. Between July 2012 and April 2014 he acquired an additional 17.5 million in lieu of salary. In July 2013 Mr. Nielson acquired an additional 50 millions shares for extinguishing certain obligations.

Between January 25, 2013 and June 27, 2014 Mr. Nielson sold over 6.9 million shares of EWSI for proceeds of just over $181,000. The complaint alleges violations of each subsection of Securities Act sections 5 and 17(a) and Exchange Act sections 10(b), 13(a), 13(b)(5) and 16(a). The complaint is pending. See also SEC v. Johnson, Civil Action No. 18-cv-364 (S.D. Ohio Filed May 24, 2018)(action against Carolyne Johnson, former Secretary and Treasurer of EWSI; settled with the entry by consent of a permanent inunction based on Securities Act sections 17(a) and Exchange Act sections 10(b), 13(b)(2)(A) and 13(b)(2)(b) and the entry of an officer and director bar and penny stock bar); see also the cooperation agreement entered into with Arthur Kaplan discussed here. Lit. Rel. No. 24151 (May 25, 2018).

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