Commission Files Another Offering Fraud Action

Offering fraud actions are a long-time staple of SEC Enforcement. The agency has uncovered and initiated a wide variety of cases in this area ranging from sham entities selling worthless shares to more sophisticated actions centered on schemes such as selling non-existent tickets to Broadway plays. The most recent case in this area is based on a fugitive selling shares of a company that has no actual business, SEC v. Guess, Civil Action No. 8:24-cv-00172 (D. Neb. Filed May 9, 2024).

Defendants in the action are Jerry D. Guess and Guess & Co. Corporation, Inc. Defendant Guess is the founder and president of Guess & Co. He has a checkered history that includes a conviction on a misdemeanor check fraud action and being named as a defendant in an action based on a claimed real estate fraud where he failed to appear for a court hearing and subsequently fled to Canada in the wake of a criminal contempt order that was entered against him. He also pleaded guilty to charges of wire fraud and filing false tax returns in 2011. In that case Mr. Guess was sentenced to prison and was released in 2017. Defendant Guess controls Guess & Co.

For nearly one year, beginning in June 2021, Mr. Guess conducted an offering of Guess shares to the public. Potential investors were told that the firm was a diversified energy, health care, technology and real estate firm. The company was reputed to have earned millions of dollars in revenue from its operations in recent years. A business plan was distributed that supposedly was designed to revitalize rural America. Yet the only revenue earned by the company recently is $14,654 from the sale of 19 computers to an electronic re-seller store. The plan was based on false statements. The complaint alleges violations of Securities Act Sections 17(a)(1) and 17(a)(3). The case is in litigation. See Lit. Rel. 26005 (May 14, 2024).

Commission Files Manipulation Action

Directional note: Each Monday has typically features a post titled This Week in Securities Litigation. The article generally reviewed each of the cases filed the previous week by the SEC. Today we are trying a different presentation. Each day this week will feature one or more of the cases filed last week along with other related items as appropriate. All of the cases filed last week will be covered by week end along with other significant items that occur this week. Next week the traditional This Week In Securities Litigation format will return to this space. Comments on the presentation appreciated.

Manipulation: This topic has long been a focus of the Commissions enforcement division. Typically, the cases filed involve penny stock issuers. A good example of these cases is SEC v. Nutra Pharma Corp., Civil Action No. 2:18-cv-5459 (E.D.N.Y.).

The action named as defendants: Erik Deitsch, former CEO of microcap issuer Nutra Phama Corporation, and Sean McManus, a consultant for Nutra Phama. The firm purports to make pain relief drugs based on cobra venom. Press releases issued by the company and Defendant Deitsch implied that the company had engaged a firm to distribute its product internationally. The releases also suggested that the firm was expanding its cobra venom facilities. The claims were false.

The press releases were published while Mr. Deitsch and Nutra Pharma were conducting an unregistered offering of company shares. Defendant Deitsch engaged in a manipulation of the firm’s shares while the press releases were being distributed, according to the claims. The complaint as to Mr. Deitsch alleged violations of Securities Act Sections 5(a), 5(c), and 17(a) and Exchange Act Sections 9(a)(2), 10(b), 13(a) and 16(a). Mr. McManus was charged with violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).

On August 31, 2022, the court granted summary judgement on claims that Mr. Deitsch violated Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 9(a)(2), 13(a), 13(d) and 16(a).

The court concluded that Mr. Deitsch had violated the Sections charged as to him. The Commission dropped an aiding and abetting charge as to Mr. McManus.

Subsequently, the Court concluded that Mr. Deitsch had violated the Sections charged on a motion for summary judgment. The Commission dropped the aiding and abetting claim tied to the company as to Mr. Deitsch. On March 19, 2024, the court entered partial consent judgments against each individual Defendant based on the charged Sections. Mr. Deitsch agreed to a three-year officer and director bar and penny stock bar.

The action concluded last week on May 13, 2024. The court entered consent judgments as to each Defendant. Each agreed to be permanently enjoined based on the Sections charged. Mr. Deitsch was ordered to pay disgorgement in the amount of $44,046.28 and prejudgment interest of $5,013.49 as well as a penalty of $30,000. Mr. McManus was ordered to pay disgorgement of $5,500 and prejudgment interest of $625.03 and a penalty of $5,500. He also agreed to a two-year penny stock bar. See Lit. Rel. No. 26007 (May 15, 2024).