SEC: Gatekeeper Facilitates Unlawful Stock Sales
Gatekeepers are a critical focus for SEC enforcement. Lawyers, accountants and other professional are often at the scene and, in many instances, can be either key to halting, or in some instances implementing a wrongful scheme. The latter is clearly the situation in SEC v. OTC Capital Partners, LLC, Civil Action No. :16-cv-20270 (S.D. Fla. Filed January 22, 2016).
The action centers on a scheme to convert corporate debt to securities which are sold into the market, raising millions of dollars. The key is a lawyer’s Rule 144 opinion which moves the shares past the transfer agent and permits their sale to the public.
The defendants are OTC Capital, which describes its business as providing financing for companies through aged debt and other transactions; Adi Elfenbein who once held Series 7 and 63 licenses, worked as a registered representative and is the sole owner of OTC Capital; and attorney Joseph L. Pittera, a sole practitioner from California.
The scheme is straight forward and was repeatedly implemented through a series of step:
- OTC entered into a Debt Purchase Agreement with MusclePharm Corporation vendors who held aged invoices that MucclePharm had failed to pay;
- The agreement authorized OTC Capital to amend the terms of the debt and covert the debt invoices into common stock of MusclePharm priced at a substantial discount;
- MusclePharm’s board of directors approved the issuance of the necessary stock and directed the transfer agent to issue unrestricted shares;
- Attorney Pittera was retained by Mr. Elfenbein to write opinion letters for ten deals between the two companies; and
- Rule 144 letters were authored, claiming that the holding period had been met because it began to run not from when the stock was issued but the date of the invoice despite the fact that the invoices were not securities.
About 23.9 million shares were sold into the open market raising $1.19 million, although there was no registration statement in effect or exemption available. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is pending. See Lit. Rel. No. 23452 (January 22, 2016).