SEC’s Focus on Microcap Fraud Continues

The retail investor focus of the SEC’s Enforcement Division is translating into a concentration on microcap fraud. The actions being brought include those centered on shell creation factories that frequently create the often empty shell companies used in manipulations, the classic pump-and-dump manipulation actions and offering frauds. These fraudulent techniques have been repeated frequently in the markets over the years, deceiving investors who part with their savings for what almost always turns out to be worthless securities whose price was tied to fraud.

The Commission’s latest action in this milieu is SEC v. Loflin, Civil Action No. CV -19-02548 (D. Ariz. Filed April 19, 2019). Defendant David Loflin is apparently an old hand at pump-and-dump manipulations, although he is not a recidivist. His long time side-kick is Individual A, who apparently has also participated in a number of these fraudulent actions. Individual A passed away after the events in the complaint but before it was filed.

The pattern of the case is, unfortunately, an all to familiar one. Over a three year period beginning in 2013 Mr. Loflin and Individual A acquired shares in a firm called Greenway Design Group, Inc. The company supposedly distributed consumer air conditioning cooling systems and, in more recent days, entered the cannabis market. Its name has changed over the years. The shares were traded on OTC Link, although it was not a reporting company.

Mr. Loflin and his sidekick, Individual A, essentially made a deal with Greenway’s owner who was desperate for cash through which they acquired shares in the firm. The deal centered on a promissory note under which cash was owed. The note was acquired along with another, backdated and turned into convertible debt. The conversion permitted Mr. Loflin and Individual A to obtain the shares needed for a manipulation.

Critical to the success of the scheme was the ability to trade the shares. The shares Mr. Loflin and Individual A acquired were not registered and in fact were restricted. Each carried a legend attesting to the restriction. Mr. Loflin prepared a package of documents which falsely stated that the restrictions could be removed. Those documents also noted that Mr. Loflin was not an affiliate of the issuer, another false statement. Nevertheless, the attorney letter in the package of materials asserted that the one year holding period of Rule 144 had been met and that the restrictions on the share certificates could be removed.

In January 2015 Mr. Loflin began furnishing deposit security requests for the stock certificates to his broker so that the shares could be deposited into his brokerage account. The package of documents submitted were false. In part they claimed that Mr. Loflin was not an affiliate of the issuer. That statement was false. The documents also claimed that Mr. Loflin was not acting in concert with anyone. The statement was false.

Finally, Defendant Loflin and Individual A pumped the share price using email blasts and company press releases: 1) In late January 2015 four email blasts and one firm press release were published. The share price rose 57%. 2) In May 2015 four email blasts and one company press release were published. The share price increased 125%. 3) In mid-September 2015 two email blasts were published. The share price increased 16.7%. 4) In late October 2015 thirteen email blasts were issued. The share price increased 233%. Overall Mr. Loflin received about $152,800. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b).

To resolve the action Mr. Loflin consented to the entry of a permanent injunction based on the sections cited in the complaint. The order also bars him from serving as an officer and director of a public company and from participating in any penny stock offering. In addition, he agreed to pay disgorgement, prejudgment interest and a penalty in amounts to be determined by the Court. See Lit. Rel. No. 24457 (April 19, 2019).

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