The Access Theory: A Key Enforcement Approach
The access or gatekeeper theory of enforcement traces to the early days of the Division of Enforcement, launched in 1972. The idea was to leverage the scarce resources of the Division and the agency to create a more effective enforcement program. It posits that the professionals who work in the securities markets, such as market professionals, attorney, accountants and others, have professional obligations. If those obligations are properly adhered to and implemented the markets, securities deals and others involved will be protected. Stated differently, the professionals will serve as a kind of advanced guard, helping stop fraud even before the Commission can get there.
Commission officials from Judge Stanley Sporkin to Chairman Jay Clayton have repeatedly invoked the theory. While it has never been enshrined in a statute, regulation or even case law, it is a long established hallmark of SEC Enforcement. A recent Commission enforcement action illustrates the point. In that case but for the attorney involved there would have been no microcap market manipulation; no losses for the investors. The attorney not only failed to adhere to her professional obligations but made the fraud happen. SEC v. Sidoti, Civil Action No. 5:20-cv-02178 (C.D.CA Filed Oct. 19, 2020).
Jillian Sidoti is partner in the law firm of Trowbridge & Sidoti LLP, Murrieta, California. Defendant Sidoti was key to the launch of Blake Insomnia Therapeutics, Inc. The microcap firm was incorporated in Nevada, had a claimed principal place of business in New York City and changed its initial name from BioHemp International, Inc. to Blake. Its shares were suspended from trading by the Commission in July 2019.
Ms. Sidoti and others took a series of steps to take Blake from the drawing board to selling securities to the public. First, there was a plan. In June 2012 the attorney chatted with Individuals A and B, respectively, a long-time client and that person’s business partner. The plain was to launch two shell companies per week for three weeks. Individuals A and B explained that none of the companies would have bona fide investors, each would have the appearance of having 35 unaffiliated, independent investors and, of course, the necessary paperwork would be put in place. Each of these steps were taken. Ms. Sidoti would only be involved with Blake.
Second, attorney Sidoti created the necessary legal documents. Articles of Incorporation to form Blake in Nevada with a stock ticker of BKIT were prepared. Figurehead officers were created and listed. A private placement memorandum was drafted to sell securities. It listed the figurehead officers and detailed their duties. It represented that the firm was a development stage company that intended to create an ‘online booking system” to aid consumers in finding and hiring live entertainment for events.
Individual A recruited 35 friends and acquaintances to serve as the initial shareholders for the new firm. Each supposedly wrote a check for $285 dollars to obtain the securities. None of the representations were accurate.
Third, the attorney created a Form S-1 Registration Statement to file with the Commission for Blake. The Registration Statement represented that 10.6 million shares of Blake would be distributed in August 2012. The Registration Statement supposedly furnished would be investors with material information about the company and its business. It did not. Mr. Sidoti also executed a legal opinion letter in connection with the filing. It represented that the Blake shares were validly issued, fully paid and non-assessable. They were not.
In the fall of 2013 the next or fourth key step was taken. The attorney helped market and sell the Blake shell to the buyers. By early the next year the attorney had brokered a sale of all the outstanding shares. The price was $275,000. Before the deal was completed Ms. Sidoti took a series of steps to conceal the fact that the buyers – the Control Group – held all of the shares.
By early 2014 Blake issued 21 million new restricted shares. That diluted the initial 10.6 listed in the S-1 filed with the Commission. The shares held by the initial 35 shareholders were then transferred to an offshore entity controlled by the Control Group. The shares were not restricted. The shares of the original Blake Affiliates were restricted. Those were also transferred to offshore entities.
Finally, Ms. Sidoti positioned the Control Group to sell Blake’s shares to the public. This was done by preparing legal opinion letters which were false – they represented the shares could be sold. The opinion was furnished to the transfer agent to facilitate the sale of the shares to the public.
Following a promotional campaign the shares were sold to the public. Ultimately the shares were traded on OTC Link until suspended. At each step in the process, which began in 2012 and ended in 2017 with the public buying worthless securities, was facilitated by the attorney who opened the gate to the markets. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24949 (Oct. 19, 2020).