This Week In Securities Litigation (Week ending Nov. 30, 2018)
Crypto currency continues to be a focus for SEC Enforcement. Last week the agency filed two settled ICO cases, setting the standard for settlement of unregistered offerings in the wake of the DAO Report. This week agency filed its first touting actions in connection with an ICO. Each case involved an offering the Commission and U.S. Attorney have alleged to be fraudulent. Each involved a celebrity who touted the offering in return for payment without disclosing that fact. The Commission also filed two microcap fraud actions.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 2 civil injunctive case and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Touting- crypto currency: In the Matter of Floyd Mayweather Jr., Adm. Proc. File No. 3-18906 (Nov. 29, 2018). Respondent Mayweather, a well known professional boxer, in three instances touted ICOs through social media in return for compensation without disclosing that fact. For example, Mr. Mayweather touted the Centra Tech, Inc. ICO from July through October 2017 on his Instagram and Facebook accounts. While he was paid $100,000 that fact was not disclosed. Earlier he had taken similar actions for ICOs using social media in return for payment. Respondent has 7.8 million Twitter followers, 21 million Instagram followers and 13.4 million Facebook followers. The Commission brought an action alleging fraud against the ICO promoters. Each ICO here post-dates the Commission’s section 21(a) DAO report. The Order alleges violations of Securities Act section 17(a). To resolve the proceedings Respondent agreed to an undertaking which precludes him from receiving compensation for three years in connection with a securities offering. He also consented to the entry of a cease and desist order based on the section cited in the Order and to the payment of disgorgement in the amount of $300,000, prejudgment interest of $14,775.67 and a penalty of $300,000. See also In the Matter of Khaled Khaled, Adm. Proc. File No. 3-18907 (Nov. 29, 2018)(action against celebrity music producer DJ Khaled for touting the Centra Tech ICO; resolved with a similar undertaking and a consent to the entry of a cease and desist order based on the same section and the payment of disgorgement of $50,000, prejudgment interest of $2,725.72 and a penalty of $100,000).
Manipulation: SEC v. Landis, Civil Action No. 1:18-cv-12453 (D. Mass. Filed Nov. 28, 2018) is an action which names as defendants Eric Landis and his controlled firm, Ridgeview Capital Partners LLC. Mr. Landis is a recidivist securities law violator. He previously settled a securities manipulation suit with the Commission. He also pleaded guilty in a parallel criminal action to a felony charge for obstruction of justice. Beginning in January 2015, and continuing for at least the next three years, Mr. Landis and his firm are purported to have manipulated the share price of 97 publicly traded companies. The purpose was to create the illusion of activity and high demand to attract others to trade in the shares. In conducting these activities, Defendants defrauded persons in two groups. First, Defendant Landis represented himself to be a stock promoter who was paid by others to generate interest in the shares of various small companies. In making these representations Mr. Landis claimed to have access to email lists of tens of thousands of subscribers who could be solicited. In fact he did not have these lists and in some instances did not send emails in connection with his schemes. Second, Defendants defrauded shareholders. Defendants arranged to place thousands of manipulative trades in the shares of firms that retained them. Multiple brokerage accounts were used, at times in the name of Ridgeview. In conducting these activities Mr. Landis intended to create the false appearance of active trading in the securities and infused the markets with false information regarding the actual supply and demand for the shares. The complaint alleges violations of Securities Act sections 17(a)(1) and (3) and Exchange Act sections 9(a)(1) and (2) and 10(b). The case is in litigation. See Lit. Rel. No. 24362 (Nov. 29, 2018).
Manipulation: SEC v Tobin, Civil Action No. 1:18-cv-12451 (D. Mass. Filed Nov. 27, 2018) names as defendants Morrie Tobin; Milan Patel, a licensed attorney; Matthew Ledvina, also an attorney; and Daniel Lacher, a resident of Switzerland who provided services to undisclosed company insiders or control persons as an intermediary to foreign asset managers and brokers. The action involves the manipulation of the shares of Environmental Packaging Technologies Holdings, Inc. and CURE Pharmaceutical Holding Corp. Beginning in 2013, and continuing to the present, Defendants took a series of steps to manipulate the share price of Environmental Packaging. First, steps were taken to conceal the fact that Mr. Tobin controlled the shares of Environmental Packaging. Those included transferring the shares to two offshore asset managers that included a Swiss firm run by Roger Knox. Messrs. Ledvina and Lacher served as the purported beneficial owners. Second, Individual A, a partner of Mr. Tobin promised shares for assistance, engineered a reverse merger involving public Environmental Packaging with a shell. That was followed by a $1 million promotional campaign designed to inflate the share price. The CEO of the private company in the merger raised the money for promotion. Finally, the money for the promotion was funneled to a firm that appeared to be independent of the group to inflate the share price. Similar steps were taken for CURE. The shares for Environmental Packaging and CURE were not registered. In late June 2017 the Commission suspended trading in the shares of Environmental Packaging. Subsequently, Defendants took further steps to conceal the role of Mr. Tobin and obstruct the Commission’s investigation. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act section 10(b). The case is in litigation. See Lit. Rel. No. 24361 (Nov. 28, 2018).
Fraudulent offering: SEC v. Saltsman, Civil Action No. 07-CV-4370 (E.D.N.Y.) is a previously filed action which named as a defendant Steven Newman, among others. This week the Court entered a final judgment of permanent injunction against Mr. Newman based on Securities Act section 17(a) and Exchange Act sections 10(b) and 13(a). The order also bars Mr. Newman from serving as an officer or director of a public company and directs him to pay disgorgement of $429,100. That amount shall be deemed satisfied by the criminal restitution paid in the parallel criminal action. The underlying action is based on fraudulent PIPE offerings in which nominee entities and directors were falsely alleged to be control persons. The misrepresentations were made in the offering documents. The case, which traces to October 2007, continues as to the other defendants. See Lit. Rel. No. 2460 (Nov. 26, 2018).
Offering fraud: U.S. v. Williams, No. 1:16-cr-00436 (S.D.N.Y.) is an action in which defendant Steven Brown was sentenced to serve 63 months in prison followed by three years of supervised release. He was also directed to forfeit his interest in a California property and $673,028 in criminal proceeds. Restitution will be considered at a later date. The action and prior guilty plea are based on an eight year scheme that began in 2009 engaged in by Mr. Brown and others. In that scheme investors were solicited to invest in feature length motion pictures. At times the investors were told about the money Mr. Brown and others had invested and shown bank statements and other materials. The representations were false. While over $12.5 million was raised, most of the money went to other ventures, to repay earlier investors and for personal items.
Offering fraud: U.S. v Kantor, No. 18-CR-177 (E.D.N.Y.). Defendant Blake Kantor, also known as Bill Gordon, conducted a fraudulent investment scheme in which investor cash was converted to what was represented to be a valuable cryptocurrency – ATM Coin. Beginning in March 2014 Mr. Kantor established the Blue Bit Banc or Blue Bit Analytics, Inc. The firm sold binary options, a form of highly speculative investment that has been banned in some countries. Over a three year period beginning in 2014 Mr. Kantor and his confederates solicited investors for Blue Bit Bank, raising about $1.5 million from over 700 investors. Investors were not told that the computer software used by Blue Bit altered the data used in connection with the binary options in a manner which made it most difficult for them to make a profit – the high risk options many consider gambling became virtually no gamble for Mr. Kantor. Investors were also not told that the ATM Coin they received was worthless. In October 2017 Mr. Kantor and others involved with the scheme took steps to evade detection. Customer lists were altered after FBI agents told Mr. Kantor that they were investigating. Mr. Kantor also met with the agents and misinformed them about the business, claiming he had not had any involvement with it for a period of time. Defendant Kantor was charged with conspiracy to commit wire fraud, obstruction of an official proceeding and making false statements to Special Agents of the FBI. Mr. Kantor pleaded guilty to conspiracy to commit wire fraud. In connection with his plea agreement Mr. Kantor admitted to obstructing an investigation into his fraudulent scheme. The date for sentencing has not been set.
Misappropriation: U.S. v. Polese, No. 1:18-cr-10028 (D. Mass.) is an action which named as a defendant James Polese and his co-defendant Cornelius Peterson who previously pleaded guilty. This week Mr. Polese was sentenced to five years in prison followed by three years of supervised release. He was also ordered to pay a fine of $30,000 and restitution in the amount of $462,000. Previously, he had pleaded guilty to one count of conspiracy and investment adviser fraud, eight counts of bank fraud, and one count of aggravated identity theft. The charges were based on a scheme that took place beginning in 2014 and continued for three years. During that period Mr. Polese and his co-defendant misappropriated about $500,000 from client accounts and diverted the funds to their own use. Mr. Peterson was previously sentenced to serve 20 months in prison followed by two years of supervised release. He was also ordered to pay restitution in the amount of $462,000.
Disclosure: The Securities and Futures Commission initiated proceedings in the Market Misconduct Tribunal against Health and Happiness International Holdings, Ltd. and its Chairman, Luo Fei. The charges allege a failure to timely disclose price sensitive material information regarding the firm. Specifically, on July 23, 2015 the firm issued a profit warning announcement stating that the revenue and profit of the Group for the six months period ended June 30, 2015 were expected to decrease by about 11% and 36% respectively as compared with the corresponding period in 2014. The share price on July 24, 2015 closed down 21.6%. The SFC found that in mid-June 2015 the consolidated management accounts showed that net profit had decreased by 13.7% and 28.9%. While the firm knew about the information by about June 21, 2015 it was not disclosed until July 23, 2015.
Program: The Fifth Annual Dorsey Federal Enforcement Forum will be held on December 5, 2018. The program, centered on a tech theme and SEC enforcement, includes a keynote address on artificial intelligence and its impact on the legal profession, panels analyzing critical issues facing SEC enforcement, the question of broker protocols, trends in investment adviser inspections, how to conduct an ICO and concludes with an address on cyber-security and internal controls. A holiday gathering follows. The program and registration for it and the party are here or separate registration for the holiday party only here.