Court Vacates Order in Unregistered Dealer, Crown Bridge Partners Case

On August 19, 2024, the United States Court of Appeals for the Second District in New York ruled in the case of Darkpulse, Inc., Social Life Network, Inc. and Redhawk Holdings Corp. v. Crown Bridge Partners LLC and its managing members, Soheil Ahdoot and Sepas Ahdoot. The Plaintiffs were appealing the ruling of the United States District Court Southern District of New York, which dismissed the case on September 29, 2023.

The District Court Case

Darkpulse, Social Life (which has since changed its name to Decentral Life, Inc.) and Redhawk filed their complaint against Crown Bridge and its managing members on September 23, 2022, asserting “unlawful debt[s]”. Specifically, the plaintiffs alleged that the defendants extended to them – and collected from them – convertible promissory notes with interest rates exceeding the maximum permitted by New York’s criminal usury laws.

The defendants moved to dismiss the complaint pursuant to Rule 12(b)(6), asserting that each promissory note at issue contains a Nevada choice-of-law clause and Nevada does not have criminal usury laws.

The District Court granted the motion to dismiss on September 29, 2023, finding “no reason to disregard the parties’ explicit choice of Nevada law in the Notes,” and applying Nevada law to “find[] that the Complaint fails to sufficiently allege that Defendants violated 18 U.S.C. §1962(c).”

In making its ruling, the District Court relied primarily on “the reasoning and conclusions” of the decision in DarkPulse, Inc. v. FirstFire Global Opportunities Fund, LLC, No. 21CV11222(ER), 2023 WL 199196 (S.D.N.Y. January 17, 2023). In that case, the court enforced a similar Nevada choice-of-law clause, finding that DarkPulse had failed “to meet its burden of showing that Nevada has no reasonable connection to the parties”. 

The Appeal

In their appeal, the plaintiffs contended that the District Court erred in relying on the analysis set forth in FirstFire and in enforcing the choice-of-law clause to apply Nevada law in this case.

In its analysis, the Appeals Court determined that the factual allegations in FirstFire differ in meaningful ways from the allegations in this case, leading to a different outcome. Importantly, the parties in FirstFire met in Nevada to negotiate the agreement at issue there. By contrast, in this case, the complaint alleges that Crown Bridge and Dark Pulse negotiated the note in New York and is silent as to where the parties executed the note. Similarly, the complaint alleges that the Social Life and RedHawk notes were also negotiated within the boundaries of New York. Additionally, although Social Life and RedHawk are incorporated in Nevada, their principal places of business are in other states. 

The Appeals Court determined that the District Court did not properly grapple with these facts to correctly apply New York law. Rather, it relied on the analysis of FirstFire instead of conducting an independent analysis of the facts alleged in this case. Based on its findings, the Appeals Court has ruled to VACATE the Order of the District Court and REMAND for proceedings consistent with its Order.

The case will now go back to the District Court to rule again following the guidance of the Appeals Court, which asks that the scope of the jurisdictional discovery include the facts alleged in this case (not FirstFire) to determine whether a reasonable relationship to the state of Nevada exists to apply the choice-of-law clause, in particular, whether Social Life and RedHawk chose to incorporate in Nevada in order to benefit from the lack of usury laws in that state.

More on Crown Bridge

Crown Bridge Partners LLC and its managing members, Soheil and Sepas Ahdoot of Great Neck, N.Y., were charged by the Securities and Exchange Commission (the “SEC“) on August 2, 2022,  for failing to register with the SEC as securities dealers.  

The SEC’s complaint, filed in the federal district court in Manhattan, alleged that, between January 2016 and December 2020, Crown Bridge purchased about 250 convertible notes from 150 microcap issuers and converted the notes into 35 billion newly issued shares of stock at a large discount from the market price. It then allegedly sold the newly issued shares into the market at a significant profit.

As alleged, neither Crown Bridge nor the Ahdoots were registered as dealers with the SEC or associated with a registered dealer, as their activities required them to do.

Without admitting or denying the allegations, Crown Bridge and the Ahdoots agreed to be permanently enjoined from further violations of the registration provisions of the Securities Exchange Act of 1934, to pay disgorgement and prejudgment interest of $8,390,601.27 and a civil penalty of $810,307, and to a five-year penny stock bar.

Crown Bridge also agreed to surrender all conversion rights in its currently held convertible notes, surrender all unexercised warrants that it acquired in connection with convertible notes, and cancel any shares it holds that were acquired by converting notes or exercising related warrants.

The Final Judgement was entered into the court records on August 9, 2022. The Final Judgement included a list of shares to be surrendered on pages 8 and 9 and a list of notes to be surrendered on pages 10 and 11. 

Over the last several years, the SEC has been targeting toxic lenders who use variable-rate convertible notes to get shares at a huge discount to the market price to make millions in profits. These toxic notes are almost always harmful to the issuer’s share price and, thus, to retail investors, as the dilution caused by converting the notes drives the price of the stock down, often leading to reverse stock splits. The SEC has been applying its definition of a broker-dealer as a person who “is in the business of buying and selling securities on a regular basis” to these toxic lenders, who often do convertible notes with dozens of different issuers, leading to hundreds of transactions, and the Securities Exchange Act of 1934 generally requires broker-dealers to register with the SEC unless they qualify for an exemption.  As such, these toxic lenders are acting as unregistered securities dealers.

Several of those cases have already resulted in favorable outcomes for the SEC:

• In the SEC vs GHS INVESTMENTS, LLC, MARK S. GROBER, SARFRAZ S. HAJEE, AND MATTHEW L. SCHISSLER, GHS agreed to pay $2,030,806 in disgorgement, prejudgment interest of $221,458.43, and a civil penalty of $173,080.62.  Each of Grober, Hajee and Schissler will also pay a $10,000 penalty and consent to cease and desist from committing or causing any violations and any future violations of Section 15(a)(1) of the Exchange Act.  GHS  will also have to (i) surrender for cancellation all rights to all shares of common stock that it received in connection with convertible, variable rate notes; (ii) surrender all conversion rights under all remaining convertible, variable rate notes; and (iii) surrender for cancellation and retirement all remaining warrants that it received in connection with convertible, variable rate notes. (read more here)
• In the SEC vs JOHN D. FIERRO, et al., Civil Action No. 20-02104 (GC) (JBD), the court ordered the defendants to pay disgorgement of $4,053,148, prejudgment interest of $1,326,440, and a civil penalty of $500,000, for a total judgment of $5,879,588. The court also ordered the defendants to surrender certain stock and conversion rights under existing convertible securities for cancellation. (read more here)
• In the SEC vs GPL VENTURES LLC, et al., 21-cv-6814 (AKH), the court ordered the defendants to pay $29,681,569 in disgorgement and $2,489,799 in prejudgment interest, total civil penalties of $7,000,000 and directed the defendants to surrender for cancelation all remaining unconverted convertible notes still held, with a face value of approximately $11 million. (read more here)
• In the SEC vs BHP CAPITAL NY, INC. and BRYAN PANTOFEL, Case No. 1:23cv22233-GAYLES-TORRES, the court ordered the defendants to pay a total of $2,553,073.44 in disgorgement, prejudgment interest, and penalties and directed the defendants to surrender for cancellation and retirement all remaining warrants, shares, and conversion rights on convertible notes still held by the defendants.
• In the SEC vs. IBRAHIM ALMAGARBY and MICROCAP EQUITY GROUP, LLC, Case No. 17-62255-CIV-COOKE/HUNT, the court ordered the defendants to disgorge $885,126.30 in total net profits and $182,150.69 in prejudgment interest, for a total of $1,067,276.99. The court also ordered the defendants to surrender their remaining shares for cancellation. (read more here)
• In the SEC vs JUSTIN W. KEENER, d/b/a JMJ Financial, Case No. 20-cv-21254-BLOOM/Louis, the court ordered the defendant to pay disgorgement of $7,786,639, prejudgment interest of $1,425,266, and a civil penalty of $1,030,000, for a total judgment of $10,241,905.  The court also ordered the defendant to surrender for cancellation all stock and conversion rights under existing convertible securities. (read more here)

The courts also denied Carebourn Capital, L.P.’s Motion for Judgement on the Pleadings to dismiss the SEC case filed against that penny stock financier in the Securities and Exchange Commission v. Carebourn Capital, L.P., et al., Civil Action No. 21-cv-02114 (D. Minnesota filed September 24, 2021). That case is in the final stages, with the two sides hacking out remedies for a settlement.  The final judgment in the SEC’s favor could come any week now. (read more here).

Ongoing cases include the following:

• 5/7/2024 – SEC v. Curt Kramer, Power Up Lending Ltd., Geneva Roth Remark Holdings, Inc., and 1800 Diagonal Lending, LLC (formerly known as Sixth Street Lending LLC) (Complaint)
• 4/29/2024 – SEC v. Tri-Bridge Ventures, LLC and John Francis Forsythe, III (Complaint) (read more here)
• 1/23/2024 – SEC v. Aryeh Goldstein, Adar Bays, LLC, and Adar Alef, LLC (Complaint) (read more here)
• 9/28/2023 – SEC v. Adam Long, L2 Capital, LLC., and Oasis Capital, LLC (Complaint) (read more here)
• 6/01/2023 – SEC v. Auctus Fund Management, LLC, Louis Posner and Alfred Sollami, and Auctus Fund LLC (Complaint) (read more here)
• 9/22/2022 – SEC v. Morningview Financial, LLC and Miles M Riccio (Complaint) 
• 8/02/2022 – SEC v. Crownbridge Partners, LLC, Soheil Adhoot, and Sepas Ahdoot (Complaint) 
• 6/07/2022 – SEC v. LG Funding, LLC and Joseph Lerman (Complaint)

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
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