SEC Charges David Loflin in Greenway Design Pump-and-Dump
The SEC charged David Loflin on April 22,2019, for his role in a pump-and-dump scheme in the stock of Greenway Design Group, Inc., a Phoenix, Arizona company that was secretly controlled by David Loflin’s now-deceased business partner. According to the SEC’s complaint, in 2013, David Loflin helped his business partner gain control of Greenway, using a front company to hide his partner’s identity.
David Loflin then created back-dated convertible promissory notes to document debts owed by Greenway that could be repaid with the company’s stock. David Loflin purchased portions of the notes, converted them into stock and prepared all of the paperwork. David Loflin secured false attorney opinion letters in order to obtain stock certificates and deposit them for sale with his brokerage firm. The letters and paperwork contained false and misleading information, meant to give the impression that David Loflin was permitted to sell the shares into the open market Read More
Regulation A Form 1-A Offering Circular Disclosures – Going Public Lawyers
Regulation A Form 1-A Offering Statements require line item disclosure of information about the issuer and the offering. Form 1-A is subject to a full review by the SEC. Regulation A offerings can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction. Regulation A+ simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital. Issuers conducting Regulation A+ offerings must provide the disclosures required by Form 1-A. Regulation A + Form 1-A consists of the following three parts:
- Part I: an eXtensible Markup Language (XML) based fillable form, which captures key information about the Issuer and its offering using an easy to complete online form, similar to Form D, with drop-down menus, indicator boxes or buttons, and text boxes, and assists Issuers in determining their ability to rely on the exemption. The XML-based fillable form will provide a convenient means of assembling and transmitting information to EDGAR, without requiring the Issuer to purchase or maintain additional software or technology;
- Part II: a text file attachment containing the body of the disclosure document and financial statements, formatted in HyperText Markup Language (HTML) or American Standard Code for Information Interchange (ASCII) to be compatible with the EDGAR filing system; and
- Part III: text file attachments, containing the signatures, exhibits index, and the exhibits to the offering statement, formatted in HTML or ASCII to be compatible with the EDGAR filing system.
Rule 506(c) Accredited Crowdfunding Offering Requirements – Crowdfunding Attorneys
Rule 506 Offerings are the most common of the Regulation D exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”). Rule 506 contains two distinct offering exemptions. Rule 506(b) and Rule 506(c). Rule 506 (b) provides an exemption to an unlimited number of accredited investors and up to thirty-five non-accredited investors without the use of general solicitation and advertising while Rule 506(c) allows the issuer to sell to an unlimited number of accredited investors so long as it verifies that each investors is an accredited investor. Read More
SEC Charges Kimberly Sredich with Misappropriation Scheme
On April 18, 2019, the SEC charged Kimberly Sredich, a Michigan resident, with misappropriating funds from brokerage customers of a registered broker-dealer with which she was associated. The SEC’s complaint alleges that between 2014 and 2018, Kimberly Sredich sold securities in at least 15 customer accounts and misappropriated the proceeds of the sales.
According to the complaint, many of the customers were elderly. The complaint further alleges that Kimberly Sredich forged customers’ signatures and used blank letters of authorization previously signed by customers to transfer funds to a company she controlled. She then allegedly transferred most of the misappropriated funds to a personal bank account. Read More
Regulation A l The Colossal Exemption l Securities Lawyer 101
Overview of the Regulation A Exemption
The Regulation A offering exemption provides investors with more investment choices and issuers with more capital raising options during their going public transactions. Regulation A is mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act. The Regulation A exemption provides for two distinct offering exemptions. Tier 1 of Regulation A provides an exemption from SEC registration for offerings of up to $20 million. Tier 2 exempts offerings up to $50 million. One of the most notable differences between the two Regulation A+ tiers is that issuers that conduct a Tier 2 offering will become subject to ongoing Regulation A reporting obligations, though such obligations are significantly less burdensome than those that apply to SEC reporting issuers filing Form S-1 Registration Statements.
Regulation A can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction. The exemption simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital. Regulation A has had a notable impact on companies going public. One key benefit of Regulation A is that companies using Regulation A can comply with scaled down public company SEC reporting requirements. If the company wants to become a fully reporting company, Regulation A allows them to file a Form 8-A to register a class of securities. Unlike Form 10, Registration on Form 8-A if effective upon filing.
SEC Charges Yuh-Yue Chen, a California Engineer with Insider Trading
The SEC announced on April 18,2019, the filing of insider trading charges against Yuh-Yue Chen, a former engineer at Skyworks Solutions, Inc., a Massachusetts-based company with executive offices and a design center in Irvine, California that designs, manufactures and sells wireless analog semiconductors.
The SEC’s complaint alleges that Yuh-Yue Chen, while working as an engineer at Skyworks in Irvine, traded multiple times in advance of the company’s earnings announcements. The complaint further alleges that Yuh-Yue Chen improperly accessed the company’s accounting and finance area, reviewed non-public financial reports, and used that information to purchase Skyworks securities in advance of the company’s announcements of financial results for the second and third quarters in 2014. The SEC charges that after Skyworks announced positive quarterly financial results on April 22, 2014 and again on July 17, 2014, Yuh-Yue Chen sold Skyworks securities for a total profit of at least $739,959. The complaint further alleges that in September 2014, Chen fled the country after Skyworks’ security found him loitering in the office restricted area designated for the accounting and finance staff. He recently returned to the United States for a visit at the end of March, when he was interviewed and subsequently served with the SEC’s complaint prior to his planned departure. Read More
SEC Obtains Final Judgments Against Joseph Meli and Parties involved in Ticket Resale Scams
On April 11, 2019, two federal court judges entered final judgments against Joseph Meli, a New York City man, and six of his companies, in connection with two SEC cases that charged Joseph Meli with operating multi-million dollar fraudulent schemes involving purported purchases and resales of tickets to popular concerts and Broadway shows. Joseph Meli and his companies settled with the SEC and collectively agreed to pay more than $58 million in disgorgement and prejudgment interest.
In January 2017, Joseph Meli was charged by the SEC, arrested by the FBI, and charged criminally by the U.S. Attorney. In the SEC case, Joseph Meli’s wife and mother were named as relief defendants based on their alleged receipt of stolen investor funds. In September 2017, the SEC charged Joseph Meli in a second case also involving an alleged ticket resale scheme, along with New York-based sports radio personality Craig Carton and six of their companies.
What is Form 211? Rule 15c-211, Sponsoring Market Maker Requirements
Locating a sponsoring market maker to file the Form 211 under Rule 15c-211 has become a challenging step in the going public process. The Financial Industry Regulatory Authority (“FINRA”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change that will impact Form 211 filings in going public transactions. The proposals seek to amend FINRA Rule 6432 to require sponsoring market makers submitting Form 211 filings to certify that “neither the member nor persons associated with the member have accepted or will accept any payment or other consideration prohibited by FINRA Rule 5250”
FINRA Rule 5250 prohibits members from receiving any payment or other consideration by issuers or issuers’ affiliates and promoters, directly or indirectly, for publishing a quotation, acting as a market maker, or submitting an application on Form 211. This is a common issue in going public transactions. Read More
SEC Charges Woodbridge Directors, Ivan Acevedo and Dane Roseman with Fraud
On April 11, 2019, the SEC charged two former directors of investments at Woodbridge Group of Companies LLC for their roles in its massive Ponzi scheme. The defendants, California-based Ivan Acevedo and Dane Roseman, were separately arrested and charged by criminal authorities, along with Woodbridge owner Robert H. Shapiro.
The SEC previously charged Woodbridge and Shapiro, and Woodbridge’s highest-earning unregistered brokers. In January, a federal court in Florida ordered Woodbridge, related companies, and Shapiro together to pay $1 billion for operating this Ponzi scheme. Read More
SEC Charges Arif Naqvi and Dubai-Based Advisory Firm
On April 11, 2019, the SEC charged Arif Naqvi and Abraaj Investment Management Limited, a Dubai-based investment advisory firm, with misappropriating funds from a private equity fund client.
The SEC alleges that Arif Naqvi and his firm raised money for the Abraaj Growth Markets Health Fund (“Health Fund”), collecting more than $100 million over three years from U.S.-based charitable organizations and other U.S. investors. According to the SEC’s complaint, Arif Naqvi misappropriated money from the Health Fund and commingled the assets with corporate funds of Abraaj Investment Management Limited and its parent company, and used it for purposes unrelated to the Health Fund. The SEC alleges that Arif Naqvi and his firm made misrepresentations to investors and issued false and misleading financial statements to hide that they were spending investor money in unrelated ways. Read More
SEC Charges Investment Adviser, Gonzalo Ortiz with Securities Fraud
The SEC filed a civil injunctive action on April 10,2019, charging a New Jersey resident, Gonzalo Ortiz with defrauding an investor by lying about his trading success, concealing trading losses, and misappropriating funds.
The SEC’s complaint, filed in federal court in Brooklyn, alleges that Gonzalo Ortiz, of Hackensack, New Jersey, falsely touted his success in investing in stocks and promised the investor a minimum 50% return in a year, and induced the investor to give him control of over $570,000 the investor’s retirement savings. The complaint alleges that contrary to these promises, Gonzalo Ortiz misappropriated almost half of the funds and invested the other funds in high-risk microcap companies that generated significant losses. Gonzalo Ortiz then concealed the misappropriation and losses by providing the investor with a phony account statement that falsely showed high returns. According to the complaint, Gonzalo Ortiz misappropriated approximately $224,500 of the investor’s money, and lost approximately $290,000 through his trading. Read More
SEC Charges Fifteen Unregistered Brokers for Illegal Offering of Intertech Solutions
On April 9,2019, the SEC charged fifteen individuals with acting as unregistered brokers or aiding-and-abetting such activity in connection with Intertech Solutions, Inc.’s fraudulent and unregistered securities offerings.
The SEC’s complaints allege that Alexander Bevil, Richard Bohnsack, Daniel Broyles, Charles Davis, Michael Duke, Joel Duncan, Martin Lewis, Mark Parman, William Roth, Paula Saccomanno, Kenneth Shelton, Billy Ray Statham, Jr., Glenn Story, Dennis Swerdlen, and Harold Wasserman were hired by Intertech Solutions to engage in or facilitate cold-call solicitations of hundreds of prospective investors throughout the United States and Canada from at least February 2014 through December 2016. The complaints allege that, as a result of the defendants’ conduct, Intertech Solutions raised over $7 million from retail investors. According to the complaints, Intertech Solutions paid the defendants exorbitant commissions ranging from 35% to 50% of the funds provided by each investor. The complaints allege that the defendants did not disclose their commission rates to investors and instead distributed private placement memoranda that indicated that only 10% of investor proceeds would be used as commissions. The SEC previously charged Intertech Solutions and its control persons with orchestrating the fraudulent and unregistered offerings. Read More
SEC Charges Former Seaworld Associate General Counsel, Paul Powers with Insider Trading
On April 10, 2019, the SEC charged Paul Powers, a former senior lawyer at SeaWorld Entertainment Inc with insider trading based on nonpublic information that the company’s revenue would be better than anticipated for the second quarter of 2018.
The SEC alleges that Paul Powers had early access to key revenue information as the company’s associate general counsel and assistant secretary, and he purchased 18,000 shares of SeaWorld stock the day after he received a confidential draft of the 2018 second quarter earnings release that detailed a strong financial performance by the company after a lengthy period of decline. According to the SEC’s complaint, Paul Powers immediately sold his SeaWorld shares for approximately $65,000 in illicit profits after the company announced its positive earnings and the company’s stock price increased by 17 percent. Read More
Final Judgment Against Robert DePalo, a Broker Charged with Stealing from Investors
On February 5, 2019, the SEC obtained a final judgment against a New York-based broker, Robert DePalo who was charged with orchestrating a $6.5 million offering fraud.
In May 2015, the SEC charged Robert DePalo with defrauding over twenty investors by misrepresenting the value of their investments and use of their funds, including by sending the first $2.3 million of investor funds to his personal bank account. The SEC also alleged that Robert DePalo made false statements to SEC examiners in an attempt to conceal the fraud. Read More
SEC Charges College Official for Fraudulently Concealing Financial Troubles from Investors
On March 28, 2019, the SEC charged Keith Borge, the former controller of a New York-based not-for-profit college with defrauding municipal securities investors by fraudulently concealing the college’s deteriorating finances.
According to the SEC’s complaint, in recent years, the College of New Rochelle came under considerable financial stress because of declining student enrollment and plummeting revenue from tuition. To hide the college’s deteriorating financial condition from investors, the college’s former controller, Keith Borge, created false financial records, didn’t file payroll tax submissions, and didn’t assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college’s operations. Keith Borge’s misconduct resulted in the college’s financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million. Keith Borge also falsely certified the accuracy of the college’s financial statements. The financial statements were published by Keith Borge to an online repository in connection with the College’s continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors’ decisions to invest in the bonds. Read More
SEC Shuts Down Fraudulent Investment Advisor Who Was Targeting the Israeli-American Community
The SE announced on April 1, 2019 that it had halted an ongoing investment fraud by Investment Advisor Motty Mizrahi targeting members of the Jewish community, primarily in the Los Angeles, California region.
The SEC filed an emergency action in federal court against Motty Mizrahi and MBIG Company, his sole proprietorship, alleging that, since June 2012, they defrauded at least 15 advisory clients out of more than $3 million. According to the SEC’s complaint, unsealed on March 29, 2019, Motty Mizrahi falsely claimed that MBIG used sophisticated trading strategies to generate “guaranteed” returns of between 2-3% per month, the investments were risk-free, and clients would not lose their money and could withdraw their funds at any time. Unbeknownst to his clients, however, MBIG had no bank or brokerage account of its own – rather, clients unwittingly sent money to Motty Mizrahi’s personal bank account. Motty Mizrahi used the money to fund his personal brokerage account, in which he engaged in high-risk options trading producing losses of more than $2.2 million, and to pay personal expenses. The SEC alleges that Motty Mizrahi covered up his fraud by issuing MBIG’s clients fabricated account statements, showing positive account balances and profits from trading. When clients demanded proof of MBIG’s securities holdings, Motty Mizrahi showed them brokerage statements reflecting a multi-million dollar balance for a fictitious MBIG brokerage account. Read More
SEC Charges Investment Adviser with Long-Running Securities Fraud
On March 22, 2019, the SEC charged registered investment adviser Direct Lending Investments, LLC with a multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private funds, as well as the inflation of the private funds’ returns.
According to the SEC’s complaint, Direct Lending advises a combination of private funds that invest in various lending platforms, including QuarterSpot, Inc., an online small business lender. The SEC alleges that for years, Brendan Ross, Direct Lending Investments’s owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans and to falsely report to Direct Lending that borrowers made hundreds of monthly payments when, in fact, they had not. The SEC alleges that many of these loans should have been valued at zero, but instead were improperly valued at their full value, because of the false payments Ross helped engineer. As a result, between 2014 and 2017, Direct Lending cumulatively overstated the valuation of its QuarterSpot position by approximately $53 million and misrepresented the Funds’ performance by approximately two to three percent annually. The SEC alleges that Direct Lending collected approximately $11 million in excess management and performance fees from the Funds that it would not have otherwise collected, had the QuarterSpot position been accurately valued. Read More
SEC Charges Reverse Merger Shell Brokers, Tiber Creek and James Cassidy
On March 26, 2019, the Securities and Exchange Commission (SEC) announced settled actions against Reverse Merger Shell Brokers, James K. McKillop, attorney James M. Cassidy, and Cassidy’s firm Tiber Creek Corp. The agency accused both men of acting as unregistered brokers and of failing to file required beneficial ownership forms with Edgar. While that may sound dull, the case is of interest for several reasons, and in addition illustrates why going public via a reverse merger can turn out to be a poor idea.
We’ve written often about dormant shells and the people who sell them to unwary owners of private companies who want to go public. Usually the shell vendors we’ve discussed obtain their inventory by petitioning for custodianship of the shell companies they wished to control. Once custodianship is granted, the custodian is free to inform the transfer agent that he’s in charge. He can issue himself stock, or a promissory note that converts to stock. If the shell company is a delinquent SEC registrant, he can terminate registration. But his main goal is to sell the shell to someone who wants to take his own company public. Shell vendors always claim their shells are “clean,” but there’s no guarantee of that. Buyers may discover too late that their new shell has a closet full of skeletons, in the form of a bad history, bad share structure with a series of reverse splits, or toxic and potentially dilutive promissory notes. If such issues exist, the only way to resolve them is through litigation, which can be expensive and time-consuming.
SEC Settles with James K. McKillop, Unregistered Public Shell Company Broker
On March 26, 2019 the SEC filed settled charges against recidivist James K. McKillop for acting as an unregistered broker and for failing to timely file required beneficial ownership forms in connection with his position at Tiber Creek Corp. The SEC also separately filed related settled administrative charges against Tiber Creek and Tiber Creek’s president, James M. Cassidy.
According to the SEC’s complaint and the SEC’s order, Tiber Creek maintained an inventory of SEC-registered public shell companies, for which James McKillop and James Cassidy served as the officers, directors, and fifty percent shareholders. The SEC alleges that since July 2012, James McKillop and James Cassidy effected securities transactions through Tiber Creek for more than 100 public shell companies without being registered as brokers. The complaint also alleges that on more than 110 occasions, James McKillop and James Cassidy failed to timely file required beneficial ownership reports, including Schedules 13G and Forms 4, in connection with the public shell companies. Read More
SEC Speaks Reverse Mergers – Going Public
On March 8, 2019, Securities and Exchange Commission (SEC) Chairman Jay Clayton and Brett Redfearn, Director of the agency’s Division of Trading and Markets, spoke at Fordham University’s Gabelli School of Business in New York City. They addressed a variety of topics, but a few points of interest stood out including their discussion of reverse mergers in going public transactions. One was the need to do more to combat retail investor fraud. That had been the subject of a lively roundtable discussion that took place at SEC headquarters in Washington on September 26, 2018. Clayton and Redfearn wanted to discuss the conclusions drawn from that and two other roundtables convened in 2018, and to suggest new directions, along with some plans for reform, for 2019.
Clayton stressed, as he had at the roundtable, his fidelity to five principles that serve as his guide. They are: Read More
Former COO Fraudulently Caused Advisory Firm to Overbill Clients
The SEC filed on March 28, 2019 charges against the former Chief Operating Officer (COO), Richard Diver of a Commission-registered investment adviser for aiding and abetting the advisory firm’s actions to overbill its clients as part of a fraudulent scheme to improperly inflate his own pay.
According to the SEC’s complaint, between 2011 and December 2018, former COO Richard Diver, a resident of Spring Lake, New Jersey, engaged in an illicit scheme to steal approximately $6 million from his employer. Richard Diver, whose duties included managing the advisory firm’s payroll and client billing functions, allegedly inflated his salary by hundreds of thousands of dollars per year. As part of this scheme, Richard Diver defrauded investors by causing the investment adviser to overbill more than 300 investment advisory client accounts by approximately $750,000, for the purpose of generating additional revenue. As alleged in the complaint, Richard Diver used this revenue to finance his inflated salary and when confronted by the investment adviser’s CEO in December 2018, Richard Diver confessed to having carried out the scheme. Read More
SEC Halts Ponzi Scheme Targeting Vietnamese Investors
The SEC announced fraud charges and an asset freeze on March 18, 2019, against the operators of a $25 million Ponzi scheme falsely promising high annual returns with minimal to no risk to investors in the Vietnamese community of Orange County, California.
The SEC alleges that Kent R.E. Whitney founded The Church for the Healthy Self three months after being released from federal prison for orchestrating a prior investment scheme involving commodities. According to the SEC, the Church for the Healthy Self’s investment program, CHS Trust, promised investors tax-deductible, guaranteed, and insured returns of at least 12%, through reinsurance investments and options trading. Read More
What is a NYSE Control Company Anyway? NYSE Attorneys
Public Companies that qualify as a “Controlled Company” with securities listed on the Nasdaq Stock Market (NASDAQ) or the New York Stock Exchange (NYSE), must comply with the exchange’s continued listing standards to maintain their listings. NASDAQ and the NYSE have adopted qualitative listing standards. Companies that do not comply with these corporate governance requirements may lose their listing status.
Under NASDAQ and NYSE rules a “controlled company” is a company with more than 50% of its voting power held by a single person, entity or group. Under NYSE and NASDAQ rules, a controlled company is exempt from certain corporate governance requirements including:
- the requirement that a majority of the board of directors consist of independent directors;
- the requirement that a listed company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
- the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
- the requirement for an annual performance evaluation of the nominating and governance committee and compensation committee.
SEC Obtains Final Judgments Against Investment Adviser, Goldsky Asset Management
On January 2, 2019, a federal district court entered final consent judgments against an Australia-based investment adviser, Goldsky Asset Management, LLC, and its owner, Kenneth Grace, for making false and misleading statements about its business in filings with the Commission and on its website.
The SEC’s complaint, filed on September 27, 2018 in the Southern District of New York, alleged that Goldsky Asset Management’s Forms ADV for 2016 and 2017, which Grace signed, falsely stated that Goldsky Asset Management’s hedge fund, Goldsky Global Alpha Fund, LP, had an auditor, a prime broker and custodian, and an administrator. The complaint further alleged that, in its Forms ADV and ADV Part 2A, Goldsky Asset Management stated that it managed over $100 million in discretionary assets under management, when it in fact had no assets. According to the complaint, Goldsky Asset Management’s website falsely claimed that Goldsky Global Alpha Fund earned 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. Read More
The Bad Actor Rule of Rule 506(d) – Securities Lawyer 101
According to a recent Securities & Exchange Commission (“SEC”) report, thousands of businesses raise billions of dollars in capital through offerings exempt from registration under Regulation D of the Securities Act of 1933, as amended. Rule 506 is the most commonly used Regulation D exemption. For small issuers, the amount raised is typically less than $2 million.
Rule 506(c) allows for general solicitation of accredited investors. This rule, a product of the JOBS Act, became effective on September 23, 2013 and is the original source of the “Bad Actor Rule.” The Bad Actor Rule prohibits an issuer from relying on the exemption if the issuer or certain other persons are subject to certain “Disqualifying Events” including being convicted of, or being subject to judicial or regulatory sanctions for, certain violations of U.S. based laws.
The Bad Actor Rule Codified
The “Bad Actor” rule is codified in paragraphs (d) and (e) of Rule 506. Rule 506(d)(1) states that the exemptions in Rule 506(b) and Rule 506(c) are not available if a covered person has had certain Disqualifying Events. Read More
SEC Charges Texas Radio Host for Ponzi Scheme Targeting Elderly Investors
The SEC announced on March 12, 2019 that it has charged Texas resident William Neil “Doc” Gallagher-the self-styled “Money Doctor” featured on three Dallas-area radio stations-in an emergency action to shut down a $19.6 million Ponzi scheme targeting elderly investors’ retirement funds. The SEC also charged Gallagher Financial Group, Inc. and W. Neil Gallagher, Ph.D. Agency, Inc., companies that Gallagher used to carry out the scheme.
The SEC’s complaint, which was filed under seal on March 7, 2019, alleged that Gallagher made frequent religious references on his radio shows to establish his standing among a target audience of retired Christian investors. From December 2014 through January 2019, he raised at least $19.6 million from approximately 60 senior citizens. Falsely claiming to be a licensed investment adviser, he offered an investment that he called a Diversified Growth and Income Strategy Account, in which he promised to acquire income-generating assets for his clients in five specified categories. He promised investors that they would receive guaranteed, risk-free returns in their accounts ranging from 5% to 8% per year. In reality, except for one $75,000 annuity purchase, Gallagher purchased no assets in any of the five categories and no other assets to back the promised returns. Instead, he exhausted virtually all investor funds on spending unrelated to the accounts, including misappropriating significant portions for personal and company expenses and to make Ponzi payments to investors. To lull investors and conceal the scheme, Gallagher provided investors phony account statements showing false account balances. Read More
Do State Blue Sky Laws Apply To Rule 506(c) Offerings? Going Public Lawyers
Issuers are often unaware of the state laws that apply to their private placements prior to completion of their going public transactions. Federal securities laws require that the purchase or sale of a security be subject to a registration statement under the Securities Act of 1933 (the “Securities Act”) or exemptfrom registration. Rule 506 of Regulation D under the Securities Act provides an exemption for private placement offerings. The JOBS Act amended Rule 506 by creating Rule 506(c) which allows general solicitation and advertising in private placement offerings so long as sales are made only to accredited investors.
Issuers conducting any offer or sale of securities must consider state blue sky laws that may be relevant to their offering. Securities offerings under Rule 506 are deemed to be covered securities under the federal law, which preempts the states from substantively regulating Rule 506 offerings under state securities or blue sky laws. Read More
SEC Settles with Joseph Frank Vacante, Biotech Insider Trader
The SEC charged on February 21, 2019, Joseph Frank Vacante, a former employee of a biotech company with insider trading on confidential information regarding the company’s withdrawal of certain products from consideration by the U.S. FDA.
Joseph Frank Vacante agreed to pay more than $140,000 to settle the SEC’s charges.
According to the SEC’s complaint, on September 29, 2016, Joseph Frank Vacante learned that the FDA had recommended that Trinity withdraw two products which Joseph Frank Vacante believed represented the future of the company. The complaint further alleges that, that same day, Joseph Frank Vacante twice communicated with his broker in efforts to sell Trinity American Depository Receipts (ADRs) which he had received as part of his employment, including lowering the price to ensure the sale occurred. Read More
SEC Obtains Final Judgment Against Joseph Frank Vacante, Former Broker for Defrauding Customers
On March 1, 2019, a federal district court entered a final consent judgment against broker, William Gennity who was charged with defrauding customers by making unsuitable and unauthorized trades and churning customers’ accounts that enriched the broker at the customers’ expense.
The SEC’s complaint, filed in the Southern District of New York, alleges that from July 2012 to August 2014, William Gennity recommended to four customers a pattern of high-cost, in-and-out trading without any reasonable basis to believe that his customers could make a profit. William Gennity’s recommendations resulted in losses for the customers and gains for William Gennity. He allegedly also lied to his customers about the potential for the accounts to profit. The complaint also alleges that William Gennity engaged in unauthorized trading and churning. Read More
SEC Announces Settlement Against Former Investment Adviser, James Polese
On February 22,2019 the SEC announced the entry of a final judgment against James Polese, a former investment adviser at a large financial institution who was charged with misappropriating client funds.
On January 31, 2018, the Commission filed a complaint in the United States District Court for the District of Massachusetts charging James Polese and his former colleague, Cornelius Peterson, with securities fraud for engaging in various schemes to defraud their clients, including fraudulently misappropriating $350,000 of one client’s money, using $100,000 of those funds to make investments in their own names, and directing the remaining $250,000 to James Polese’s personal bank account. The Commission’s complaint also alleged that James Polese and Cornelius Peterson invested $100,000 of another client’s funds into an investment in which Cornelius Peterson and James Polese held a financial interest, without informing the client or disclosing their conflict of interest. Read More
