SEC Files Action Based on Misappropriation of Pre-IPO Shares

The SEC filed a fraud action based on the misappropriation of shares of a private firm held by investors through an LLC. The shares were then resold and reissued to other investors. SEC v. Kumar, Civil Action No. 23145 (N.D. Cal. Filed December 2, 2014).

Defendant Vinay Kumar Nevatia solicited real estate and securities investments through a number of entities he owned or controlled from 2007 through 2013. Previously, he had worked as an executive search consultant.

In August 2008 Mr. Kumar and eight other investors purchased 179,900 shares in CSS Corp. Technologies (Mauritius) Limited, a privately held technology company. Mr. Kumar, who knew one of the co-founders of the company, told investors that the shares were only available to those with personal connections to the firm. This was represented to be an exclusive, pre-IPO, opportunity.

To simplify the transaction, according to Mr. Kumar, the shares would be held through VRSBS Investments, LLC. The investors, who contributed $899,500, became the sole members of the firm along with Mr. Kumar who invested $25,000 or less than 3% of the total funds.

VRSBS was governed by a document titled “Operating Agreement of BRSBS Investment, LLC.” That agreement stated that the sole purpose of the entity was to buy and hold CSS shares for the benefit of its members. Mr. Kumar, as the managing member, was required to provide other members with a description of the material terms of any potential sale and was prohibited from commingling his proceeds with personal accounts. Investors then requested that certificates be issued reflecting the number of shares owned by each individual investor. This would permit each investor to have a certificate as evidence of the investment. Mr. Kumar made the necessary arrangements.

In November 2011 Mr. Kumar sold about half of the CSS shares originally purchased by the VRSBS investors to three directors of a venture capital firm. The directors agreed to pay $359,800 for 89,950 CSS shares. The funds were not wired to VRSBS. Rather, Mr. Kumar arranged for the payment to be directed to his personal trust bank. When the directors requested the share certificates Mr. Kumar claimed that all of the stock was in one certificate which would have to be reissued.

Three months later, on February 16, 2012, Mr. Kumar entered into an agreement to sell another 25,000 CSS shares. This agreement was with two of the venture capital firm directors. The sales price was $100,000. Six days later Mr. Kumar agreed to sell another 60,000 CSS shares for $195,000, this time to a Cayman Islands private equity fund managed from Hong Kong. Both sales were of shares held by VRSBS. The venture capital directors wired payment to a bank account controlled by Mr. Kumar. The fund wired its payment to VRSBS. Virtually all of the funds were then diverted by Mr. Kumar to his account.

When the fund requested stock certificates, Mr. Kumar arranged for the reissuance of the CSS shares. He represented to the firm and its transfer agent that the original shares had been lost. Eventually the shares were reissued.

While the shares were being reissued, Mr. Kumar told the original investors that he was going to have new certificates issued in the name of each investor. He also told them that CSS was planning to conduct a potentially lucrative IPO.

In July 2013 some of the original investors learned from CSS that Mr. Kumar had sold nearly all of the shares. When confronted with these facts, Mr. Kumar claimed that he had only temporarily transferred the shares to protect them from his creditors. He then stopped communicating with the investors.

The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23145 (December 2, 1014).