This Week In Securities Litigation (Week of August 12, 2024)
Last week the Commission filed four new cases. One centered on insider trading while three focused on offering frauds.
Be careful, be safe this week and stay cool.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 4 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Insider trading: SEC v. Targum, Civil Action No. 1:24-cv-12043 (D. Mass. Filed August 8, 2024) is an action which names as defendants Steven Targum, Elliot Tagum and Nicholas Rosenberg, respectively, a consultant to Frequency Therapeutics, Inc., Mr. Targum’s Son and an attorney who is a close Friend of Son. Steven Targum learned through his position that Frequency Therapeutics failed a clinical trial on February 4, 2023. The next business day, February 6, 2023, he sold all of his shares of Frequency Therapeutics. The then tipped Son who immediately sold his shares in the company. Shortly after that Son told his friend Nicholas Rossenberg about the failed trial. He sold his shares. The results of the trial were announced on February 10, 2023. The share price closed down 80.6%. As a result, the three men avoided significant losses: Dad avoided losses of $86,750, Son $8,370 and Friend $15,323. The complaint alleges violations of Exchange Act Section 10(b). See Lit. Rel. No. 26070 (August 8, 2024).
Offering fraud: SEC v. Thompson Hunt and Associates, Ltd., Civil Action No. 1:24-cv-06035 (S.D.N.Y. Filed August 8, 202) is an action which names as defendants: the firm; Carl Arnal; Michael J. Cohen; Christopher Vaughn; Brookdale Consultants LLC; Growth Point Consultants, Inc.; Damon Artis; and Richard Gavzie. The case centers on two boiler room schemes. The first involved the fraudulent sale of thinly traded penny stocks by Defendant Growth Point, a private company owned by Defendant Artis. Between July 2016 and September 2023 Growth Point’s sales agents used high pressure, boiler room tactics, to induce investors to purchase penny stocks at prices higher than the acquisition price based on the understanding that a part of the price would go to them. The stocks were generally sold to senior citizens. During the period Defendants Artis and Gavzie, through Growth Point, generated almost $7 million and collectively received just under $2.7 million in undisclosed commissions. The second centered on the offering of unregistered securities issued by Defendant Thompson Hunt, a private company, through its chairman and founder, Defendant Armal and its Chief Executive, Defendant Vaughn, and the misappropriation of the offering proceeds. For the offering Defendants Amal and Vaughn prepared marketing materials that included several misstatements regarding the offering. Thompson Hunt engaged Defendant Brookdale, another boiler room entity for the offering. Between June 2021 and March 2023 Brookdale fraudulently induced about 30 investors to purchase the unregistered shares. About $1.3 million was raised from 30 investors. As a result of both schemes Defendants Growth Point, Artis and Gavzie received about $1.8 million, $950,000 and $320,000 in commissions, respectively. The complaint alleges violations of Securities Act Sections 5(a), 5(b) and 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26069 (August 8, 2024).
Offering fraud: SEC v. Woods, Civil Action No. 2:24-cv-663 (C.D. Ca. Filed August 6, 2024). Named as defendants are: Taylor Woods and Howard Wu. Defendants were co-founders and co-owners of Urban Commons LLC, U.S. Hospitality Investments LLC, Sky Holdings LLC and the co-managing members of Urban Commons LLC. All are participants in the wrongful schemes. Each facet of the fraud involved U.S. based hotels. In the first part of the scheme Defendants induced investors to consent to the sale of their interests in the hotels. Those interests, which involved about thirteen U.S. based hotels, were valued at about $160 million. Defendants represented to the hotel owners that they had a buyer for all thirteen properties, that owners should execute consent solicitation statements to facilitate the deal, that they would receive a pro rata share of the net proceeds from the deal and retain a security interest in the properties. Defendants ultimately exploited the consents to consolidate the properties for placement into a REIT and assign themselves a 15.2% interest in the properties. The REIT had a public listing in Singapore. Delays in closing were attributed to the claimed buyer. In reality, there was no buyer. Once the REIT filed for bankruptcy the second facet of the scheme launched. In this part of the deal Defendants raised at least $1.775 million from a new group of investors. The purpose was to place a bid to buy the hotels that had been placed in the REIT out of bankruptcy to operate them. Despite representations to the investors that their funds would only be used for the deal, in fact much of the investor money was used for personal and unrelated business purposes. Defendants failed to return most of the investor money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 26068 (August 7, 2024).
Offering fraud: SEC v. Shafi, Civil Action No. 4:24-cv-04636 (N.D. Ca. Filed July 31, 2024). Named as defendant is Abraham Shafi, a resident of Hawaii. He is the co-founder of Get Together, Inc., known as IRL. He served as its CEO during the relevant period and up to April 2023. Defendant and his co-founders created the IRL social media app in 2018. At launch the idea was to build a social media platform centered on events that people would attend together “in real life” and later remotely. Mr. Shafi began promoting the company in September 2019 using “incent” advertisements. The ads offered users a reward unrelated to the app in exchange for downloading the app. The point was to drive large download volumes and achieve a high rank in the Apple App Store, according to statements Mr. Shafi made to others. The advertising was effective. Defendant did not properly disclose the expenditures for it. Investors not aware that Defendant and a friend misused the company credit cards and that large, that large amounts of advertising was purchased and that about $170 million of preferred stock was issued by the company in a “Series C” offering. As a result, investor VC1, a venture capital fund, purchased about $125 million of company securities from the firm and another $7.5 million directly from Defendant. Another venture capital fund purchased an additional $10 million worth of IRL securities. After the offering, Defendant continued to deceive investors despite the fact that they had representatives on the board of directors. Mr. Shafi also orchestrated a scheme to continue under reporting expenditures. For example, he used firm credit cards to cover significant expenses for his wedding. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 26066 (August 6, 2024).
Singapore
Statement: The Monetary Authority of Singapore released a Monetary Report Statement dated July 26, 2024 (here).