This Week In Securities Litigation (Week of August 19, 2024)
The Commission filed five new enforcement actions last week. Those cases were based on crypto pyramid schemes (two cases), false statements, an offering fraud and a stock manipulation.
Be careful, be safe this week and stay cool.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed five new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Unregistered broker: SEC v. Rondini, III, Civil Action No. 23-cv-81285 (S.D. Fla. Filed Sept 18, 2023) is a previously filed action alleging that Defendants Wilson J. Rondini, III and Falcon Capital Partners Ltd. acted as unregistered brokers over a four year period, beginning in September 2018 and continuing through the end of 2022. Defendants resolved the matter, consenting to the entry of permanent injunctions based on Exchange Act Section 15(a). In addition, they agreed to pay, on a joint and several basis, Disgorgement in the amount $5,220,000, prejudgment interest of $283,597 and a penalty of $246,403. While the same charge had been made against Falcon Capital LLP, it was dismissed. See Lit. Rel. No. 26077 (August 14, 2024).
Crypto Pyramid scheme: SEC v. Drive Planning, LLC. Civil Action No. 1:24-cv-03583 (N.D. Ga. Filed August 13, 2024). Named as defendants are: Russell T. Burkhalter and Drive Planning, LLC. Mr. Burkhalter at one time held a Series 65 securities license and is a Georgia resident insurance agent. He is also the founder, owner and alter ego of Drive Planning. The company was organized in 2015 as a limited liability firm under the laws of the state of Georgia. Beginning in 2020, and continuing through at least June 2024, Defendant Bukhalter aggressively marketed and sold interests in Drive Planning called Real Estate Acceleration Loans or REAL. The interests were described in promotional materials as a bridge loan promising to pay a return of 10% in three months. Potential investors were told by Defendants that trained sales agents would pool their funds and loan them to property developers who used the money to enter into joint ventures that raised the funds necessary to pay the promised returns to REAL investors. By the end of June 2024 over 2,000 investors had purchased the interests being marketed by Defendants. Over $300,000,000 was raised from investors. Drive Planning did not, however, have any legitimate way to raise the funds required to pay the promised 10%/three month returns, according to the complaint. To the contrary, the payments actually paid to investors were the product of classic Ponzi scheme fraud – portions of the investor money was used to make the payments labeled as “returns.” Defendant Burkhalter pledged to halt the operation and the work of the sales agents on June 21, 2024. There was no halt. Defendant Burkhalter is the signatory on bank accounts which are alleged to contain millions of dollars of investor funds. These facts, alleged to constitute violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a), require immediate relief temporary relief in the form of an asset freeze and appointment of a receiver, the Commission told the court. The investigation continues as the court considers the requests for immediate temporary relief. See Lit. Rel. No. 26076 (August 14, 2024).
False statements: SEC v. Durland, Civil Action No. 3:24-cv-02062 (N.D. Tx. Filed August 13, 2024) is an action which names as defendant Stephen Durland who had previously been enjoined in a Commission enforcement action based on an alleges stock-dumping scheme. SEC v. Pegasus Wireless Corp., No. 4:09-cv-2302 (N.D. Cal Filed May 26, 2009). He also pleaded guilty in the related criminal action and served 33 months in prison. Here he is alleged to have participated in a scheme to inflate the share price of three penny stocks. That was done by making false statements such as those concealing his role in the preparation of the financial statements and the conversion terms for a note. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). See Lit. Rel. No. 206075 (August 13, 2024).
Offering fraud: SEC v. Heckler, Civil Action No. 20-cv-4654 (E.D.N.Y.) is a previously filed action which named as defendants Randy Heckler and his firm, Randy Heckler, Inc. Mr. Heckler was previously bared from acting as a broker by FINRA in 2019 in a matter where he solicited over $700,000 of investment from an elderly investor and that person’s son. Here Defendant and his firm told an investor that he was successfully managing a hedge fund to solicit his business. In fact there was no hedge fund; the investor funds were diverted to personal use. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) & (4). In this matter the Court entered a final judgment as to Mr. Heckler based on the Sections cited in the complaint. The charges were dismissed as to the entity. See Lit. Rel. No. 26074 (August 13, 2024).
Insider trading: SEC v. Del Prete, No. 23-cv-200452 (D.N.J.) is a previously filed action in which the court entered a final judgment against defendant Robert Del Prete based on Exchange Act Section 10(b). The judgement also directed that Defendant pay disgorgement in the amount of $60,170 and prejudgment interest of $7,012. Those sums will be paid in the parallel criminal case in which Mr. Del Prete pleaded guilty and was sentenced to serve one year on probation which included three months of home confinement. The charges stem from Defendant’s role as an accounting consultant to HighCape Capital Acquisition Corp., a special purpose entity involved in a merger with Quantum-Si Incorporated. In January and February 2021, while serving as an accounting consultant for HighCape, Defendant attended board meetings of the firm where the merger was discussed. One hour after the February meeting Defendant purchased shares. The day after the deal announcement he liquidated his position, realizing about 100% in profits based on his illegal trading. See Lit. Rel. No. 26073 (August 13, 2024).
Crypto pyramid scheme: SEC v. Nova Tech Ltd., Civil action 1:24-cv-23059 (S.D. Fla. Filed August 12, 2024). Named as defendants in this action are: NovaTech Ltd., a company registered and formed under the laws of St. Vincent and the Grenadines in September 2019; Cynthia Petion, a U.S. citizen currently residing in Panama who has been described as the founder, sole shareholder, Director, Managing Member and CEO of NovaTech; Eddy Petion, a U.S. citizen and the husband of Cynthia Petion who is believed to be in Panama; Martin Zizi, a promotor of NovaTech; and James Corbett, Corrie Sampson, Dapilinu, Dunbar, John Garofano and Marsha Hadley, each alleged to be involved in the scheme. Over a four-year period, beginning in 2019, Cynthia and Eddy Petion operated a crypto trading investment and pyramid scheme largely through NovaTech. The multi-level marketing structure or MLM was used to raise capital of over $650 million from over 200,000 investors in this country and others. Many of those targeted were in the Haitian-American community. Potential investors were solicited through a variety of mechanisms. Those included public websites, social media, a network of promotors and others. Potential investors were told that the firm would pay average returns of 2-3% per week – its rate of return in recent weeks. Investors were also told that NovaTech had never posted a weekly trading loss. Yet in reality, the firm appears to have only traded a fraction of the investor assets it held, and those suffered significant trading losses. In reality, the sole source of new revenue appears to have been other investors – a typical pyramid scheme. Mr. & Mrs. Petion also misappropriated assets from the scheme. This included transferring millions of dollars of commingled investor assets to themselves. Those assets were also used to make payments to existing investors. In addition, the couple made a series of false and misleading statements about the use of investor capital. Those included claims that the trading was profitable, the company was a “registered hedge fund,” and the firm was safe and secure. The other Defendants were instrumental in promoting and marketing the scheme. The scheme collapsed in May 2023 following a series of actions by several U.S. states and Canadian provinces against it. Most investors were unable to withdraw their funds. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26072 (S.D. Fla. Filed August 12, 2024).
Manipulation: SEC v Casey, Civil Action No. 24-cv-2971 (S.D. Tx. Filed August 9, 2024) is an action which names as defendants: Vertical Holdings, LLC; Dover Hill LLC; GSK Strategies, LLC; Carmel Ventures, LLC; ALS Investments, LLC; Highbridge Consultants, LLC; Adrian James as Trustee of the ASI Living Trust; Esports Group, Inc., Oak Grove Asset Management, Inc; and Ysw Holdings, Inc. Defendant Kevan Casey, individually and at times in conjunction with other Defendants acquired large quantities of shares in a series of five microcap stocks at steep discounts and then resold the shares without making the proper disclosures regarding ownership stakes, paid stock promotions and/or relations to the companies involved. This approach facilitated the acquisition and later disposition of the stocks. For example, defendants did not make the required disclosure informing others that they controlled 5% or more of the stock as required. As part of the scheme stock promoters were retained to sell the shares. As a result of the scheme Defendant Casey and his co-defendants were able to profit by at least $56 million. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(d), 16(a0 and 20(a). See Lit. Rel. No. 26071 (August 9, 2024).
FinCEN
Remarks: Deputy Director Jimmy Kirby delivered the Opening Remarks during the Beneficial Ownership Information Reporting Event, Huston, Texas, August 14-15, 2024 (here).
BaFin
Paper: The Federal Financial Supervisory Authority or BaFin, published a paper titled AI at Banks and Insurers: Automatically Fair? The paper was published on August 16, 2024 (here).