This Week In Securities Litigation (Week of October 7, 2024)
As the Government fiscal year drew to a close on September 30, 2024, the Commission filed a series of cases focused on the sale of private funds, crypto assets, stock schemes, insider trading, false statements, mini bonds, an audit fraud and insider trading.
Be careful, be safe this week
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 12 new civil injunctive actions and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Sale of private funds: SEC v. The Pre IPO Marketplace Inc., Civil Action No. 1:24-cv-06886 (E.D.N.Y. Filed Sept. 30, 2024) is an action which names as defendant: The firm, owned 50% by defendants John LoPinto and Robert Wilks, managed 22 of 31 funds involved here and five similar entities. The complaint alleges that over a three-year period, beginning in October 2019, Defendants raised about $120 million from over 900 investors selling interests in private funds. Those funds claimed to hold stock in private companies that had not yet conducted an IPO offering. The sales were managed by unregistered persons. A series of false statements were made in the phone calls used to market the interest. Those statements included claims that the interests were in pre-IOP firms, that no upfront fees or commissions were charged, that the interests had been acquired directly from the company and that the interests were registered with the SEC. Each claim is false. The complaint alleges violation of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) as well as Advisers Act Sections 206(1), 206(2) and 206(4). See Lit. Rel. No. 26149 (Oct. 2, 2024).
Crypto investment platforms: SEC v. Rari Capital, Inc., Civil Action No. 2:24-cv-07967 (C.D. Cal.) is a previously file action which named as defendants: the firm and its three co-founders – Jai Bhavani, Jack Lipstone and David Lucid. In resolving the action, the court entered final judgments against Defendants Bhavnani and Lipstone. Those judgement preclude future violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 15(a). Defendants were also directed not to participate in the issuance, purchase, or sale of crypto assets offered and sold as securities except for their own account for a period of five years or from the time of serving as an officer or director of a pubic company. Defendants were, in addition, also directed to pay disgorgement, prejudgment interest and a penalty. Defendant Lucid consented to the entry of a final judgment on the same terms with the exception that it did not include an injunction against future violations of Section 17(a)(2). The firm settled, consenting to the entry of a judgment based on Securities Act Section 5(a), 5(c) and 17(a)(2). It also precludes participating in the issuance, purchase offer or sale of any security. The complaint on which the settlements are based alleged that Defendants told investors they could invest in pools of crypto assets that would generate substantial returns. A significant portion of the pool lost money. Defendants also engaged in unregistered broker transactions. See Lit. Rel. No. 26148 (Oct. 2, 2024).
Stock scheme: SEC v. Zhabilov, Civil Action No. 1:24-cv-07362 (S.D.N.Y. filed Sept. 30, 2024). The case names as defendants six individuals: Harry Zhabilov, Billy Ray, Jr., Charles Dilluvio, Stephen Apolant, Dannie Zhabilov and Jonathan Farber. In addition, four entities were named as defendants. SEC v. Zhabilov, Civil Action No. 1:24-cv-07362 (S.D.N.Y. filed September 30, 2024). Defendants collectively took steps to take control of the publicly traded shares of Enzolytics, Inc., a Delaware based firm. In doing so, the group took steps to conceal their identity. In 2018 Defendants Zhabilv and Ray made a series of misrepresentations in the course of selling Enzolytics shares to transfer agents, attorneys, and the public. This allowed them to sell the shares. It also permitted them to sell the debt supposedly owned by Enzolytics to Apolant and Dilluvio’s associate for $100,000. Defendants Ray and Zhabilov shared those payments. In return, Enzolytics issued over half a billion unrestricted shares to Dilluvio’s associate. In 2020 the Control Group –Defendants Zhabilov, Ray, Diluvio and Apolant – obtained unrestricted Enzolytics shares it could sell to the public through agreements for consulting services with Dilluvio and Defendant Zhabilov’s daughter, Dannie. The Control Group then used a series of misrepresentations relating to Dilluvio and Dannie’s affiliate. That permitted them to convert the debt from unpaid consulting agreements they could and did sell. Subsequently, Defendant Zhabilov and his daughter created false documents furnished to the transfer agent to facilitate stock transactions. About 231 million unrestricted shares of Enzolytics were transferred to Dannie. The misrepresentations were used to circumvent transfer restrictions. The shares were then transferred to Defendant Farber for sale. Defendant Ray was paid a brokerage fee for his participation. Defendant Farber then sent Dannie $7.125 million for the transferred shares. She used the funds for personal items. While Defendant Farber was selling the stock of the Control Group, that it funded a stock promotion campaign for Enzolytics stock. The control group also used a sham consulting agreement to get Charles Dilluvio 200 million unrestricted Enzolytics shares. He in turn sold those shares to the public through an intermediary. Defendants Apolant and Dilluvio subsequently converted the Enzolytics debt into about 400 million unrestricted Enzolytics shares. Those shares were issued without restriction but under a false attorney opinion which incorrectly stated that Apolant and Dilluvio were not affiliates of Enzolytics. Finally, Defendant Farber transferred at least 350 million Enzolytics shares from the Control Group and sold most of the shares to the public. Mr. Farber then transferred about $62 million in stock sale proceeds back to Control Group. When Control Group sold Enzolytics stock there were no registration statements for the sale and no exemption. Defendants shared about $92 million in stock sale proceeds generated by the scheme. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and Rule 10b-5 as well as Section 15(a)(1). See Lit. Rel. No. 26144 (Sept. 30, 2024).
Insider trading: SEC v. Siegel, Civil Action No. 1:24-cv-07210 (S.D.N.Y. Filed Oct. 1, 2024). The court in this action entered a final judgment against Barry Siegel, a former employee of Footlocker. It judgment imposed a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). It also ordered the payment of disgorgement in the amount of $112,868.95, prejudgment interest in the amount of $9,975.97 and a penalty of $112,868.95. It a barred Defendant from serving as an officer or director. The complaint alleged that Defendant traded in the shares of his former employer in two instances based on inside information. Prior to the first trade the share price fell by over 27%. In the second instance the share price fell by over 28%. In each instance Defendant had inside information which permitted him to profit from the transactions. See Lit. Rel. No. 26147 (Oct. 1, 2024).
False statements: SEC v. Craigie, No. 1:24-cv-7382 (S.D.N.Y. filed Sept. 30, 2024). Defendant James R. Craigie served as the CEO of public company Church & Dwight Co. Inc. for eleven years, beginning in 2004. He also served as a non-independent member of the Board of Directors beginning in 2007 and continuing until 2019. He was, in addition, a director of several other public companies. To become an independent director the Board had to assess if Mr. Craigie had any material relationship with the firm. To make this assessment the Board relied primarily on Mr. Craigie. After considering information provided by Mr. Craigie the Board determined in January 2019 that he was independent, effective at the 2020 annual shareholder meeting. In fact, Mr. Craigie did not disclose that he maintained a close personal friendship with a firm Executive. He also asked Executive not to disclosure their relationship. In early 2023 the firm learned that Mr. Craigie had a close personal relationship with Executive. The Board determined that he had violated his obligation of candor and confidentiality under the company Code of Conduct. In 2021 and 2022 the firm represented in its proxy materials that Mr. Craigie was an independent director – it was unaware of his relationship with Executive. The complaint alleges violations of Exchange Act Section 14(a) and Rule 14a-9. To resolve the matter Defendant Craigie consented to the entry of a permanent injunction based on the Section and Rule cited in the complaint. He also agreed to pay a penalty of $175,000 and the entry of a five-year officer director bar. See Lit. Rel. No. 26145 (Sept. 30, 2024).
Mini bonds: SEC v. Choice Advisors, LLC, Civil Action No. 3:21-cv-01669 (S.D. Cal.) is a previously filed action which named as defendants the muni-advisor and one of its advisors, Matthias O’Meara. This action was resolved and a final judgement entered. The judgement imposed permanent injunctions based on Exchange Act Sections 15B(c) and Exchange Act and MSRB Rule G-42 and G-17. Mr. O’Meara was also ordered to pay disgorgement and prejudgment interest in the amount of $179,081 and a penalty of $133,491. The firm was directed to pay disgorgement and prejudgment interest of $107,448 and a penalty of $79,889. The court previously granted the Commission’s motion for summary judgment. The complaint alleged that there had been a fee-splitting arrangement involving Defendants and an underwriter to the bond offerings for the adviser. In addition, Mr. O’Meara improperly worked on different sides of the transaction which is prohibited. Defendants also breached their fiduciary duty by failing to disclose the arrangements. See Lit. Rel. No. 26142 (Sept. 30, 2024).
Audit fraud: SEC v. Oyebola, Civil Action No. 1:24-cv-07363 (S.D.N.Y. Filed Sept. 30, 2024) is an action which names as defendants Olayinka Oyebola & Co., chartered accountants registered with the PCAOB, and Olayinka Temitope Oyebola, a licensed accountant with the firm. The complaint centers on a scheme that began in 2020 and was orchestrated by Mmobuosi Odogwu Bayne and perpetrated through three U.S. companies he controlled, Tingo International Holdings, Inc., Agri-Fintech Holdings, Inc. and Tingo Group, Inc. It centered on billions of dollars worth of fabricated transactions at the primary subsidiary of each of the aforementioned firms and the recording of fraudulent revenue, income and assets in documents filed with the Commission by these entities. Defendant Oyebola’s firm served as Tingo Mobil’s external auditors during most of the fraud. Defendants not only gave their imprimatur to the fraudulent statements, they joined with, and lent their affirmative aid to, Mmobuosi and the Tingo Entities scheme. For example, in 2020 they discovered the fraud yet disseminated fraudulent audit reports on the Firm’s letterhead with forgeries of Oyebola’s signature. In 2023 Oyebola intentionally misled the Israeli-based auditor of Tingo Group. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 as well as Rules 13b2-2(a). See Lit. Rel. No. 26143 (Sept. 30, 2024).
Stock fraud scheme: SEC v. Lee, Civil Action No. 3:23-cv-00145 (D. Conn.) is a previously filed action which named as defendants Song Yeoi Lee and his firm Ameritrust Corporation. His children were named as relief defendants. The complaint, on which a default judgment was entered, alleged that Defendants misled and misappropriated funds from investors in the United States and the Republic of Korea between 2019 and 2023. According to the complaint, during that period investors were solicited primarily in Korea to acquire shares in the firm. The funds were not used as promised – they were stolen by Defendants. A default judgement was entered against the firm and the estate of Mr. Lee. imposing injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). It also directed the payment of disgorgement in the amount of $11,967,705 along with prejudgment interest of $1,602,391 and a penalty of $2,232,280 was ordered. A judgement was also entered against an affiliated entity, Beespoke Capital, directing the payment of disgorgement of $4,871,097 plus prejudgment interest of $325,421. Judgments were also entered against Mr. Lee’s three adult children by consent. See Lit. Rel. No. 26146 (Sept. 30, 2024).
FinCEN
Release: The Financial Crimes Enforcement Network announced that the U.S. Department of Treasury is undertaking coordinated actions to disrupt Russian cybercrime services, issuing an order identifying a Russian virtual currency exchanger associated. The release is date September 26, 2024 (here).
ESMA
Release: The European regulator announced a 2025 Work Program focused on strategic priorities and implementation of new mandates on October 1, 2024 (here).
Hong Kong
Remarks: The Securities and Futures Commission of Hong Kong welcomed the publication on October 3, 2024, of an industry-led working group for environmental, social and governance of ESG ratings and data products providing products and services in Hong Kong (here).
Singapore
Remarks: Ms. Gillian Tan, Assistant Managing Directors and Chief Sustainability Officer, Monetary Authority of Singapore, delivered remarks at the New York Climate Week MAS – World Bank Event on Market-based Approaches for Coal Transition, September 26, 2224 (here).